1. Adventure Capitalism.
Investing in Indian Power Generation.
Lu Sixiao Teo Jie Min Tan Li Geok, Kelly
Felix Jendrosch Julius Bachmann
Group 9, Seminar 2, International Business Environment
Nanyang Business School
November 2nd, 2011

2. Investing in Indian Energy
“Power, more than any other industry, captures the
prevalence of the state in Indian business – and the
harm it can do. Private capital has poured into
building power stations, but most other bits of the
supply chain are in the hands of the state. Often this
set-up fails to deliver.”
The power and the glory. (2011, October 22). The Economist -
Special Report: Business in India, 401, 17

3. Agenda
1. Risk Analysis Still high: Political
and Legal
2. Indian Energy Sector
3. Strategies
4. Recommendation

4. PESTEL Framework
Political Economic Social Legal
Environment Environment Environment Environment

5. Agenda
1. Risk Analysis Still high: Political
and Legal
2. Indian Energy Sector Renewable Energies
3. Strategies Corruption &
Regulations
4. Recommendation Wind Energy JV in
Tamil Nadu

6. Politics – Stability, Institutions and
Regulation
• High regional disparities
• Red Tape
– Legislators regulate excessively but lack
understanding of FDI
• Weak institutions

7. Politics – Corruption in India
Transparancy International. (2010). Corruption Perception Index 2010. Berlin. Retrieved on 25th Oct. 2011 from:
http://www.transparency.org/regional_pages/asia_pacific/resources/surveys_and_indices#cpi

8. Economics – Slowing Growth at High
Speed
Corporate Catalyst India. (2011). Key to India Investment. Retrieved on 26th Oct. 2011 from:
http://www.cci.in/pdf/india-investment-guide.pdf

9. Economics – Inflation threatens social
cohesion
Corporate Catalyst India. (2011). Key to India Investment. Retrieved on 26th Oct. 2011 from:
http://www.cci.in/pdf/india-investment-guide.pdf

10. Economics – Conglomerates Rule
• Diversified, family owned business
group dominate the economy
– Declining return on equity (ROE)
– Low Debt Levels
– Strong Corporate Growth
– High Profitability
• Immense, often unrecorded informal
sector

11. Economics - Disparities
• Half of national output in Maharashtra
(Mumbai) and Karnataka (Bangalore)
• 40% of Indians output is concentrated
with the top 0,2% of firms
• 41% of the biggest 100 firms, measured
by the profit, is state-controlled

12. Society – Diverse Environment…
• 7th largest country worldwide
• Second largest population
• Variety of religions
• 15 national language

13. Society – …slows down decision
making processes
• Moderately high income inequality level
of 36.8
• Rigid hierarchies

14. Legal – Electricity Regulatory
Commission
• Authority with broad discretion
– setting tariffs
– determining cross-subsidy levels
• No foreseeable end to differences in the
regulatory treatment

15. Legal – Recent Amendments
• FDI Approval routes
• 1991 Electricity Act Amendments
– opened the door for domestic and foreign IPPS
• New Exploration License Policy in 2000
– permits foreign companies to hold 100% equity
ownership in oil and natural gas project

16. Legal Environment – Improving
Regulation
The legal structure for FDI in India and its
energy sector is becoming more and more
transparent and less prone to the
arbitrariness of officials

17. Increasing Electricity Market

18. Increasing Electricity Market
• 30% of the total consumed energy
imported
• Blackouts and power thefts
• Indian economy growth at 8% annually

19. Oil: net imports grow

20. Gas: net imports grow

21. Oil and Gas Markets too dominant in
India‘s energy mix
• Production controlled by state-owned
corporations
• Market opening due to lack of
technology

22. Nuclear Energy not feasible
• 2005: bilateral contract with the US
• Purchase of 10 nuclear power plants
• FDI prohibited by the Foreign
Investment Promotion Board

23. Risky Solar Energy

24. Wind Energy as an opportunity

25. Political Strategies – Follow the laws
• US: Foreign Corrupt Practices Act
– Prohibit giving of bribes
• India: Prevention of Corruption Act
– Disallows receiving and giving of bribes
Do not engage in corruption.

26. Political Strategies – Checks &
Balances
• Prior check with Central Vigilance
Commission of India.
• Project Vigeye to report complaints.
• Third party audit rights

27. Political Strategies – Follow
international standards
• Protect from regulatory uncertainties
• International standards
– World Trade Organisations
– OECD Guidelines for Multinational
Enterprises

28. Social Strategies – Assessing local
needs
• Pricing and affordability
• Value conscious consumers willing to
pay premium
– Benefits and quality > cost

29. Social Strategies - Business
Negotiation Culture
• Recognise business tactics
• Building relationship key to success in
negotiation.
• Do not start into business discussion
immediately

30. Economic Strategies - Future
Infrastructure Investment
• Less skewed towards generation of
electricity
• Open access transmission
 Resulting in better transmission infrastructure
• New emphasis on least cost alternatives

31. Economic Strategies – Keep Fixed
Cost Low
• High competition
 Many state controlled companies
 Few IPPs
• Need
 Competitive fixed cost
 Reform of retail tariff

32. Economic Strategies - Insuring
Payment Risk
• SEB’s and state government’s solvency
is critical
• Need for insurance or hedging
• Unreliable government guarantees

33. Legal Strategies - Power Purchase
Agreement
• Ensuring adequate and bankable
payment
• Opening a broader market
• Diversifying customer base
 Distinction between wholesale trading and retail
trading

34. Legal Strategies - Tariff Structure
Reform
• Challenges
 Financial constraints and payment default risk
 Poor quality and inefficient pricing
• Measures
 Negotiate to maintain tariff level
 Two-part tariff structure

35. Competitive Strategies - Corporate
Entities
Wholly Owned Subsidiary or a Joint
Venture
Government Approval
Foreign Investment Inform the concerned
Promotional Board (FIPB) regional office of the RBI
(Remittance towards share application and
issuing shares to the foreign investor)

36. Competitive Strategies - Wholly Owned
Subsidiary
• All regulations applicable to an Indian
company apply
• Treated equally as a domestic company

37. Competitive Strategies - Joint Venture
• All regulations applicable to an Indian
company apply
• Management of JV is influenced by
terms in shareholders’ agreement

38. Competitive Strategies - Enter
Consumer Market
• Act provides for direct sale of electricity
to end consumers
• Provides greater credibility compared to
single-buyer SEB model
• Potentially fierce foreign competitor

39. Recommendations – Wind Energy
Wind power plants in the southern Indian
state of Tamil Nadu.
Why renewable?
- Environmentally friendly
Why wind power?
- Produced most effectively in economically
stable environment.

40. Recommendations – Wind Energy
• Costs of wind generated electricity have
decreased
• Wind energy in India has untapped
potential.
• Industry development as important
policy goal

41. Recommendations – Tamil Nadu
Less seismic activity
Stronger wind density

42. Recommendations – Joint Venture
• Treated as a domestic company
– Insulation against legal challenges lodged
by the SEBs
– Flexibility in payment security, contract
terms, and project-specific profitability
– Less politically charged agreement

43. Conclusion – High risk, high returns.
• Huge demand for renewable energy
– Increasing prices
– Environmentally friendly
• Proposed wind power plant in Tamil
Nadu
– Reducing external risk
– Utilizing the given opportunities

44. Thank You!
Looking forward
to a wild
discussion!