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Down the Rabbit Hole What the bankers aren’t telling you!

---------------------------------------------------------- An Analysis of Lending Practices Adopted by Banks to

Finance ‘Developmental’ Projects in India

The Research Collective - PSA February 2014

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PROGRAMME FOR SOCIAL ACTION

H – 17/1, Malviya Nagar, New Delhi 110017.

Phone Number: +91-11-26687725 | 26671556

Email: lakshmi@psa-india.net | trc@psa-india.net

The Research Collective, the research unit of the Programme for Social Action (PSA),

aims to facilitate research around the theoretical framework and practical aspects of

development, industry, sustainable alternatives, equitable growth, natural

resources, community & people’s rights. Cutting across subjects of economics, law,

politics, environment and social sciences, the work bases itself on peoples’

experiences and community perspectives. Our work aims to reflect ground realities,

challenge detrimental growth paradigms and generate informed discussions on

social, economic, political, environmental and cultural problems.

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ACKNOWLEDGEMENT

We, at PSA, are happy and excited that our work on scrutinising lending to mega projects, which was

initiated in July 2011 and spanned over two years, is seeing the light of the day in the shape of this

report.

Down the Rabbit Hole – What the Bankers Aren’t Telling You! is a consolidation of the preliminary

work undertaken by The Research Collective of PSA.

I thank the communities of people in Siang, Singrauli, Lohit, Dhenkanal and Shella for sharing their

stories and trusting me with information. Vijay Taram, Ba Chyne, Awadhesh Kumar, Amulya Nayak

and Bhakta Bandhu Behera - thank you for enabling my field visits to the project areas and

introducing me to the communities.

The final report was made possible only because of the critical inputs provided by a number of

individuals who took the time to read through and provide feedback. I am grateful for the significant

feedback provided by Appu Esthose Suresh, Ashish Kothari, Dunu Roy, Himanshu Damle, J John,

Justin Guay, Kanchi Kohli, Nityanand Jayaraman, and Shripad Dharmadikari. Ram Wangkheirakpam,

Persis Taraporevala and Himanshu Thakkar - thank you for your vital comments on the specific case

studies. I thank Kavaljit Singh and Professor Arun Kumar for meeting with me to discuss the contents

of the report and for providing their valuable feedback.

For the many critical discussions, frequent feedback and prompt help, a special thanks to Himanshu

Damle. I thank Alex, Sura, Joe and Bala for their assistance.

Vijayan MJ, thank you for trusting and believing in the abilities of an individual with little experience

and background in economics, finance and academia to pursue this study. I thank you for initiating

this work, for the one million ideas, for having an ever-open ear, for being a constant support. And

most of all, for helping shape this report!

PSA Collective of friends and colleagues, thank you for standing by me while I struggled to

comprehend the complexity of the crisis in the lending world and then all through the numerous

phases of writing, structuring and restructuring of this report. And finally for owning up the work!

Aashima Subberwal, thank you for rescheduling other work and numerous other meetings to ensure

the completion of this report.

I salute the struggles of the communities of people in Siang, Singrauli, Lohit, Dhenkanal, Shella,

Mulshi and Velhe, Krishnapatnam and the thousand other places across the country. I earnestly

hope that this work is useful and assists the process of bringing about responsible lending in the

country.

Lakshmi Premkumar

The Research Collective

Programme for Social Action

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CONTENTS

Preface ………………………………………………………………………………………………………………..………………….. 7

Introduction ………………………………………………………………………………………………………….………………… 9

Chapter ONE

1.1 Case Studies …………………………………………………………………………………………………………………………… 12

1. GMR Kamalanga Energy …………………………………………..…………………………………………………….. 13

2. Athena Demwe Lower Hydro Electric Power ………………………………………………………………….. 18

3. Sasan Power …………..………………………………………………………………………………………….…………… 23

4. Lavasa Hill City ………………………………………………………………………………………………………………… 30

5. Lafarge Surma ………………………………………………………………………………………………………………... 37

6. Coastal Andhra Power ……………………………………………………………………………………………………. 42

1.2 Flawed Mechanisms & Implications …………………………………………………………………………………...… 44

Social Impacts of Projects ……………………………………………………………………………………….………. 45

Environmental Impacts of Projects …………………………………………………………………………………. 49

1.3 Financial Risks in Poorly Assessed Projects …………………………………………………………………………… 53

Chapter TWO

2.1 The Project Finance Bug ……………………………………………………………………………………..……………….… 60

2.2 What is a Bad Loan Worth? ………………………………………………………………………………….…………........ 61

2.3 Banking Sector ‘Reforms’ …………………………………………………………………………………….…..…….……… 67

2.4 Rewriting ‘Development’ Finance - The Changing Trends …………………………………….………………. 69

2.5 Reserve Bank of India (RBI) ……………………………………………………………………………………….………….. 70

Conflict of Interest at the Reserve Bank of India ……………………………………………………………. 72

Chapter THREE

3.1 Public Sector Banks - A Pandora’s Box! …………………………………………………………………..…………….. 73

3.2 Stonewalling Information - A Complete Lack of Transparency …………………………………….………. . 81

Chapter FOUR

4.1 Democratically Accountable and Publicly Transparent Investment ………………………………..…….. 84

4.2 Global Mechanisms for Accountable and Transparent Investment…………………………………...... . 85

4.3 Voluntary Guidelines Lack Teeth ……………………………………………………………………………………………. 86

4.4 Regulation of Socio-Environmental Norms in Lending in India ………………………………………….. …. 88

The Veil of Internal Guidelines ……………………………………………………………………………………….. 89

Chapter FIVE

5.1 Conclusion ……………………………………………………………………………………………………………………….……. 93

5.2 Recommendations ………………………………………………………………………………………………………..………. 97

Annexures

Annexure 1 – List of current Board of Directors at the RBI ………………………………………………………….. 99

Annexure 2 – Information provided by eleven banks to applications under the RTI Act ……….… ….. 101

Annexure 3 – SBI Circular on Credit Policy and Procedures Department; March 2008 …………………. 103

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TABLES

Table 1 Financial information of the six case study projects Page 54

Table 2 Status of the six case study projects Page 55

Table 3 Basic statistics of the eleven public sector banks Page 73

Table 4 Loans sanctioned by LIC, SBM, CBI and SBI to public sector undertakings (PSUs) and private sector companies (PSC)

Page 74

Table 5 SBI’s non-performing assets in public sector undertakings and private sector companies

Page 75

Table 6 IB and SBM’s non-performing assets in public sector undertakings and private sector companies

Page 76

Table 7 Non-performing assets in Union Bank of India and Bank of India Page 77

Table 8 Losses suffered due to loan default by State Bank of Mysore Page 77

Table 9 Sectoral increase and decrease in loans and NPAs in the eight year period between 2003-04 and 2010-11 along with loans and NPA for 2010-11 at SBI

Page 78

Table 10 Distribution of SBI’s loans to private sector companies in selected sectors

Page 79

Table 11 Distribution of SBI’s NPA on loans to private sector companies in selected sectors

Page 80

ABBREVIATIONS

Cr - Crores

Kms - Kilo Meters

Ha - Hectares

M - Meters

Ft - Feet

MTPA - Million Tonnes Per Annum

MCFT - Million Cubic Feet

MCM - Million Cubic Metre

MLD - Mega Litre Per Day

MT - Million Tonnes

MW - Mega Watts

PLF - Plant Load Factor

Rs - Rupees in INR

USD - US Dollar

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PREFACE - A Robinhood Antithesis: The Great Indian Banking Scam

Why does the Reserve Bank of India have representatives of the Indian corporate sector1 sitting at

the helm of its affairs? While small entrepreneurs, farmers and students are finding it difficult to get

loans worth few lakhs, why are big corporations sanctioned loans worth hundreds of crores, even

while topping the defaulters list? Why are banks not held liable for the bad loans they grant to

disastrous projects? More importantly, why are banks funding projects that are inherently

undemocratic, irreparably damaging the environment, displacing large number of people and

ultimately, serving only to increase private profits?

Bad loans in Public Sector Banks (PSB) shot up by more than 400 per cent in the last five years,

hitting Rs. 1,64,000 Cr in March 2013! Accounting for the bad loans that are restructured and shown

as good loans, this amount doubles to Rs. 3,25,000 Cr. In the five years between 2008 and 2013,

PSBs transferred and adjusted Rs. 1,40,000 Cr from their profits to provision for bad loans. It is

important to note that out of the Rs. 1,64,000 Cr bad loans in PSBs, Rs. 64,000 Cr or 39 per cent is

only from the top 30 bad loan accounts!2 Corporate borrowers in India are demonstrating exemplary

skills in taking huge loans from banks and not repaying them; rendering them bad loans or non-

performing assets (NPAs)!

Today, corporations operate neither with their money nor with the money they generate from the

market through shares. This aspect of ‘corporatocracy’ must be understood for us to get into this

study and realise its relevance. Corporates float Special Purpose Vehicles (SPV) and garner much of

the finances required through Project Finance loans from financial institutions and banks. In India,

flow of finance to corporations through loans is largely unregulated and based on sheer brand trust,

often openly violating safety mechanisms and standard due diligence that should be performed

before sanctioning of such loans.

While serious questions need to be raised in the country about the endangering of our public

finances by the banking sector, we must go beyond the evident to get to the root of the crisis. Social

and environmental issues in projects, categorised by bankers as ‘risks’, form a substantial portion of

the problem. Our banks have been lending to projects that do not even have necessary

environmental clearances and assessment of social impacts. At a time when banks are not

considering social and environmental issues as factors that could potentially change the fortunes of

their capital risks to projects, the study Down the Rabbit Hole: What the Bankers Aren’t Telling You

makes a case for it.

It was on a journey during the monsoon of 2010 on a Mumbai suburban train that some of us first

discussed this work concretely. Exploring and investigating the Indian capital market – especially the

financial institutions, had been in our minds for a long time. The discussions on that journey

however provided us the much needed clarity and impetus as a collective to dive deep into the

work, resulting in this study. We are grateful to the primary author of the study, Lakshmi

Premkumar, for having taken on this expedition – as a researcher, investigator and critical learner.

1 The Board of Directors at RBI include GM Rao, YC Deveshwar, Kiran Karnik and Nachiket M Mor.

2 C.H Venkatachalam, General Secretary of All India Bank Employees Association (AIBEA) – Dec 2013

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For two years, we ran around like Alice in Wonderland, filing RTIs, appellate petitions, visiting

different institutions for file inspections, scheduling hearings at the CIC office, arguing with

bureaucracy, consulting investigative journalists and reading related books and articles. We tried to

leave no stone unturned in this tedious process of collecting and collating information for this study.

We were told that the information we were seeking was classified. Why, we wondered! If a

corporation or a company does not want its basic financial information to be disclosed, they should

not take huge loans from public capital.

The All India Bank Employees Association (AIBEA) in December 2013 demanded that “People’s

money (be used for) for people’s welfare, national savings (be used for) for national development

and not for private corporate loot”. The nationalised banks, a Robinhood antithesis, are lending

public money to finance big corporate projects that are destroying the land, livelihood, environment

and cultures of the very people whose money the banks survive on. Fortunately for the affected

people and unfortunately for the project proponents and banks, many projects have been fatally

delayed, or worse abandoned, due to social and environmental conflicts. State Bank of India’s 2008

internal circular attributes stalling of projects to poor management of social and environmental

issues. The circular goes on to state, “Management of social and environmental impacts by units

have to be continuous and proactive. These have a cost aspect, which also has to be suitably

factored into the project costs.” Despite this warning, improper financial lending continues unabated

and has become worse in the last 6 years!

The introduction to this study has argued that the cases analysed in the study are not exceptions but

the norm. The idea is not to expose a few cases and corporations but to point towards a larger

malaise. Small European countries like Ireland are today paying an extraordinary price, in billions, for

bank bailouts. The Indian Banking sector is going to witness a financial riot of an unprecedented kind

in the coming years. The net loss and increasing Gross Non-Performing Assets (GNPA) are going to

affect our day-today lives. The EIA consultants who copy pasted environment and social impact

reports to seek easy clearance for projects, the ministry babus who took money for clearing projects,

the bankers who cleared huge loans without adequate collateral from project proponents will all

wash their hands off – leaving us people to deal with the crises. Our economic dreams will become

nightmares and the growth balloon will burst.

This phenomenon cannot be tackled unless we start to discuss and oppose the policies which are

drowning public money in poorly planned and undemocratically implemented projects. The first step

is to publicly exposing such lending practices and its impacts. We hope this study paves the way.

A news item this morning grabbed my attention. The Lilliput Kidswear Limited, a brand that sells

children’s wear through a retail chain, was successfully sued by the Chinatrust Commercial Bank. The

Delhi High Court has appointed a liquidator to take charge of all assets of Lilliput as it failed to fulfil

its commitment to repay a Rs. 15 Cr loan to the bank. This figure is a paltry sum compared to the

loans taken by India’s giant corporations from our national banks. I hope that enough wisdom is left

in our institutions, RBI and the Government to act against the corporate loot of Indian public funds.

Vijayan MJ 08 January 2014

General Secretary, PSA

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INTRODUCTION

India in the last decade has witnessed a boom in infrastructure and ‘development’ projects

propagated largely by private sector corporations. The sheer number and scale of highway,

expressway, hydro power, airport, urban infrastructure, thermal power, steel, aluminium

and mine projects are on the rise. The implementation of these projects requires large-scale

resources of land, water, forests, minerals, material, labour, power and finance. This

diversion of natural resources to private sector corporations, and in some cases the

destruction of resources in the course of implementing projects, has lead to situations of

conflict with communities of people whose lives and livelihoods have been dependent on

the same resources for several generations or longer. Many of these projects which

irrevocably harm human and environmental life are also in violation of national legislations

and state policies. Most of all, the fact about these projects floated by mammoth

corporations is that they are run on public finances; effectuated with loans sanctioned by

financial institutions, especially public sector banks.

In the course of lending, financial institutions, especially those in the public sector, cannot

contradict the constitutional and democratic programme of the country. Banks and other

financial institutions are negating their role in presuming responsibility as lenders for

harmful and negative impacts of projects they finance. It is a shocker that the invisibility

cloak donned by financial institutions, in the process of facilitating and actualising projects

with devastating impacts, is being preserved as a public secret. On the one hand there is a

dearth of work studying this aspect of lending in India and on the other hand there is little

or no discussion within the Indian Government, Parliament, industry or public on the non-

transparent and unaccountable lending patterns adopted by financial institutions, its

impacts on natural resources, communities and economy, and the inexcusable absence of a

central mechanism to holistically regulate and monitor lending to projects.

In whose interest are public sector banks sanctioning huge loans to projects with negative

impacts and to projects which do not meet the basic norms required by country laws? Are

financial institutions biased towards corporate clients and if so, what determines this

bias? Are they seeing greater returns from the loans to corporate projects?

Are financial institutions publically accountable for the money they sanction as loans? Is

there transparency in their lending?

Do social and environmental issues in a project have a bearing on its loans? What policies

do financial institutions have for ensuring due diligence and monitoring of social and

environmental impacts in the projects they finance?

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Who regulates the financial institutions and their lending to such projects? In case of

violation of country laws by projects made possible through loans sanctioned by financial

institutions, are there mechanisms for recourse in the lending framework?

This report is an attempt to understand the lending framework for financial institutions in

the country, particularly with regard to financing of mega ‘development’ and infrastructure

projects; transparency and accountability in financial transactions; and the mechanisms for

monitoring and regulating social and environmental impacts arising from the projects

financed by financial institutions.

The study and work began with the straightforward idea of bringing out a set of case studies

of ‘development’ and infrastructure projects from across various sectors to understand the

role of financial institutions in the projects they finance. The case studies were to detail

social, environmental and financial aspects of the project, violations if any, and their legal

repercussions. Each project was then to be traced backwards to identify the financial

institutions which provided loans to the project, study terms and conditions of the loan,

policies regulating the loan agreement and repayment of loan. Each of the selected case

studies were to help in analysing loan policies within financial institutions, understanding

the process through which loans to projects are sanctioned, the due diligence processes, the

ensuing mechanisms for monitoring and regulating the loan and the ripple back effect of the

projects’ distress on the quality and the repayment of the loan.

This approach proved to be idealistic as it became evident that project specific financial

information was next to sacrosanct and aggressively guarded. Financial institutions denied

access to basic information on their lending to specific projects, sought through Right to

Information (RTI) applications filed by the author of this report. As an alternative, RTI

applications were shot off to eleven public sector financial institutions requesting general

information on loans to companies, sector-wise distribution of loans, default on such loans,

action taken on defaulters, credit risk management policies, procedures for sanctioning

project finance loans and environmental and social guidelines for project finance. Analyses

of the information received through RTI expanded the scope of this work to include the

understanding of newer concepts in lending such as project finance, non-performing assets,

restructuring of loans, ever-greening of loans, responsible investment, etc,. The RTI

responses however did make clear that public sector banks were in a disadvantaged

position with regard to loans sanctioned to projects of private sector companies and were

largely unwilling to part with information that exposed this situation.

This report of five chapters begins with six case studies - GMR Kamalanga Energy (GKEL),

Athena Demwe Lower Hydro Electric Power (HEP), Sasan Ultra Mega Power Project, Lavasa

Hill City, Lafarge Surma and Krishnapatnam Ultra Mega Power Project (Coastal Andhra

Power). The narration of cases includes a profile of the project, environmental and social

impacts, lending from financial institutions, financial issues and a rationale for its inclusion

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in this study. Chapter one concludes by summarising the social, environmental and financial

issues which emerge from the six cases along with an analysis of their implications. The

Second Chapter discusses tenets of lending, impacts of bad loans on public and private

sector banks, trends in ‘development’ finance and the authority of the Reserve Bank of India

to regulate financial institutions.

Moving on to the current situation of loans in financial institutions in India, the third chapter

relies on information sought from the 11 public sector banks through Right to Information

applications. The Chapter attempts to paint the canvas with trends in sanctioning of

corporate and project finance loans, the extent and rise of defaults, lending percentages to

public sector undertakings and private sector companies, sector wise classification of loans,

exposure of banks to different sectors, and the lack of transparency within financial

institutions. Chapter four critiques voluntary guidelines, soft law mechanisms and internal

guidelines advocated for sustainable environmental and social practices while

simultaneously articulating for democratically accountable and publicly transparent

investment upheld through a legislative frame. The fifth chapter concludes the report with

strong legislative and regulatory recommendations.

The risks involved in financing of mega projects by banks are enormous and necessitate an

in-depth understanding into their implications and repercussions. This report intends to

explore consequences of unaccountable lending, due diligence oversights prior to

sanctioning of loans to projects, social and environmental issues impacting loan quality and

other weak links in the lending framework.

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Chapter ONE

1.1 CASE STUDIES

The six case studies presented in this section illustrate social and environmental concerns

and their implications on the finances of the project. The impacts of environmental and

social issues on the progress of a project and subsequently on the loans sanctioned by

financial institutions are established through the case studies. While numerous projects

have been put on hold for multiple reasons, the cases presented here are those which have

been ‘stayed’, delayed or stopped because of mass resistance by affected communities or

proceedings and court cases stemming from environmental and social concerns and

violations. Specific aspects of finance, environment, land, human rights, legalities and

violations are presented in the different cases. The information relating to finance – loan

amount, date of sanctioning loan, period of repayment, interest on loan, quality of loan and

restructuring of loan - is neither uniform for all cases nor complete in any one case owing to

the limited access to the same. The case studies have been prepared on the basis of

information available in public domain and have been cross checked for their reliability.

The cases used in this report are GMR Kamalanga Energy (GKEL), Athena Demwe Lower

Hydro Electric Power (HEP), Sasan Ultra Mega Power Project (UMPP), Lavasa Hill City,

Lafarge Surma and Krishnapatnam Ultra Mega Power Project (Coastal Andhra Power). Three

out the six projects used as case studies are coal fired thermal power projects. Though this

might seem as a disproportionate reliance on power projects to illustrate the issues, it

merely reflects the inexplicable expansion of power production and coal mining in the last

decade. State Bank of India’s loans in the eight years between 2004 and 2011 grew 37 times

in power industry and 16 times in coal mining. This rise is unparalleled in any other sector.

While the cases were identified on grounds pertaining to lending, investigation revealed

that all the six projects had severely violated social and environmental norms.

The Athena Demwe Lower HEP is an out of the ordinary case as it establishes that loans are

infact sanctioned by financial institutions prior to the granting of statutory clearance by

Ministries. While Lafarge Surma establishes that independent safeguards within

international financial institutions and banks are callously violated by the same institutions,

GMR Kamalanga Energy draws our attention to the use of domestic financial institutions by

International Financial Corporation (IFC) as intermediaries to route funding to projects to

evade their environmental and social safeguards. Reliance Power’s Sasan and

Krishnapatnam UMPPs are classic cases of poor planning by the project proponent and

Government and of due diligence lapses by financial institutions, leading to huge default

and restructuring of loan. The Lavasa Hill City is a paragon for every real estate project gone

wrong in the country – the mega project with a cost of Rs. 1,68,000 Cr has violated every

social and environmental legislation and obtained consents through bribery and corruption.

Despite this and default and restructuring of loan, the banks continue to lend to the project!

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Case Study No.1 - GMR KAMALANGA ENERGY

Special Purpose Vehicle - GMR Kamalanga Energy Limited

Project Cost - Rs. 5733 Cr

Lenders to Project - Infrastructure Development Finance Corporation, State Bank of

India, Andhra Bank, Bank of Baroda, Canara Bank, Central Bank

of India, and IDBI Bank

Indirect Lender - International Finance Corporation (IFC)

Social Concerns - Improper public consultation; forced acquisition of land; low

award as compensation for land; diversion of irrigated double

crop land; acquisition of land in excess of approved extent; filing

of false cases on affected people; poor R&R plan; non-

employment of local people in the project; rights of people were

not recognised as per the Forest Rights Act 2006; acquisition of

land without proper consent from gram sabhas.

Environmental Concerns - Project is sited in a critically polluted area; false information in

the EIA report; EIA consultant implicated in bribery case;

violation of environmental clearance; diversion of irrigational

canals; negative impacts on ground and surface water table.

Legal Status - Pending cases in Bhubaneswar High Court against acquisition of

land; complaint with the Compliance Advisor Ombudsman (CAO)

of the World Bank found prima facie evidence against the

project and the case is currently pending a full audit; pending

complaint against environmental violations with the MoEF.

CASE RATIONALE - GMR Kamalanga Energy exposes the weak regulatory mechanisms for

Indian financial institutions which are used by international financial institutions to route

funding to projects with severe social and environmental impacts.

GMR Kamalanga Energy Limited (GKEL), a Special Purpose Vehicle3 (SPV) of GMR Energy, is

setting up the 1400 MW coal based thermal power plant in two phases in Kamalanga village,

Dhenkanal district, Odisha. The State Government of Odisha signed the Memorandum of

Understanding (MoU) with GMR Energy Limited in June 2006. The environmental clearance

for phase I (3x350 MW) was granted by MoEF in February 2008 and the proposal for phase II

(1x350 MW) was cleared in December 2011. Shandong Electric Company of China has been

awarded the engineering and construction contract and Lahmeyer International was

appointed as technical consultant. While the MoU mandated that the plant be

commissioned by June 2011, the first unit of the power plant was operationalised in January

2013.

3 A Special Purpose Vehicle is a legally independent entity set up by a company with the narrow purpose of

executing a single project.

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The total land requirement for the project is 1050 acres as per stipulations by Ministry of

Environment and Forests (MoEF) and Central Electricity Authority (CEA). Coal for the first

three units of 1050 MW is to be sourced from the Thalcher Mahanadi Mine while the fourth

unit is dependent on imported coal. The project has been sanctioned supply of water from

River Brahmani, which is 2 kms away from the plant site. By December 2011 GKEL had tied

up 85% of power sale through Power Purchase Agreements (PPA) with GRIDCO (Formerly

Grid Corporation of Odisha), Haryana Power Trading Corporation (HPGCL) and PTC India

Limited (Formerly Power Trading Corporation of India Limited).

Social Impacts from GKEL

The total number of project-affected persons is 5053. This population belongs to 11 villages

in Mangalpur Panchayat of Dhenkanal district. Private agricultural land, forest land and

community grazing lands have been acquired for this project. The affected communities

contend that the project has violated basic environmental and social norms leading to loss

of livelihood, loss of land and damage to environmental and natural resources. According to

Negotiating Power, a November 2012 report4 on the socio-economic impacts of GKEL on

project-affected families, there was no informed public consultation with the affected

people, as mandated by the Environmental Impact Assessment Notification 2006. “The

villagers alleged that the state administration did not hold public consultations on the

project and its impacts before the process of land acquisition began. The Odisha State

Pollution Control Board records that the public hearing5, as per the norms of the

Environmental Impact Assessment notification, was held on 13 August 2007 at the Meeting

Hall of the Block office, Odapada, Dhenkanal. Villagers contend that very few of them had

known about the public hearing and participated in it.”

Families report being coerced and threatened into parting with land at very low prices. Land

has been forcibly acquired from Adivasi and Dalit communities after destroying the standing

crops in the presence of paid goons. Cases against acquisition of land for GKEL, filed by

affected families, are pending before District Courts and the Bhubaneswar High Court.

The MoEF clearance for Phase I of the project states that “the land requirement for the

project shall not exceed 1050 acres for all activities / facilities of the power project including

colony (45 acres) and ash pond (474 acres)”. The MoEF clearance for phase II (1x350 MW)

states that no additional land for the expansion will be acquired. The Negotiating Power

report however contends that GKEL could be acquiring land in excess of 1050 acres and in

violation of the environmental clearance. And since acquisition of lands for a railway line,

road and water pipeline for GKEL is currently ongoing, this contention seems correct.

4 Negotiating Power: Socio-economic Study in the GKEL Project Affected Area, Dhenkanal, Odisha. November

2012. The Research Collective. 5 According to the Environment Impact Assessment (EIA) Notification 2006, project proponents are mandated

to hold a public hearing, with the affected community, facilitated by the State Pollution Control Board.

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The R&R Action Plan put out by GMR Kamalanga Energy is vague and does not contain any

measures to rehabilitate affected families. The only real measure mentioned in the ‘Action

Plan’ is disbursement of compensation for land acquired for the project. Under ‘Vocational

Training and Self-employment Schemes’ it is stated that ‘some options may be considered’.

The District Collector has stated on record that the socio-economic survey submitted by

GKEL is inconsistent with the state guidelines for the same. While the District collector has

stated that information provided by the company has not allowed the state to determine

the extent of land already lost to GKEL, the company is proceeding with further acquisition

of land for laying water pipe line, railway line and link road. A number of affected families

filed cases in the Bhubaneswar High Court against this new acquisition of land for GKEL.

The award fixed for land acquired for the GKEL project is Rs. 3.5 Lakhs plus solatium at 30

per cent for an acre of land and Rs. 5 Lakhs plus solatium at 30 per cent for an acre of land

with a house on it. A common price for land of different types, irrigated and un-irrigated,

had been paid to land owners. The 2009 benchmark valuation, issued by the District Sub-

Registrar, fixed the land price for Mangalpur Gram Panchayat at Rs. 7.5 Lakhs per acre. The

mean average rate for agricultural land in Mangalpur in the 3 years prior to acquisition was

Rs. 3,99,638 per acre – almost a Lakh higher than the amount paid by GKEL to Mangalpur

residents. This contention has also been confirmed by the Comptroller and Auditor General

of India (CAG) in the 2010 Audit Report (Civil) which investigated irregularities in the land

acquisition process for projects in the State of Odisha. In the case of GKEL it was reported

that there was under-assessment of compensation due to erroneous fixation of market

value of land which “was mainly due to ignoring the highest sales statistics close to the date

of publication of notice under section 4(1) and considering the same for earlier periods.”

According to the survey in the Negotiating Power report, while over 90 per cent of the

affected families had been promised employment, only 11 per cent received jobs at GKEL,

that too under sub-contracts. According to GKEL’s MoU with Government of Odisha and the

Rehabilitation and Periphery Development Advisory Committee (RPDAC) plan, the project

was to employ local labour for 90 per cent of unskilled and semi-skilled work, 60 per cent of

skilled work and 30 per cent of supervisory and managerial positions. The CAG is currently

investigating employment positions in projects by independent power producers in Odisha

State due to increasing concerns of locals being neglected for jobs in such projects. The

audit will verify whether projects, including the GKEL, have abided by the employment

clause stated in the MoUs.

Community’s rights over forests were not recognised according to the provisions of the

Forest Rights Act 2006 (Scheduled Tribes and Other Traditional Forest Dwellers -

Recognition of Forest Rights Act) and land was acquired without seeking consent for

diversion of forest land for non-forest purposes from Gram Sabhas as mandated by MoEF6.

6 F. No. 11-9/1998-FC (pt). 30.07.2009. Ministry of Environment and Forests (FC Division) Circular.

16

Environmental Impacts from GKEL

The project is located in an area identified by the Central Pollution Control Board (CPCB) as a

Critically Polluted Area7 (CPA) in the country. Based on a 2009 CPCB report, the MoEF placed

a temporary moratorium in January 2010 on consideration of environmental clearance for

projects located in 43 critically polluted areas. This moratorium was lifted in March 2011

from Angul-Dhenkanal, on the assurance that Odisha State Pollution Control Board had

implemented an action plan to improve the environmental quality in the area. Conversely,

the 2011 CPCB Interim Assessment Report of Environmental Pollution Index, released in

May 2012, divulged that pollution levels had significantly increased in Angul-Dhenkanal. It is

now the second most critically polluted area. GKEL’s proposal for expansion of 350 MW was

cleared after the moratorium was lifted.

The environmental clearance from the MoEF for GKEL was based on false information

submitted in the Environmental Impact Assessment8 (EIA) report. While the project’s EIA

report, prepared by SS Environics, claims that no irrigated land was acquired, 455 ha of

ayacut9 land under the command area of Rengali Canal and another 16.72 acres of land

which was an intrinsic part of the Rengali Irrigation Project were acquired for the project. In

the course of construction, GKEL has altered the alignment of minor and sub-minor canals of

the Rengali Irrigation Canal, which was laid to improve agriculture in the area. The company

has also illegally extracted ground water from deep bore wells for construction activities.

Both these acts are in violation of the clearance and have severely impacted ground and

surface water in the area. A complaint entailing the environmental violations has been filed

with the MoEF by the affected community.

In January 2013, the Central Bureau of Investigation (CBI) indicted SS Environics, EIA

consultant for GKEL, for allegedly obtaining clearances by bribing an Environment Ministry

official. The CBI is currently investigating past projects related to SS Environics.

Financial Issues in GKEL

The total project cost of the 1400 MW project is Rs. 5733 Cr; Rs. 4540 Cr for Phase I and Rs.

1193 Cr for Phase II. The project achieved financial closure10 in May 2009. Finance for Phase

7 The 2009 CPCB environmental assessment in 88 industrial clusters across the country was based on

calculations of Comprehensive Environmental Pollution Index (CEPI). Angul ranked as the seventh most polluted area with a CEPI score of 82.09. CEPI is a scientific method to evaluate and rank critically polluted areas where air, water and land pollution exceed the assimilative capacity of the environment, affecting human health. CEPI was devised with the objective to prepare remedial action plans to facilitate pollution abatement and restore environmental quality of respective industrial clusters. The 2011 CPCB Interim Report of Environmental Pollution Index, released in May 2012, revealed that pollution levels increased in many of the critically polluted areas. Angul is now the second most critically polluted area with a CEPI score of 89.74. 8 The EIA Notification mandates project proponents to assess the probable impacts of proposed project on the

community, local economy, environment and culture. 9 Area served by an irrigation project such as a canal, dam or a tank.

10 Financial closure is a stage when all conditions of a financing agreement are fulfilled and funds are

committed by lender(s) to the borrower.

17

I was met with a Debt Equity Ratio11 of 75:25, with the equity portion of Rs. 1135 Cr tied up

between GMR Energy and IDFC. The debt component of Rs. 3405 Cr is secured from 13

banks, including State Bank of India, Andhra Bank, Bank of Baroda, Canara Bank, Central

Bank of India, IDBI Bank and Infrastructure Development Finance Company (IDFC) as the

lead lender and debt arranger.

Investigation into the GKEL project by local and Delhi-based groups disclosed that GKEL was

financed by the International Finance Corporation (IFC) through an intermediary, India

Infrastructure Fund (IIF), which is managed by IDFC. IFC, the private sector lending arm of

the World Bank Group, has a Sustainability Framework which promotes sustainable

development; sound environmental and social practices; and transparency and

accountability towards positive development impacts. All projects financed by IFC are

mandated to adhere to the framework which includes Policy on Environmental and Social

Sustainability, Performance Standards and Policy on Access to Information. IFC’s Access to

Information Policy claims to provide accurate and timely information regarding investments.

However, until local activists in Odisha and Delhi discovered IFC’s role in the project through

their investigations, no information was made public. The IDFC or IIF do not have any social

or environmental safeguard policies12. Had this project been directly funded by the IFC, it

would have been in violation of some of IFC’s key performance standards and disclosure

requirements. Had IFC approached the project directly or voluntarily disclosed its

association with the project, the funding may not have even come through.

Nonetheless, even if GKEL is financed through an intermediary, the IFC is still accountable to

communities raising concerns regarding the project. On 15 April 2011, the Odisha Chas

Parivesh Sureksha Parishad and Delhi Forum lodged a complaint against the GKEL project,

with the Compliance Advisor Ombudsman (CAO). The CAO is the independent recourse

mechanism for IFC which addresses concerns of communities who are affected by projects

financed by IFC. This complaint made to the CAO raises concerns on the funding model of

using financial intermediaries and highlights the fundamental standards that have been

flouted by GKEL – failure to disclose fundamental information to the community, social and

environmental problems and harassment and intimidation by the company.

On finding prima facie evidence in support of the complaint, the matter is now pending a

full audit with the compliance unit of CAO. If the CAO audit were to find that IFC’s finance to

GKEL is not consistent with IFC’s Performance Standards, their recommendations to the

World Bank could potentially have damaging impacts on the GKEL project in particular and

GMR projects in general.

11

Debt Equity Ratio is the proportion of debt and shareholders’ equity used to finance a project by a company. According to Investopedia, ‘a high Debt Equity Ratio means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense’. 12

In June 2013, IDFC adopted the Equator Principles, a voluntary guideline to regulate and monitor investments to mitigate environmental and social risks in project finance transactions.

18

Case Study No.2 - ATHENA DEMWE LOWER HYDRO ELECTRIC POWER

Special Purpose Vehicle - Athena Demwe Power Limited

Project Cost - Rs. 13,144.91 Cr

Lenders to Project - Power Finance Corporation and Rural Electrification Corporation;

other lenders are not known

Social Concerns - Lands have been acquired in violation of the 6th Schedule of the

Indian constitution; public hearing for the project was not

conducted properly; affected communities have lost agricultural

land, community forests, reserved forests and river bed forests;

impacts of this project on the local communities have been

under estimated in the EIA; over 5767 ha of land to be used for

Catchment Area Treatment (CAT) have not been assessed for

human and animal impacts; rights of the people have not been

recognised as per the Forest Rights Act 2006; acquisition of land

without proper consent from gram sabhas.

Environmental Concerns - Project’s EIA did not factor downstream impacts and cumulative

impacts from 6 mega hydro projects sited on Lohit River;

unnatural daily flow fluctuation in Lohit River to have adverse

impacts on fishing, agriculture, communities, ecology,

biodiversity and endangered species; misrepresentation of facts

and details in its application for wildlife clearance; granting of

wildlife clearance despite recommendations against clearing of

project from experts within Wildlife Board.

Legal status - The environmental clearance granted to the project stands

challenged in the National Green Tribunal.

CASE RATIONALE – Banks sanctioned loans to this PPP project without assessing

environmental and social impacts of the project and prior to the granting of mandatory

clearances by concerned Ministries. The case of Athena Demwe narrates a reversal of

logic. Instead of sanctioning loans subsequent to following due diligence and the sanction

of clearances by relevant Ministries, clearances are being requested to save the

deteriorating quality of loans granted in unwise haste.

The Government of Arunachal Pradesh (GoAP) awarded the Demwe Hydro Electric Project

(HEP) under Public Private Partnership (PPP)13 through bidding on build, own, operate and

transfer basis to Athena Energy Ventures Private Limited (AEVPL). The Government of

Arunachal Pradesh holds 26 per cent equity and after 40 years the project will revert to the

State Government. The project, whose scheduled date of commissioning (or beginning

operations) is April 2016, is to provide 12 per cent of the power free of cost to the state.

13

A public private partnership (PPP) is a venture or project, funded and operated through a partnership between the government or a public sector authority and one or more private sector companies.

19

AEVPL formed the Athena Demwe Power Limited (ADPL), a Special Purpose Vehicle (SPV),

for implementation of the project. AEVPL is a Joint Venture between AIP Power Private

Limited (formerly Athena Infraprojects Private Limited), PTC India Limited (formerly Power

Trading Corporation), Infrastructure Development Finance Company Limited (IDFC) and

Industrial Finance Corporation of India (IFCI). Athena Demwe Power, a public limited

company, is executing the Demwe Lower HEP and Demwe Upper HEP.

ADPL signed a Memorandum of Agreement (MoA) in July 2007 with the State Government

of Arunachal Pradesh. The Demwe Lower run-of-the-river HEP sited in Parasuramkund, Lohit

district, Arunachal Pradesh, is to have an installed capacity of 1750 MW (5x342 MW + 1x40

MW) with diurnal storage14, a Catchment Area15 of 20,174 sq km and a full reservoir level of

424.80 m. The Demwe Lower project was accorded Formal Concurrence by the Central

Electricity Authority (CEA) in November 2009, granted environment clearance by MoEF in

February 2010, wildlife clearance by National Board for Wildlife (NBWL) in February 2012,

Stage I forest clearance16 by MoEF in March 2012 and Stage II forest clearance by MoEF in

May 2013. While the construction activities were set to begin in April 2011, construction is

yet to begin according to the company’s June 2013 Six Monthly Progress Report on

Compliance Status of Environmental Clearance. The project has applied for registering with

the Clean Development Management (CDM)17 of the United Nations Framework Convention

on Climate Change (UNFCCC) for receiving credits for emission reduction.

Social Impacts from Athena Demwe Lower HEP

The total land requirement for the project is 1590 ha, including the submergence area of

1131 ha. Out of the total land, 174 ha is community Jhum or agricultural land, 720 ha is

community forests, 192 ha is reserved forests and 502 ha is river bed forest. The lands

under question are protected under the 6th Schedule of the Indian constitution, which

provides for protection of tribal land in the North Eastern region of India against acquisition

by non-tribals. However land was acquired for this project in 23 villages from 204 families

(1349 individuals), all of whom belong to the Scheduled Tribe communities of Tayang and

Thalai of the Miju and Digaru Mishmis. The 204 project-affected families also stand to lose a

majority of the large livestock holding they currently rear. According to a 2012 report18 by

Citizens’ Concern for Dams and Development, affected villagers have complained that public

14

Diurnal storage, meaning daily storage, refers to short-term or peak storage as opposed to seasonal storage. 15

Catchment area is the area where water from a river drains into a body of water. 16

Forest clearances are granted under the Forest (Conservation) Act 1980. Stage I clearance is an in-principal approval on the basis of a prima facie review. The conditions relating to transfer along with land and funds for compensatory afforestation are stipulated. Stage II clearance follows the deposit of money for compensatory afforestation, mitigating probable environmental damage, etc. 17

CDM allows emission-reduction projects in developing countries to earn Certified Emission Reduction (CER) credits, each equivalent to one tonne of CO2, for trading with industrialised countries that are required to meet reduction targets under the Kyoto Protocol. http://cdm.unfccc.int/about/index.html 18

An Assessment of Dams in India’s North East Seeking Carbon Credits from Clean Development Mechanism of the United Nations Framework Convention on Climate Change. February 2012. Jiten Yumnam. Citizens’ Concern for Dams and Development.

20

hearings for the project did not provide necessary information and that the hearings were

conducted without sufficient notice. The report alleges that free, prior and informed

consent of the affected people was not sought prior to initiating the project.

Impacts of this project on the local people have been under estimated in the Impact

Assessment report. According to a report by the Citizens’ Concern for Dams and

Development, ‘the impact of boulder mining which will be done in the downstream areas for

dam construction has not been studied, undermining the importance of boulders serving as

defence against floods’. While the EIA report estimates that only 1590 ha will be impacted

by the project, land to be used for the Catchment Area Treatment (CAT) has not been

assessed for human and animal impacts. The CAT plantations on over 5767 ha will involve

restrictions on land use to reduce siltation and increase life of reservoir. Also, as the project

involves 1416 ha of forest land, about 2832 ha of degraded forest land will have to be

afforested as compensation. The EIA report does not mention where the project will source

this 2800 odd ha for compensatory afforestation.

The Forest Rights Act 2006 (Scheduled Tribes and Other Traditional Forest Dwellers-

Recognition of Forest Rights Act) was in operation when the Demwe Lower project was

granted clearances. However, land was acquired for this project without recognising rights

of the community as mandated by the Act and without seeking consent for diversion of

forest land for non-forest purposes from Gram Sabhas as mandated by the MoEF.

Environmental Impacts from Athena Demwe Lower HEP

The Lohit River, a tributary of River Brahmaputra, has twelve hydro projects planned

simultaneously along its waterway. Six of these are mega hydroelectric projects including

1750 MW Demwe Lower, 1500 MW Demwe Upper, 1250 MW Hutong II, 588 MW Hutong I,

1200 MW Kalai II, 1450 MW Kalai and six are small hydroelectric projects including 99 MW

Gimliang, 32 MW Raigam, 98 MW Tiding I, 68 MW Tiding II, 22 MW Kamalang, 75 MW

Dihing. The Expert Appraisal Committee19 (EAC) of the Ministry of Environment and Forests

(MoEF) on River Valley and Hydroelectric projects prescribed a study of Lohit River basin to

assess the cumulative impacts of the 6 mega projects. Inexplicably, the environmental

clearance from MoEF for Athena Demwe Lower was de-linked to the completion of this

study, negating the cumulative and compounded impacts of the multiple projects sited on a

single river course. When this decision was taken, the EAC was headed by its Chairman P.

Abraham who was also the director of PTC India, one of the promoters of the Demwe

project. The Environmental Impact Assessment (EIA) for the Demwe Lower project did not

factor in downstream impacts. Nevertheless ordering for a post-clearance study of

downstream impacts, MoEF granted the project environmental clearance in February 2010.

19

Applications for environment and forest clearance of projects are placed before sector-specific EACs, constituted under the EIA Notification 2006, for scrutiny, technical appraisal and recommendation on clearance. The sectoral Committees are for industrial, thermal power & coal mining, non-coal mining, river valley, infrastructure & CRZ, and construction projects.

21

Run-of-the-river is a method generally used for small hydro projects with little or no water

storage and subject to seasonal river flows, serving as a peaking power plant. Peaking power

plants are run only when there is a high or peak demand for electricity unlike base load

plants which are operated continuously. Contrarily, the 1750 MW Demwe Lower HEP is a

large dam project with live storage capacity of 171.2 MCM and total storage capacity of

516.38 MCM. The diurnal fluctuations from Demwe Lower HEP, as a result of its peaking

operations, are a matter for serious concern. According to SANDRP (South Asia Network on

Dams, Rivers & People), the daily fluctuation (calculated for the month of February)

between 88 and 1729 cumecs20 will ‘be disastrous for ecologically sensitive habitats in the

downstream’. Community settlements, fishing, winter agriculture in riverine tracts, river

transportation and livestock rearing in grasslands are likely to be impacted by this unnatural

daily fluctuation in flow of water.

The affected people, represented by the North East Affected Area Development Society

(NEADS), have filed a case21 challenging the environmental clearance with the National

Green Tribunal (NGT). Arguing that the project will severely damage ecology, wildlife and

livelihood of communities living upstream in Arunachal Pradesh and downstream in

neighbouring Assam, the appeal challenges the granting of the environmental clearance

without the completion of comprehensive studies to assess cumulative impacts. The case is

pending before the NGT.

In November 2011, the standing committee of National Board of Wildlife (NBWL) sent a

two-member team comprising of Asad Rahmani, Director of the Bombay Natural History

Society, and Pratap Singh, Chief Conservator of Forest (wildlife) of Arunachal Pradesh to the

project area to assess the possible impacts of the project on wildlife. Their inspection report

expressed serious concerns over the impact on biodiversity and on the downstream area in

Assam, especially due to daily water fluctuation in the Lohit River. The report recommended

against granting of clearance for the following reasons-

- Submergence of portions of Parshuram Kund Medicinal Plant Conservation Area (MPCA);

- Submergence of 23 km of river length;

- Loss of longitudinal connectivity between the Lohit River in the uplands and the plains;

- Impact on Chapories or river islands of Lohit River;

- Impact on migration of Golden Mahseer, a species of fish on the verge of extinction;

- Submergence area in close proximity to Kamlang Wildlife sanctuary;

- 43,000 trees planned to be chopped near the Kamalang Wildlife Sanctuary;

- Impact on important habitats such as Dibru-Saikhowa National Park & Biosphere Reserve;

- Impact on grassland ecology & grassland-dependent species such as critically endangered

Bengal Florican, the Gangetic Dolphin & Asiatic Wild Buffalo;

- Impacts in downstream areas.

20

Cumec, short for cubic meter per second, is a measure of flow rate. 21

The case was filed before the National Environmental Appellate Authority and transferred to the NGT in February 2012.

22

Additionally, media reports have exposed that the project misrepresented facts and details

in its application for wildlife clearance. While the application to the NBWL states that the

distance of the reservoir to Kamalang Sanctuary is 0.5 kms, the project’s submission to the

Forest Advisory Committee (FAC) mentions 50 m. The submission to FAC also mentions that

the trees to be cleared are 1,24,000 in number and not 43,000 as stated to the NBWL.

Disregarding strong recommendations against granting of clearance by members of the

Standing Committee of NBWL, the MoEF granted the project wildlife clearance in February

2012. A month later, in March 2012, the MoEF granted the Demwe Lower HEP Stage I forest

clearance and stage II forest clearance was granted in May 2013.

Financial Issues in Athena Demwe Lower HEP

The project has a planned total cost of Rs. 13,144.91 Cr with a Debt Equity Ratio of 75:25.

The company’s website claims to have achieved financial closure by the 3rd quarter of 2010-

11 i.e. between October and December 2010. There is very little information publicly

available on the financing of this project. Rural Electrification Corporation is the lead lender

to the project and Power Finance Corporation has sanctioned a loan of Rs. 2300 Crore. The

list of other banks contributing to the remaining portion of the debt is not known. A portion

of equity or debt could be contributed by the Infrastructure Development Finance Company

Limited (IDFC) and Industrial Finance Corporation of India (IFCI) since they hold stake in the

promoting company - Athena Energy Ventures Private Limited. Despite being a public

limited company, ADPL’s website does not have Annual Reports which would necessarily

have comprised some additional information.

It is however known that the loan22 from the Rural Electrification Corporation was

sanctioned to Athena Demwe Power Limited on 06 January 2010. At that time, the project

had neither environmental nor forest clearance or the clearance from the Wildlife Board.

Also the fact that the project achieved financial closure in 2010 indicates that other loans to

this project were also sanctioned in the absence of the forest and wildlife board clearance.

However, even though this project was sanctioned loans in mid 2010, it is yet to take-off. In

the event that a project is long delayed, the loans to the project are affected.

The project was granted forest clearance by the Ministry of Environment and Forest in May

2013, six years after the project was initiated and almost three years after the project’s

financial closure, because of pressure from Central Ministries and the Chief Minister of

Arunachal Pradesh. As early as 2011, media reports revealed that the Finance Ministry was

pushing for the granting of clearances to the project to ‘remove uncertainty and prevent

deterioration in asset quality of financial institutions, of particularly public sector banks

which have given huge loans to Athena Demwe Power’. The MoEF was also pressurised to

go ahead with the project ‘given its strategic location’. The tens of dams planned on the

22

Refer Page 18 of the Athena Demwe UNFCC Clean Development Mechanism Project Design Document Form.

23

tributaries of the Brahmaputra, including the Lohit, are said to be part of India’s strategy to

counter similar projects by China on the other side of the border. These hurried plans to

build dams in the North-East region are to enable India to establish its first-user rights over

River Brahmaputra. Neither of these two rationales however justifies the irreversible and

harmful impacts this project poses to the local people. The stiff resistance to these dams

arising out of serious social and environmental impacts are concerns that financial

institutions providing loans to these projects need to factor in their assessments.

Case Study No.3 - SASAN POWER

Special Purpose Vehicle - Sasan Power Limited

Project Cost - Rs. 19,400 Cr (increased to Rs. 23,000 Cr)

Lenders to Project - State Bank of India, Power Finance Corporation, Rural

Electrification Corporation, Punjab National Bank, Life Insurance

Corporation, Axis Bank, Union Bank, IDBI, India Infrastructure

Finance Company-India, Bank of Baroda, Andhra Bank,

Corporation Bank, United Bank, India Infrastructure Finance

Company-UK

Part of the loan is refinanced by US Exim Bank, Bank of China,

China Development Bank and Exim Bank of China

Social Concerns - Land has been acquired from Adivasi, Dalit and backward

communities at low prices; families protesting the acquisition

were arrested by the police to force the selling of land; the

affected families have not been adequately rehabilitated;

violation of Madhya Pradesh Rehabilitation Policy 2002; rights of

people were not recognised as per the Forest Rights Act 2006;

acquisition of land without proper consent from gram sabhas.

Environmental Concerns - UMPP could emit 27,000 tonnes of carbon dioxide; over 7000

acres of forest land has been diverted for the mines.

Legal Status - Numerous project-affected families have filed cases against the

acquisition of their land for the project; Reliance Power’s

petition with the Central Electricity Regulatory Commission for

revision of tariff of power is pending.

CASE RATIONALE - Reliance Power refinanced nearly 75% of what was to be long term

loans from domestic banks within a year of its sanction with loans from US and Chinese

banks. Subsequently, Reliance Power is seeking revision of tariff of power from the plant

on the basis that that the ‘rupee had depreciated’. The depreciation is affecting the

project because of the huge loans from foreign banks. These refinanced loans have yet

again been restructured in March 2013 on account of delay in commissioning of plant.

With numerous reports of violations by Sasan Power and lack of due diligence by the

MoEF coming to light, it is evident that the domestic banks had sanctioned large amounts

of long term loans without adequately assessing the project.

24

Sasan Power Limited (SPL) was incorporated in February 2006 as a wholly owned subsidiary

of Power Finance Corporation Limited (PFC) in order to build, own, operate and maintain

the Sasan Ultra Mega Power Project (UMPP). UMPPs are planned by the Government of

India under the eleventh five-year plan to tackle power shortfall and ‘bridge the gap’. Power

Finance Corporation (PFC), the financial institution under Ministry of Power, is the nodal

agency for facilitating and auctioning UMPPs to competitive power producers. Of the four

UMPPs awarded so far, Sasan Power, Jharkhand Integrated Power and Coastal Andhra

Power were won by Reliance Power and Coastal Gujarat Power was won by Tata Power.

Twelve more such Ultra Mega Power Projects are currently under development by PFC.

Reliance Power won the bid for Sasan Power in 2007 through the competitive bidding

process by matching the lowest price of Rs. 1.19 per unit quoted by the original bid winner,

the Lanco-Globeleq consortium. A Power Purchase Agreement (PPA) was executed in 2007

with 14 procurers in seven States. Their off-take shares are as follows- Madhya Pradesh

(37.50%), Punjab (15%), Uttar Pradesh (12.50%), Delhi (11.25%), Haryana (11.25%),

Rajasthan (10%) and Uttarakhand (2.50%).

Sasan UMPP is a 3960 MW (6x660) pit-head coal based power plant sited in Sidhi, Singrauli

district, Madhya Pradesh. The project has been allocated three captive pit-head coal mine

blocks, Moher (402 MT), Moher Amlori extension (198 MT) and Chhatrasal, having total

reserves of almost 750 MT. The Sasan plant however requires only 460 MT of coal. The

project has acquired approximately 10,000 acres of land, of which almost 7000 acres is for

coal mines. The mines are located in forested areas, approximately 25 kms away from the

main plant in Sidhi village.

As per the MoU, the project was to be commissioned in May 2013 but Reliance Power

sought an extension until June 2014 and Sasan Power synchronised the first unit in March

2013. Based on a complaint filed by the Western Regional Load Despatch Centre (WRLDC)23,

the Central Electricity Regulatory Commission (CERC) ruled in June 2013 that Sasan Power

had actually not commenced commercial operations as stated in March 2013, as the set

testing parameters had not been met. Reliance Power challenged the order at the Appellate

Tribunal for Electricity (APTEL) which set aside CERC’s June order stating24 that the

Commission “had decided the issue on merits without giving an opportunity of being heard

to the Appellant (Reliance Power)”. The CERC is to decide on the matter afresh.

Social Impacts from Sasan Power

Along with government, revenue and forest lands, private lands of 946.58 Ha has been

acquired from Dalit, Adivasi and Backward Communities from the villages of Sidhi Kurd,

23

Along with WRLDC, the State governments of Punjab and Himachal Pradesh, which were to receive electricity from SPL, contend that Commercial Operation Declaration (COD) established by an Independent Engineer’s certificate was not in line with the provisions of the PPA. 24

Reliance Power wins appeal against CERC order on Sasan UMPP. 13 August 2013, The Economic Times.

25

Sidhi Kala, Tiyara, Jhanjhi, Harrhawa and Gidda Kadi. The affected families25 contest that

they were promised compensation of Rs. 7.5 Lakhs per acre of land but paid very low prices,

of lesser than Rs. 3 Lakhs per acre. The families were threatened and forced to receive

award cheques for the land lost to the project. The phase of acquiring land involved violent

clashes between the community, the authorities and project developers. Houses were

forcibly broken using bulldozers and dumpers and people were arrested by the police to

facilitate the process. Affected families from Harrhawa alleged that no prior notice was

served on them when their houses were broken down. Around 50 families continued26 to

live on land that Reliance Power enclosed with an illegal concrete wall. The villagers alleged

that the company used the police to threaten and/ or arrest villagers who voiced out against

the project. In about 15 reported cases, men from affected families were arrested on false

charges and released only after their families gave an undertaking to leave their land.

Gidda Kadi is a hamlet with largely Dalit and Adivasi families. About 50 Adivasi families of

Gidda Kadi belonging to Gond, Baiga and Panika communities are affected by the project.

The families in this village possess land records for the land they own. Many families had

refused to receive the compensation cheques and have instead filed cases against the

acquisition of their land by Sasan Power in the Bhopal High Court.

Surya Vihar, the rehabilitation colony set up by Reliance Power, is sited in Basma Dand, an

unpopulated area with fallow barren land, 15 kms away from Sidhi village. A 60 x 90 ft plot

in Surya Vihar was allotted to those families who lost both land and house. The company set

up 1400 plots and built 376 ‘houses’ in the colony. The houses are single rooms measuring

10 x 12 ft, with a kitchen and a toilet. Electricity to the houses is supplied for three hours a

day. Villagers reported that it was impossible to live in the deserted colony, in houses which

could not accommodate even small families. The villagers arrived at a compromise with the

District Collector who agreed to give families an option of receiving an empty plot in Basma

Dand and Rs. 75,000 as cost of constructing house. As of 2011 a total of 62 families lived in

Surya Vihar and only 20 families lived in the houses constructed for this purpose. The

remaining 350 odd houses built by Reliance Power remain unused and wasted.

In breach of the Madhya Pradesh Rehabilitation Policy 2002, which stipulates mandatory

employment in the project for one person of every displaced family, and Sasan Power

Limited’s own Resettlement Action Plan which guarantees the same, the project has

predominantly employed migrant workers from neighbouring districts and states for both

unskilled and skilled labour. Labour colonies set up in the vicinity of the plant to house the

migrant workers are witness to this.

25

Information used in this section is based on visits made by the author of this report in September 2011. 26

The 50 families continued to live in their houses located within the plant premises in September 2011.

26

Community rights over forests around the main plant in Sidhi and the mines in Moher and

Moher Amlori extension were not recognised according to the provisions of the Forest

Rights Act 2006 and land was acquired for this project without seeking consent for diversion

of forest land for non-forest purposes from the Gram Sabhas as mandated by the MoEF.

Environmental Impacts from Sasan Power

The 4000 MW coal-fired UMPP is located in Singrauli district, which is the 9th most Critically

Polluted Area27 with a Comprehensive Environmental Pollution Index score of 81.73. The

MoEF placed a temporary moratorium in January 2010 on consideration of environmental

clearance for projects located in 43 Critically Polluted Areas, including Singrauli. This

moratorium was lifted in June 2011 from Singrauli even though CPCB’s Interim Assessment

Report of 2011, disclosed that pollution levels in Singrauli had increased to 83.35. It is

apprehended that the Sasan Power plant28 will significantly add to the existing levels of

pollution as UMPPs emit approximately 27,000 tonnes of carbon dioxide per year.

UMPPS in India are mandated to employ the ‘super-critical’ technology to reduce emissions

and increase efficiency. Arguing that employing ‘super-critical’ technology ‘reduces’

pollution, project proponents of UMPPs are availing Certified Emission Reduction (CER) units

for trading in the carbon market by registering with the Clean Development Mechanism

(CDM) Executive Board of the United Nations Framework Convention on Climate Change

(UNFCCC). Sasan Power registered for Clean Development Mechanism credits in February

2011. Despite UMPPs being among the largest single sources of green house gas emissions

in the world, along with substantial radioactivity and heavy metal release from fly ash, the

Sasan project was granted the benefit of CDM merely because the use of super-critical

technology will ‘reduce’ the Co2 emission. According to a November 2011 report29, Sasan

Power Limited misrepresented facts in the Project Design Document (PDD), a key document

for validation and registration of a project with the CDM Board.

Sasan Power was granted environmental clearance and forest clearance for the main plant

from the Ministry of Environment and Forest in 2009. Environmental and forest clearance

for Moher and Moher Amlohri were granted in December 2008 and May 2010. The

Chhatrasal mine was denied permission for mining in January 2012 by a committee of the

MoEF as over 965 ha of land of the proposed mine were ‘good quality forests’ and the mine

fell within MoEF’s ‘No-Go’30 or inviolate list. Based on recommendations of the Empowered

27

Refer footnote 7 28

For further reading on the impacts of thermal plants in Singrauli, refer to report by Green Peace - The Coal Curse – A Fact Finding Report on the Impact of coal Mining on the People and Environment of Singrauli. 29

The Indian Clean Development Mechanism: Subsidizing and Legitimizing Corporate Pollution - An Overview of CDM in India with Case Studies from various sectors. November 2011. National Forum of Forest People and Forest Workers (NFFPFW), NESPON and Society for Direct Initiative for Social and Health Action (DISHA). 30

The Ministry of Environment and Forests along with the Ministry of Coal initiated the classification of forested areas into two zones of Go and No-Go in 2009. The ‘No-Go’ zone imposes a ban on mining activity in the concerned area on environmental grounds.

27

Group of Ministers (EGoM) to the Prime Minister’s Office, the project however received

Stage I Forest Clearance in November 2012. Stage II clearance is awaited.

Sasan Power Limited applied for consent for expansion of plant capacity by 1980 MW (3 x

660). The EAC deferred the proposal in September 2012 on grounds that “the proposal was

premature in its present form”. The Committee in its minutes noted that “primary

information sought in the Terms of Reference (TOR) was answered perfunctorily with no

details”. The Committee stipulated that the project proponent carry out a long term study

of the impacts of radio activity and heavy metal release from coal, not only for the

expansion but also for the existing UMPP. This indicates that impacts from the project were

not sufficiently assessed in the EIA report for the 3960 MW plant.

Sasan Power Limited was mandated by the Forest (Conservation) Act 1980 to afforest 1385

ha of non-forest land in compensation for diverting the same amount of forest land for

construction of its main plant and Moher & Moher Amlohri mine. A September 2013 report

by the Comptroller Auditor General of India (CAG) on Compensatory Afforestation in India

revealed that the Ministry of Environment and Forests had exempted Sasan Power Limited,

in violation of the Forest (Conservation) Act 1980, from providing non-forest land of 1385 ha

as compensatory afforestation. According to the report, “SPL was allowed compensatory

afforestation over double degraded forest land (as opposed to non-forest land) even though

it was not eligible for such an exemption”.

Banking on Coal and Scams

The viability of the Sasan project is heavily dependent on optimisation of the coal reserves

allotted to the project. However, the project has run into trouble with more than one of

their plans for coal use. For instance, Reliance Power’s request for approval to pledge the

mining lease of Moher and Moher Amlohri Extension coal blocks as security to lenders was

rejected by the Coal Ministry in January 2012 on the grounds that there was no precedence

and that the request for mortgage should come from the State Government. Reliance Power

was required to mortgage the mining lease as per the financing agreement signed with the

consortium of domestic banks. This agreement to mortgage the mining lease in return for

loans had been reached without the approval of the Ministry of Coal.

To maximise the use of coal allocated in excess of Sasan plant’s requirement, Reliance

Power sought the diversion of surplus to its other power plant operated in the same state.

In August 2008, an Empowered Group of Ministers (EGoM) allowed diversion of the excess

coal from coal blocks allocated for Sasan UMPP to Reliance Power’s Chitrangi Power Project.

In an unprecedented move, Tata Power challenged this approval for diversion of surplus

coal to Reliance Power in July 2011 at the Supreme Court claiming that ‘it was detrimental

to public interest’. Power from the Chitrangi plant was set to be sold at Rs. 2.45 per unit as

compared to Rs. 1.19 per unit for Sasan. Tata Power’s affidavit stated that ‘the tariff

difference will burden consumers with Rs. 25,400 Cr for 26 years’.

28

This decision by the EGoM was questioned in September 2011, when the Comptroller

Auditor General (CAG) of India in its report on Ultra Mega Power Projects alleged that the

Ministry of Power gave “undue benefit” of Rs. 4,875 Cr (reduced from the initial estimate),

spread over the next 25 years, to Reliance Power. The CAG report argued that the

Government had changed coal licence norms to allow the diversion of surplus coal from one

project to another. These concessions came after the execution of the bidding process

agreements and no benefit from this transfer of coal was planned to be passed on to the

consumer. However, the EGoM in a letter dated 02 February 2012 to the Power, Coal and

Law Ministry warned that, ‘any proposal to review the EGoM’s decision could severely dent

the confidence of the international lending community in Indian projects.’

The CAG report also argued against the allotting of coal blocks to private companies, as Coal

India Limited (CIL) produced coal at half the declared mining cost of firms such as Reliance

Power, Tata Power and Jindal Power. While Reliance Power pitched the expected cost of

mining at Sasan to be as high as Rs. 1000 per tonne, CIL operated mines Amlohri and Nigahi,

in close proximity to Sasan, cost about Rs. 450 per tonne.

Bringing to end the assertion of Sasan UMPP’s historically low cost of producing power, in

January 2013 Reliance Power sought revision of tariff through two petitions filed with the

Central Electricity Regulatory Commission (CERC). The company is seeking revision of tariff

on the basis of a ‘change in law during the construction period’ and due to ‘unforeseen

depreciation of the Indian rupee’.

Financial Issues in Sasan Power

The stated project cost of Sasan Power was Rs. 19,400 Cr and financial closure was achieved

in April 2009. In 2013 the estimated project cost had risen to Rs. 23,000 Cr. The project was

tied with a Debt Equity Ratio of 75:25, making it the largest loan on project finance basis in

India. A consortium of 14 banks led by the State Bank of India and Power Finance

Corporation financed the Rs. 13,848 Cr debt component. The breakup of the loan is as

follows- State Bank of India (Rs. 3500 Cr), Power Finance Corporation (Rs. 1770 Cr), Rural

Electrification Corporation (Rs. 1342 Cr), Punjab National Bank (Rs. 900 Cr), Life Insurance

Corporation (Rs. 800 Cr), Axis Bank (Rs. 750 Cr), Union Bank (Rs. 750 Cr), IDBI (Rs. 500 Cr),

India Infrastructure Finance Company-India (Rs. 400 Cr), Bank of Baroda (Rs. 300 Cr), Andhra

Bank (Rs. 200 Cr), Corporation Bank (Rs. 200 Cr), United Bank (Rs. 200 Cr), India

Infrastructure Finance Company-UK (USD 2,236 - dollar denominated loan). Under the ‘Fifth

Power System Development Project’, the World Bank sanctioned USD 1 Billion ‘to

strengthen transmission network for large bulk power transfers from Sasan UMPP,

Krishnapatnam UMPP and Tata Mundra UMPP.

29

Less than a year after availing the huge loans, in mid 2010 Reliance Power announced plans

to re-finance31 loans to the project. The banks that had sanctioned long term loans to the

project were to earn interests over a period of time. The refinancing of loans can potentially

deny the banks of their retained earnings even while huge amounts of money were diverted

from other profitable interests to this project for a period of more than one year.

Standard Chartered Bank was roped in to raise capital from international banks, primarily

the US Exim Bank, Bank of China, China Development Bank and Exim Bank of China. The new

loans were to be raised in the form of vendor credit whereby loans are linked to the

purchase of material. These loans were to save Reliance Power as much as Rs. 300 Cr per

year on interest payments. The approval for receiving External Commercial Borrowing32

(ECB) from the RBI was granted in September 2011.

The US Exim Bank rejected a request from Reliance Power in June 2010 to provide about

USD 450 Million, to support the sale and export of mining equipment from Wisconsin-based

Bucyrus International for Sasan Power, on environmental grounds. The US Exim Bank had

established and implemented a carbon policy post a 2002 lawsuit filed by Friends of the

Earth for the Bank’s failure to consider greenhouse gas implications in its financing activities.

The new policy required the Bank’s Board of Directors to consider potentially adverse

environmental impacts of high-carbon intensity transactions. The Bank claimed that the

‘environmental impact of the Sasan project was far too adverse’. The projected annual

carbon dioxide emissions of 27,000 tonnes from Sasan were greater than the annual

emissions of all fossil fuel projects approved by the Exim Bank in 2009. Three weeks post

this public refusal to finance the Sasan project, in July 2010 the Exim Bank approved a USD

600 Million in loan guarantees to the project. The shocking reversal and ‘compromise’ was a

result of Reliance Power’s assurance to additionally generate 250 MW of renewable energy

on the project site ‘to address low carbon policy concerns’. The Exim Bank allowed Reliance

Power to submit a new application which included an additional solar energy component.

This however was not subject to the conditionality that the actual pollution levels from the

Sasan power plant be lowered. In August 2010, US Exim Bank sanctioned USD 917 Million

(nearly Rs. 4,300 Cr) to the Sasan project, the largest such loan to an Indian company.

Apart from the US Exim Bank, Bank of China, China Development Bank and Exim Bank of

China approved a loan of USD 1.1 Billion (over Rs 6000 Cr) to Reliance Power towards

import of Boiler-Turbine Generator (BTG) from Shanghai Electric Group Company for the

Sasan project in July 2012. The Sasan UMPP was awarded the ‘Asia-Pacific Refinancing Deal

of the Year 2011’ by Project Finance and Infrastructure Finance Magazine.

31

Refinancing refers to replacing an old debt with a new debt under different terms and conditions. 32

ECB is a fairly new trend which allows Indian companies to raise funds from overseas banks through different debt instruments. This borrowing is monitored by the Reserve Bank of India. Companies use ECB to raise money from overseas allows for interest rate arbitrage i.e. taking advantage of the difference in price between two or more markets.

30

In July 2012, the Government of India levied a 21 per cent import duty on power

equipment33 in order to protect Indian power plants from cheap Chinese equipment. The

Commerce Department has opposed the Power Ministry’s attempts to protect existing

projects such as Sasan UMPP from the duty hike. According to a 2011 report by Forbes

India, between 2004 and 2007, Chinese firms sold equipments to 18 power plants in India

and atleast six of the plants have faced critical problems. Despite being aware of these

concerns on the quality of the equipment, Indian companies are continuing to purchase

equipment from Chinese firms because of lower cost and the added benefit of low-interest

loans from Chinese banks. The August 2013 report of the Central Electricity Authority (CEA),

which evaluated the performance of power generation equipment supplied by Chinese

firms, criticised the Chinese power equipment on “all key operational parameters -

operating load factor, heat rate, auxiliary consumption, frequency of forced outages,

breakdowns and safety mechanisms”34. In August 2013, the Government of India approved

new norms for bidding of Ultra Mega Power Projects on the recommendations of an

Empowered Group of Ministers (EGoM) which bars companies from importing equipment

for the projects.

Two years after the refinancing, in May 2013, Reliance Power restructured the Rs. 14,500 Cr

loan to the Sasan project. The restructuring has extended the repayment schedule to March

2015 with a marginal increase in the interest rate from 14.5 per cent to 14.7 per cent. The

delay in commencing commercial operations required extension in the repayment schedule.

The current exposure of Indian banks in the project include Rs. 3770 Cr with PFC, Rs. 3688 Cr

with IIFCL-UK, Rs. 3500 Cr with SBI, Rs. 1342 Cr with REC and Rs. 900 Cr with PNB. According

to a May 2013 news report35, at the time of this restructuring the estimated project cost

was Rs. 23,000 Cr, showing an increase of Rs. 3600 Cr from the original cost of Rs. 19400 Cr.

Case Study No.4 - LAVASA HILL CITY

Special Purpose Vehicle - Lavasa Corporation Limited

Project Cost - USD 31 Billion (approx Rs. 1,68,000 Cr)

Lenders to Project - The project is financed by a total of 27 banks including the ICICI

Bank, Axis Bank, Bank of India, Allahabad Bank, IndusInd Bank,

Andhra Bank, United Bank of India, Jammu & Kashmir Bank,

Deutsche Bank, Union Bank and L&T Infrastructure Finance

Company.

Social Concerns - Illegal acquisition of 609 ha of ceiling land; illegal acquisition of

190 ha of lands belonging to Adivasis; illegal transfer of 141 ha

33

India imports main plant equipment such as boilers and turbines mainly from China, South Korea & Russia. Chinese state-owned firms - Dongfang Electric Corporation, Shanghai Electric, Sichuan Machinery and Equipment and Shandong Electric Power Construction Corp export a majority. Reliance Power, Adani Power and Lanco are the top three importers of Chinese equipment for their power projects in India and as of April-end, 24,437 Mw of India's installed capacity was based on imported Chinese equipment. 34

CEA shock for Chinese power equipment. 12 August 2013. Business Standard. 35

Lenders restructure Rs. 14,500 Cr loan for Reliance Power’s Sasan UMPP. 31 May 2013. The Economic Times.

31

of land belonging to Krishna Valley Corporation; misusing

status of Special Planning Authority (SPA); rights of the people

have not been recognised as per the Forest Rights Act 2006;

acquisition of land without proper consent from gram sabhas.

Environmental Concerns - Construction of township without clearance from MoEF;

violation of EIA Notification 1994 and Environment Protection

Act; construction on land without state clearance; illegal

cutting of trees; illegal construction on forest lands.

Legal Status - Pending cases before the Pune District Revenue Authorities for

illegal transfer of lands; pending criminal case before the Pune

bench of Bombay High Court filed by Government of

Maharashtra for violation of the Environment Protection Act;

pending case before the National Green Tribunal challenging

environmental clearance granted by MoEF to LCL; pending

Public Interest Litigation case before the Bombay High Court

for illegal allotment of Krishna Valley Corporation land;

pending case before the Bombay High Court challenging the

Special Planning Authority status granted to LCL.

CASE RATIONALE - Poor planning and bad judgement in a project like Lavasa with an

enormous investment of Rs. 1,68,000 Cr has resulted in colossal chaos. Lavasa Hill City is a

classic case where the illegalities were first deliberately ignored, then put under the

carpet when raised by affected communities and finally ‘legalised’ by Government

authorities under pressure. Mere regularisation of violations is however not going to undo

the social and environmental harm the project is causing and the continued resistance to

the project from affected communities is proof of that. Lavasa project is caught in one too

many violations for easy redressal. Even if one were to accept that banks provided loans

to Lavasa Corporation before the violations came to light and in the absence of a robust

mechanism to assess social, environmental and financial risks, on what grounds have

banks approved another Rs. 600 Cr for work on the second phase of the project?

Lavasa Corporation Limited (LCL), a subsidiary of Hindustan Construction Company (HCC), is

setting up a township amidst seven hills surrounding a 60-km lakefront in Mulshi and Velhe

taluks, Pune district, Maharashtra. It is being developed in four phases over approximately

25,000 acres of land with an investment of USD 31 billion (approx Rs. 1,68,000 Cr). Lavasa

Hill City is a planned township, which proposes to accommodate a permanent population of

three Lakh people, involving real estate, infrastructure, retail, healthcare, tourism and

leisure, education and hospitality industries. LCL operates 35 subsidiary companies for

business operations in the different sectors.

The project was incorporated in 2000 as Pearly Blue Lake Resorts Private Limited, a business

hotel, by Aniruddha Pradyumna Deshpande with a capital of Rs. 2 Cr. Through a notification

32

in 2001 the State Government declared 18 villages in Mulshi and Velhe Taluka as ‘hill

station’. The project was converted into a public limited company in March 2003 under the

name of Lake City Corporation Limited. Hindustan Construction Company (HCC) Limited

took over as promoters of the project, which was renamed as Lavasa Corporation Limited in

June 2004. According to the company’s 2010 draft Red Herring prospectus, HCC holds 64.99

per cent, Avantha Group holds 16.25 per cent, Venkateshwara Hatcheries holds 12.79 per

cent and Vinay Maniar holds 5.95 per cent of LCL. The project was initiated in 2006 with a

plan to complete Phase 1 in 2010 and commission the entire project by 2021. However,

construction work for Phase 1 of Lavasa Hill City is yet to be completed.

Lavasa’s September 2010 draft red herring prospectus, the company acknowledged to

having 55 outstanding litigations against them. There are three public interest litigations,

twenty civil proceedings, thirty revenue proceedings, one notice from the District Collector,

and one notice from a Gram Sabha. LCL’s promoters, HCC, have four criminal proceedings,

thirty three civil proceedings (involving Rs. 139.7 Cr), twenty five industrial and labour

related proceedings (involving Rs. 86 Lakhs), twelve share related proceedings, six tax

related proceedings (involving Rs. 7.3 Cr) and one arbitration proceeding filed against them.

Social Impacts from Lavasa Hill City

The total water requirement for the Lavasa project is 45 MLD and the total power

requirement is 500 MW. LCL had an agreement with Maharashtra State Electricity

Distribution Company Limited for supply of power between 2008 and 2010, after which it

entered into contracts with Tata Power. LCL was granted permission to construct ten check-

dams within the submergence and catchment area of the Warasgaon dam. The total

capacity of the dams is expected to be 1,031 mcft. The operation of these check dams are

bound to reduce flow of water in the main reservoir. It must be noted that Warasgaon dam

contributes to Khadakwasla dam, which provides water to the entire district of Pune.

The Maharashtra Government has declared an area of approximately 23,014 acres in 18

villages in Mulshi and Velhe as hill station. As of September 2010, Lavasa Corporation held

about 9460 acres of land. The villages from which Lavasa Corporation acquired lands are

populated by Marathas and Scheduled Tribe communities of Dhangar, Koli, Thakar and

Katkari. According to local and media investigations, land had been taken by force and fraud

from several village communities. Land records had been changed without permission or

knowledge of the actual owner and on enquiry the records were found missing from the

district offices. According to the report by the People’s Commission of Enquiry on Lavasa36,

36

The People’s Commission of Enquiry on Lavasa was a collective initiative of the India Centre for Human Rights and Law, Mumbai, National Alliance of People's Movements, Shoshit Jan Andolan, National Centre for Advocacy Studies and Manav Hak Abhiyan. The report was the result of a two month enquiry by the commission whose members included Shri Y.P. Singh (Advocate, High Court of Mumbai and former CBI Official), Arvind Kejariwal (current Chief Minister of Delhi), Shri S. M. Mushrif (former Inspector General of Police, Mumbai) and Shri Nirmal Suryavanshi (Senior Advocate).

33

‘LCL had looped in real estate agents to purchase land for sums as low as Rs.500 to Rs.5000.

People were made to believe that the low payment made to them was only an initial token

payment. In many cases, only one or two acres of land were purchased while making the

registration for larger portions of land.’ In Mugaon village alone 67 Adivasi families lost 330

acres of land without receiving any compensation. The families, which were forcibly evicted

from their land, filed a complaint with the District Revenue authorities in mid 2011.

Lavasa Corporation acquired ceiling lands in violation of state rules. Local communities were

allotted land by the State Government in 1964, under the Maharashtra Agricultural Land

(Ceiling on Holding) Act 1961, which transferred surplus land to the landless and

economically backward families. The District Collector transferred 372 ha of land in excess

of ceiling, which had not been taken possession by the Government, to the company.

Another 609 ha of ceiling land allotted to farmers was taken back for transfer to Lavasa.

Also, Lavasa acquired Adivasi lands in excess of permission granted by district authorities.

While the company had permission to purchase 102 ha, it took control of 292 ha.

In 2002, the Khadakvasla Irrigation Division allotted 141.15 ha of Krishna Valley Corporation

land to Vidya Pratishtan, allegedly for use by Lavasa Hill City, on a 30 year lease for an

annual royalty of Rs. 2,75,250. The market price for leasing the same land is valued at Rs.

900 Cr. Vidya Pratishtan is an educational society headed by Mr. Sharad Pawar, president of

the Nationalist Congress Party and the Union Cabinet Minister for Agriculture. The

Maharashtra Krishna Valley Development Corporation (MKVDC) was headed, at the time the

decision was made, by Mr. Ajit Pawar, nephew of Mr. Sharad Pawar. In 2006 Shamsunder

Potare, a project-affected person filed a Public Interest Litigation in the Bombay High Court

alleging that this land transfer was illegal and in violation of the Supreme Court judgement,

which disallowed transfer of land acquired in public interest to private projects. In October

2007, the Bombay High Court issued notices to Vidya Pratishtan and to a company owned

by Mr. Sadanand Sule, the son-in-law of Mr. Sharad Pawar, in connection with the alleged

illegal allotment of plots belonging to MKVDC. The case is pending.

The Maharashtra Government began the process of rectifying the violations in the land

acquisition process for the Lavasa Hill City project in October 2010. The revenue department

pointed to three kinds of irregularities in the project:

Transfer of 141 ha of land through lease by the Maharashtra Krishna Valley

Development Corporation (MKVDC) where permission from the revenue

department, as mandated by state laws, was not sought.

Acquisition of 609 ha of agricultural land from farmers for commercial purposes in

violation of state procedures. Acknowledging this violation, the State Government

has suggested that this transfer of ceiling land to Lavasa could be regularised with

the imposition of a fine of Rs. 25 Cr.

34

Acquisition of 190 ha of land belonging to Adivasis without permission from State

authorities. Acknowledging the violation, in March 2011 the State Revenue

Department ordered Lavasa Corporation to return Adivasi lands that had been

acquired without following the due procedure.

In a first of its kind, Lavasa Corporation was granted the status of Special Planning Authority

(SPA) in June 2008 by the NCP-led Maharashtra State Government. The granting of SPA

under the Maharashtra Regional Town Planning (MRTP) Act allowed Lavasa Corporation to

approve Lavasa Hill City’s plans and work. In the light of the massive environmental

violations by the hill city project, the MoEF advised the State Government in 2010 to

reconsider the special allowance of SPA status granted to Lavasa Corporation. In its March

2011 report, the Comptroller Auditor General (CAG) of India criticised the SPA status

granted to Lavasa for lack of transparency and alleged that the SPA sanctioned illegal

expansion of the project and had approved plans and layouts in violation of the

Maharashtra Regional Town Planning Act and Development Control Regulations.

In yet another case against Lavasa, in January 2012, two brothers belonging to affected

families approached the Bombay High Court challenging the State Government's decision to

grant Lavasa Corporation the authority to acquire land and act as a Special Planning

Authority (SPA) for the hill city project. The petition sought the quashing of the 2008

notification issued by the Urban Development Department (UDD) contending that statutory

powers like the planning authority cannot be delegated to a private company registered

under the Companies Act 1969. If the status of Special Planning Authority granted to Lavasa

Corporation were to be revoked, all the decisions and approvals made by the authority will

be reviewed and plans made in violation of State and Central laws can stand to be cancelled.

Over 2000 acres of the lands acquired for Lavasa are forest lands37 which are depended

upon by the local communities for collection of non-timber forest produce. Lavasa cut down

hundreds of trees for constructing38 roads on forest land without seeking prior permission

from the Ministry of Environment and Forests as mandated by the Forest Conservation Act

1980. Community rights over forests have not been recognised according to the provisions

of the Forest Rights Act 2006. Moreover, land was acquired for this project without seeking

consent for diversion of forest land for non-forest purposes from the Gram Sabhas as

mandated by the MoEF.

Environmental Impacts from Lavasa Hill City

In March 2004, the Maharashtra State Department of Environment gave the final clearance

to LCL under the Maharashtra Hill Station Regulation of 1996. LCL did not apply for

clearance from the Ministry of Environment and Forests (MoEF) although the Environmental

37

Report of the People’s Commission of Enquiry on Lavasa. 38

How Government Agencies Fast-Tracked Lavasa. January 2011. Rifat Mumtaz. Infochange India.

35

Impact Assessment (EIA) notification of 1994 mandates central clearance for tourism-

related projects at an elevation of more than 1000 m from sea level and/ or involving an

investment of over Rs. 5 Cr. Fifty eight ha of Lavasa City is above 1000 m and the project

cost is higher than Rs. 5 Cr! In July 2005, the MoEF alerted the Maharashtra Environment

Department that the LCL project required central clearance; this was refuted by both the

State Government and LCL. This letter of rebuttal was found ‘missing’ in 2010 from the files

of the State Pollution Control Board and the State Environment Department.

In November 2010, the Ministry issued a show cause notice to LCL under Section 5 of the

Environment (Protection) Act 1986 asking ‘why the illegal structures should not be

demolished’ for violation of the Environment Protection Act. LCL was ordered to stop all

construction on site. The Expert Appraisal Committee (EAC) of the MoEF had observed that

construction had been undertaken without even the state environmental clearance on 681

ha of land and deviations had been made from the approved plan. Lavasa Corporation

Limited moved the Bombay High Court in December challenging the notice issued by MoEF.

The 13 January 2011 EAC report confirmed violation of environmental laws, including

haphazard cutting of hills. The committee stated that the planning and development of the

entire project needed to be reworked, a fresh Environment Impact Assessment was to be

conducted and a revised proposal was to be submitted to the Ministry.

In a dramatic reversal of judgment however, in June 2011 the MoEF indicated that it was

willing to clear Lavasa's 1st phase, subject to five preconditions. Lavasa agreed to meet four

of these, including setting up an environmental restoration fund, earmarking profit

percentage for the Corporate Social Responsibility (CSR) and drawing up a revised

development plan. The first condition, that the State Government take ‘credible action’

against the company for violation of environmental law, remained a point of contention. In

November 2011, Maharashtra Pollution Control Board filed a criminal complaint in the Pune

bench of the Bombay High Court against nine directors and six officials of LCL for violation of

the Environment Protection Act. Without more ado, Lavasa was granted clearance by MoEF.

Subsequently, Lavasa Corporation challenged the Ministry’s decision to impose conditions

along with the environmental clearance at the National Green Tribunal (NGT). On the other

hand, Dnyaneshwar Shedge, a project-affected person, challenged the environmental

clearance granted by MoEF on the grounds that the decision was ‘arbitrary’. Both cases are

pending before the tribunal.

Conflict of Interest

It has been established that the project developers were closely connected with high

ranking political members in Maharashtra. Sadanand Sule, the son-in-law of Sharad Pawar,

owned 21.97 per cent stake in Lavasa Corporation between 2002 and 2004. It is public

information now that the company significantly benefited from the most important

notifications, agreements and clearances granted by the Maharashtra Government in this

36

period. These included the State Government’s notification declaring 18 villages of Mose

valley as ‘hill station’, Urban Development Departments’ in-principle sanction for

development of the villages as tourist resorts, agreements with the MKVDC for construction

of mini-dams in the Warasgaon backwaters, agreement with the Maharashtra Tourism

Development Corporation and the State Environment Department’s clearance to develop a

hill station. In April 2012, the Comptroller and Auditor General (CAG) of India charged

Maharashtra State Government for favouring the developers of Lavasa Hill City by framing

regulations and making amendments to existing laws with the sole purpose of illegally

aiding the project.

Financial Issues in Lavasa Hill City

The Lavasa project has a planned total cost of USD 31 Billion (approx Rs. 1,68,000 Cr) which

include the numerous real estate, infrastructure, retail, healthcare, tourism and leisure,

education and hospitality industries. The loan portion of the project cost is financed by a

total of 27 banks including the ICICI Bank, Axis Bank, Bank of India, Allahabad Bank, IndusInd

Bank, Andhra Bank, United Bank of India, Jammu & Kashmir Bank, Deutsche Bank, Union

Bank and L&T Infrastructure Finance Company Limited.

Adding into the bargain against Lavasa, the Economic Offences Wing (EOW) of the Central

Bureau of Investigation (CBI) implicated Lavasa Corporation in the multi-Crore loan scam in

November 2010. The CBI alleged that Maninder Singh Johar, Director of Central Bank of

India, had acted upon a bribe to sanction Rs. 400 Cr as loan to Lavasa Corporation despite

unfavourable reports on the project. The investigation is pending with the CBI.

In July 2010 HCC announced that Lavasa Corporation would raise Rs. 2000 Cr through an

Initial Public Offering (IPO)39. Within four months Lavasa was forced to deter plans, in view

of the show-cause notice issued by the MoEF in November 2010.

In October-December 2011, HCC posted a net loss of Rs. 130 Cr and a consolidated debt of

Rs. 8100 Cr. In this period Lavasa Corporation had defaulted in payment of both principal

and interest on its loans. Media reports in the same period revealed that unlike State run

banks, private banks were receiving payment on their working capital loans from LCL. By

January 2012 Lavasa was downgraded to default grade by the rating agency CARE.

The loans to Lavasa Corporation had considerably deteriorated by early 2012 and lenders

along with HCC requested the RBI to treat a part of the loan to LCL as infrastructure funding.

The loans provided to Lavasa were categorised as commercial real estate and banks'

exposure to commercial real estate weighs higher risk demanding lenders to set aside

higher capital. Additionally, the Corporate Debt Restructuring (CDR) Cell does not permit the

39

Initial Public Offering refers to the first sale of stocks by a private company to the public seeking capital to expand and to become publicly traded.

37

restructuring of real estate sector loans and RBI guidelines demand that loans given to real

estate companies be classified as non-performing asset (NPA) once restructured. If the RBI

were to consider Lavasa as an infrastructure company, then HCC could approach the

consortium of banks at CDR for a restructuring package and avoid its loans being treated as

NPA. This request was rejected by the RBI in July 2012. HCC approached banks individually

for restructuring measures and a substantial portion of the Rs. 850 Cr loan at banks is now

treated as NPA. The terms of the restructuring involved a moratorium on repayment of

principal for two years and interest rate concessions for the first few years.

The State and Central authorities did not initiate action against Lavasa Corporation for over

six years while continuing to grant clearances in the interim period. Several official bodies

and individuals in the State and Centre deliberately shielded the project for unofficial

reasons. Despite the grant of clearance by the MoEF in November 2011, the project’s

progress has been remarkably slow owing to problems arising out of a multitude of

illegalities, violations and legal challenges.

Case Study No.5 - LAFARGE SURMA

Special Purpose Vehicle - Lafarge Surma Cement Limited

(Lafarge Umiam Mining Private Limited and Lum Mawshun

Minerals Private Limited)

Project Cost - USD 280 Million (approx Rs. 1515 Cr); cost of the project on the

Indian side is USD 25 Million (approx Rs. 140 Cr)

Lenders to Project - International Finance Corporation, Asian Development Bank,

German Development Bank, European Investment Bank,

Netherlands Development Finance Company, Arab-Bangla

Bank, Standard Chartered Bank, HSBC, Commercial Bank of

Cylon PLC, Uttara Bank Limited, Standard Chartered-Dhaka,

Citibank-Dhaka, Trust Bank-Dhaka

Other Lenders in India - Citibank, Mumbai and Standard Chartered Bank, Mumbai

Social Concerns - Mortgage of indigenous lands without permission; Indigenous

communities have been dispossessed of their private and

community lands without their knowledge and permission;

constitutionally protected scheduled lands belonging to the

indigenous communities in Meghalaya have been mortgaged

to international financial institutions by a company registered

in Bangladesh.

Environmental Concerns - Submission of false information to obtain clearance from

MoEF; illegal clearing of forest area for mining activity; illegal

mining without necessary consent; illegal felling of trees.

Legal Status - Pending case against illegal transfer of land to LMMPL in the

Guwahati High court filed by local community.

38

CASE RATIONALE – Lafarge’s blatant violation of environmental and social norms of the

country, even while being financed by international financial institutions and banks which

have independent safeguards to alleviate social and environmental harm, goes to show

that we cannot rely on international mechanisms to protect our human and

environmental life. In a case of curious judgment, during Lafarge’s inability to service long

term loans with international financial institutions as a result of court cases in India,

Indian banks bailed out the company by providing short term loans. The company neither

had a valid environmental clearance nor forest clearance at that time.

Lafarge Surma Cement (LSC), a cross-international border project, was set up in Bangladesh

in 1997 by Surma Holdings BV as a private limited company. Surma Holding BV,

incorporated in the Netherlands, owns 59 per cent of Lafarge Surma. Lafarge Group of

France and Cementos Molins of Spain each own 50 per cent share in Surma Holding BV.

Lafarge Surma Cement became a public limited company in January 2003. With a project

cost of USD 280 Million, this project was publicised as one of the largest foreign investments

in Bangladesh.

Lafarge Surma’s 1.2 MTPA cement plant in Chhatak, Bangladesh depends entirely on

limestone from quarries in Meghalaya, India. Limestone from Shella-Nongtrai in Sohra in

Meghalaya's East-Khasi Hills district is transported to the cement plant in Chhatak,

Bangladesh, via a 17 km-long cross-border conveyor belt. The quarries are operated by a

Lafarge Surma subsidiary- the Lafarge Umiam Mining Private Limited (LUMPL). The mining

rights however are owned by another LSC subsidiary, Lum Mawshun Minerals Private

Limited (LMMPL), which has a 35-year agreement with the local villages for mining on about

100 ha and the liberty to use another 26.6 ha for mining-related activities. While LUMPL is a

100 per cent subsidiary of Lafarge Surma Cement (LSC), only 74 per cent of Lum Maushun

Minerals Private Limited (LMMPL) is owned by Lafarge Surma. Two Meghalayans of Khasi

origin own the remaining 26 per cent in LMMPL. The Nongtrai mines supply 2 MTPA of

limestone to the cement plant. The method of mining is open cast with semi-mechanised

light trippers. The Chhatak plant began producing cement in 2006.

Social Impacts from Lafarge Surma

The total lands acquired on the Indian side from Nongtrai and Shella village include 100 ha

of land for limestone mining, 30 ha for the conveyor belt, 13 ha for shale mining and 7.6 ha

for the crusher unit. The lands under question are protected under the 6th Schedule of the

Indian Constitution, which provide for protection of tribal land in the North Eastern region

of India against acquisition by non-tribals. Additionally, the Meghalaya Land Transfer

Regulation Act 1971 prohibits transfer of tribal lands to non tribals except by a ‘previous

approval of the competent authority who shall accord such sanction subject to certain

conditions which include welfare and development of tribals’. Two Khasi locals played an

important role in acquiring these lands and obtaining mining rights from the local

indigenous Khasi people. Some parts of the land were leased and some bought from

39

villagers of Nongtrai and Shella through the two Khasi natives who in turn transferred the

rights to LMMPL, in which they hold 26 per cent shares. LMMPL then transferred the legal

rights of the land, leased and purchased for mining and conveyor belt, as mortgage to

international financial institutions (IFIs) for the USD 153 Million loan. The Deputy

Commissioner of East Khasi Hills district, Shillong (Mr. D.P. Wallang, IAS), as competent

authority under the Meghalaya Land Transfer Regulation Act 1971, granted the sanctions for

land transfer and subsequent mortgage of these lands in favour of the six international

banks.

While the 'conditional’ permission for transfer of land was granted by Indian Government in

2001, the sanction for land transfer came in 2006. The Indian Government’s position was

that, "the permission was given on the condition that in the event of non-payment of the

loan by the company, the mortgaged land can under no circumstances be transferred to a

person other than a tribal permanent local resident of the state.” This argument discounts

the fact that no local Khasi person can arrange USD 153 Million plus interests to reclaim the

land if the situation ever arose. Also, in violation of state laws and guidelines adhered to by

the IFIs, the transfer of lands was completed by 2004. Lands were mortgaged in favour of

the international consortium of lenders before appropriate State sanctions for the transfer

was given in 2006. This breach has been admitted by the international funders.

This transfer of land to LMMPL and the subsequent mortgage to IFIs have been deemed as

illegal by the local people of Shella. The people of Shella, represented by Shella Action

Committee (SAC), have been opposing the illegal occupation of land, the lease and mortgage

of tribal lands to foreign banks and consider it a violation of the Indian Constitution. The

Shella Action Committee has contended that they were unaware that their lands were

transferred to LMMPL.

A Public Interest Litigation (PIL) was filed by the Shella Action Committee (SAC) at the

Guwahati High Court in May 2007 questioning the legality of the process through which

LMMPL acquired lands in Shella and then used them as security for LSC to borrow money

from foreign banks. The PIL alleges that the Company colluded with the ex-headman of

Shella and Nongtrai Village Durbar (council) and fraudulently obtained transfer of lands in its

favour by taking advantage of the absence of proper land records in the region. The

competent authority failed to exercise due diligence while sanctioning the land transfer

which ultimately led to land owners being dispossessed of their lands.

The Guwahati High court had passed an interim order in 2007 along with issuing notices to

the Union Ministries of Home, Finance and Forests, Chief Inspector of Mines, National

Commission for Schedule Tribes and Reserve Bank of India among others for alleged

‘dereliction in their constitutional duty to protect tribal lands and environment from local

and foreign incursions.’ The case is pending before the Guwahati High Court.

40

Environmental Impacts from Lafarge Surma

The project received environmental clearance from the Ministry of Environment and Forest

(MoEF) in 2001 on the premise that there was no diversion of forest land for the mining. A

certificate to this extent, dated 13 June 2000, was prepared by the Khasi Hills Divisional

Forest Office. Similarly, Environmental Resources Management India, a Delhi-based

consultancy which prepared the Rapid Environment Impact Assessment for Lafarge,

described the project site as an area of "uneven terrain with a rugged topography" where

"the terrain undulation and the rock texture do not allow normal plant growth". It went on

to add that it was an area of low botanical and floral diversity, “covered with rocks and

debris and nearly a wasteland". Shillong-based Divisional Forest Officer (DFO), A Lyndgoh,

certified to the MoEF that the proposed mining was not in a forest area and that vegetation

was sparse in the area “with a tree crop density of 0.0009 per ha”.

The fact that the company had provided false information to avoid obtaining forest

clearance and that the mining project had illegally cleared a huge portion of dense forest for

their operations were discovered during a site inspection in 2006 by the Chief Conservator

of Forests (CCF), Khazan Singh. The CCF alerted the MoEF that the lease area was

surrounded by thick natural vegetation and that trees of huge girth were being felled by the

company. No action has been taken against the DFO, A Lyndgoh, or the EIA consultant for

fabrication of information and misleading the Government of India. In 2006 LSC initiated the

process of seeking central clearance much after mining activity had commenced. With the

mine already operational, the Public Hearing held in January 2006 was criticised by local

people as a farcical formality.

In 2007, MoEF stayed mining activity claiming that the company had not fulfilled the

environment and forest clearance norms. Lafarge challenged this stay order at the Supreme

Court. The report submitted by the Central Empowered Committee (CEC) before the

Supreme Court strongly indicted the Khasi Hills Autonomous Council and the local DFO of

falsely certifying the lands as ‘’non forest”. Mining activity was stayed two times by the

Supreme Court, in 2007 and 2010. The interim orders from the Supreme Court to stop all

mining work at the site had also forced the shutdown of the cement factory in Bangladesh.

The Government of India came under immense pressure from France and Bangladesh to

‘regularise’ the irregularities in the project and allow it to resume work. The multilateral

lenders who funded the project, including the IFC and ADB, ‘represented’ to GoI that closure

of the mine will result in the shutting down of the Bangladesh plant. The Government was

warned that such an action could dilute the Bilateral Investment Promotion and Protection

Agreement between the two countries.

Though the project was not conceived out of an international treaty between the two

countries, the Attorney General of India, on behalf of the Indian Government, argued for the

granting of clearance citing strained diplomatic relations between India and Bangladesh.

41

Upon the directions of the Attorney General, instead of a fresh Environmental Impact

Assessment (EIA) the MoEF recommended comprehensive forest rehabilitation and

conservation plan and a comprehensive Biodiversity Management Plan to mitigate the

possible impacts of mining on the surrounding forest and wildlife. Based on a report by the

High Powered Committee, the MoEF granted environmental and forest clearance with

additional conditions in April 2010. LSC was ordered to pay Rs. 130 Cr towards afforestation

and development of area, Rs. 88 Cr towards the Compensatory Afforestation Fund

Management and Planning Authority (CAMPA) and Rs. 90 per tonne of limestone mined

from the state, retrospective for all mining since 2007, to the Government of Meghalaya.

LSC was permitted to resume mining by the Supreme Court in June 2011.

Financial Issues in Lafarge Surma

The share holding pattern of Lafarge Surma as of March 2011 are as follows – 59 per cent by

Surma Holding BV, 4 per cent by IFC, 10 per cent by ADB, 3 per cent by Sinha Fashions, 3 per

cent by Islam Cement, and 21 per cent by others. The total cost of the Lafarge Surma project

is USD 280 Million (approx Rs. 1515 Cr) and the cost of the project on the Indian side is USD

25 Million (approx Rs. 140 Cr). Lafarge Surma had secured loans for USD 153 Million from

International Finance Corporation (IFC), Asian Development Bank (ADB), German

Development Bank (DEG), European Investment Bank (EIB), Netherlands Development

Finance Company (FMO), Arab-Bangla Bank (ABB) and Standard Chartered Bank. The

security for these loans included the mortgage of over 100 ha of mining land in Meghalaya.

The company faced stay orders for mining activity from the Supreme Court of India, in a

case of violation of Indian environmental laws, between May-November 2007 and February

2010-July 2011, forcing the import of clinker (limestone lumps) to continue production and

retain market share. The operation of the plant during this period resulted in loss, increasing

burden on loans. The company reported that the international lenders rescheduled loans to

the project in 2007 and in 2011; periods which directly coincide with the Supreme Court

stay orders. Rescheduling is a practice which involves restructuring the terms of an existing

loan in order to extend the repayment period.

In 2011, Lafarge Surma had loans from IFC, ADB, DEG, EIB, ABB and Standard Chartered

along with working capital loans from Standard Chartered-Dhaka, HSBC, Citibank-Dhaka,

Commercial Bank of Cylon PLC, Uttara Bank Limited, and Trust Bank-Dhaka amounting to a

total of BDT 10,687,716,830 (USD 134 Million). According to the company’s reports40,

Lafarge Surma faced ‘inadequate cash flow to service its debts along with a high proportion

of working capital loans at relatively high levels of interest’. As of 31 March 2011, LSC’s total

consolidated borrowing was BDT 1,367 Cr (USD 174 Million) and the original equity of BDT

580 Cr (USD 74 Million) had substantially diminished resulting in an unsustainable Debt

40

Rights share Offer Document. September 2011. Lafarge Surma Cement Limited.

42

Equity Ratio. To raise capital from the market, Lafarge issued Rights Share Offer in

September 2011.

Faced with capital crunch and the inability to service loans during the period of shutdown of

mine and cement plant, Lafarge Umiam Mining (LMMPL) secured long term and working

capital loans from Citibank-Mumbai and standard Chartered Bank-Mumbai amounting to a

total of BDT 1,995,522,616 (USD 25 Million). During the sanction of these loans, the project

was mired in a case in the Supreme Court of India for operating without an environmental

clearance.

Case Study No.6 – COASTAL ANDHRA POWER (Krishnapatnam UMPP)

Special Purpose Vehicle - Coastal Andhra Power Limited

Project Cost - Rs. 17,400 Cr

Lenders to Project - Rural Electrification Corporation, Life Insurance Corporation,

UCO Bank, Union Bank, Andhra Bank, Corporation Bank,

Punjab National Bank, Indian Overseas Bank, Andhra Bank,

State Bank of Bikaner and Jaipur, State Bank of Hyderabad,

Vijaya Bank, Punjab & Sind Bank, Yes Bank and Indian Bank

Social Concerns - Process of acquiring land for the project was objected by the

local communities.

Environmental Concerns - Project is sited on land with ‘poor soil quality’.

Legal Status - Pending case with the Delhi High Court and Indian Council of

Arbitration regarding revision of tariff of power.

CASE RATIONALE - The CAPL project is a case of poor planning by Reliance Power, Power

Finance Corporation and Central Electricity Authority. Six years after initiation and three

years after financial closure, the project faces hurdles arising from multiple unresolved

issues and is yet to take-off. A substantial portion of the Rs. 13,125 Cr loan sanctioned by

15 domestic financial institutions to the project is up in the air!

Coastal Andhra Power Limited (CAPL) was incorporated in 2006 as subsidiary of Power

Finance Corporation (PFC) to build, own, operate and maintain the 3960 MW Ultra Mega

Power Project (UMPP) at Muthukur Mandal, Krishnapatnam, Nellore district in Andhra

Pradesh. Reliance Power won the project in the International Competitive Bidding (ICB) held

in November 2007 for CAPL by quoting the lowest tariff of Rs. 2.33 per unit. The project

(referred to as Krishnapatnam UMPP) was transferred to Reliance Power in January 2008.

CAPL signed a 25-year Power Purchase Agreements (PPA) with off-takers of power for its

entire capacity; Andhra Pradesh (1600 MW), Tamil Nadu (800 MW), Karnataka (800 MW)

and Maharashtra (800 MW).

CAPL is a coal based thermal power plant using super critical technology imported from

Shanghai Electric Group, China. The project was scheduled to go on-stream by September

43

2013 with the commissioning of its first unit and scheduled to be fully commissioned by

October 2015. The project was registered with Clean Development Mechanism in July 2011.

The estimated cost of the project is Rs. 17,400 Cr (USD 4 Billion) with a Debt Equity Ratio of

75:25. The project achieved financial closure in July 2010. A consortium of over 15 banks

and financial institutions financed the Rs. 13,125 Cr debt component of the project; IDBI

Bank was the lead arranger and Power Finance Corporation (PFC) was joint lead arranger.

The consortium includes IDBI, PFC, Rural Electrification Corporation, Life Insurance

Corporation, UCO Bank, Union Bank, Andhra Bank, Corporation Bank, Punjab National Bank,

Indian Overseas Bank, Andhra Bank, State Bank of Bikaner and Jaipur, State Bank of

Hyderabad, Vijaya Bank, Punjab and Sind Bank, Yes Bank and Indian Bank.

The total land requirement for the project is 2412 acres, 1406 for the main plant and colony,

972 for the ash pond, 3 for the ash corridor and 31 for the water corridor. The process of

land acquisition delayed the progress of the project considerably owing to protests against

the thermal project from local communities. As of end 2010, the project was yet to acquire a

remaining of 100 acres.

The annual coal requirement of UMPP is 15 MT at 85 per cent Plant Load factor. Reliance

Power, through its subsidiary Reliance Coal Resources Private Limited, had acquired 100 per

cent interest in two coal companies in Indonesia holding three coal mines in South Sumatra.

Along with other Indian power producers, Reliance Power’s project suffered when the

Indonesian Government implemented a coal export policy in September 2011, more than

doubling the price of coal from USD 26 a tonne to USD 60. The increase in coal price would

require the CAPL project to bear approximately an additional annual cost of USD 500

million.

The developers of the project stopped work at the plant in July 2011. When this was

brought to the notice of the authorities, Reliance Power stated that ‘the project was

unviable with the new coal prices and that lenders were unwilling to fund the plant’.

According to a petition with the Central Electricity Regulation Committee (CERC), “CAPL had

signed loan agreements with banks based on appraisal of the project at fixed price including

fixed escalation of coal supply” and was therefore unable to ‘draw on debt under

circumstances which affect cash flow’.

Subsequently, Reliance Power’s requests for a tariff hike quoting the force majeure41 clause

were rejected by the four State Governments. The 11 power procurers from Andhra

Pradesh, Tamil Nadu, Maharashtra and Karnataka imposed a fine of Rs. 400 Cr for failing to

implement the project. The state-owned power utilities threatened to encash the Rs. 300 Cr

41

Force majeure is a common clause in contracts that essentially frees parties from liability or obligation when an extraordinary event or circumstance, beyond the control of parties, prevents one or both parties from fulfilling their obligations under the contract.

44

bank guarantees provided by Reliance Power, terminate the Power Purchase Agreements

and recover the land allotted to the project. An interim stay order sought by Reliance Power

in the Delhi High Court on the encashing of bank guarantees was dismissed in July 2012.

The same month, Reliance Power appealed against the order of Delhi High Court and filed

for arbitration against the 11 power distribution companies with the Indian Council of

Arbitration. In November 2012, the Delhi High Court gave Reliance Power four months to

reach an out-of-court settlement with the distribution companies. The case is pending.

Reliance’s demand to re-negotiate tariff of power on the basis that they were faced with a

force majeure situation arising out of increase in fuel price does not hold ground. The

standard Power Purchase Agreement (PPA) for projects such as the UMPP excludes fuel

from force majeure provisions. Conversely, fuel is mentioned under Clause (a) of Article

12.4 of the PPA which lists the Force Majeure Exclusions. Neither are decisions by foreign

governments listed in the ‘non-natural’ Force Majeure events specified in the PPA.

Unresolved Issues in Coastal Andhra Power

Re-negotiating tariff of power and increase in coal price are not the only issues plaguing the

CAPL project. On 15 June 2011, prior to the announcement of new coal policy by Indonesian

Government, an official team from the Ministry of Power, the Central Electricity Authority

and the Andhra Pradesh Power Generation Corporation discovered that work on the project

site had ground to a halt.

The project is sited on land with ‘poor soil quality’. Reliance Power has reported that ‘there

was presence of marine sand at the site and absence of rock strata even after drilling 60-75

metres into the earth’. This information was not included in the Detailed Project Report

(DPR) and filling up the ground with layers will significantly increase the cost of the project.

The project does not have approval from the State Government for a captive jetty to unload

the imported coal. Reliance Power claims42 to have submitted the bid for the project

‘assuming’ that a captive jetty was not mandatory as per the bid document. CAPL has also

not succeeded in getting the required approval from the port authorities to set up the sea-

water intake system within the premises of the Krishnapatnam Port.

1.2 FLAWED MECHANISMS AND IMPLICATIONS

In recent years an increasing number of ‘development’ and infrastructure projects are facing

hurdles. Clearances granted by concerned authorities are being revoked due to large-scale

violations or obfuscation of project information by project developers. Affected

42

http://www.powergridindia.com/_layouts/PowerGrid/WriteReadData/file/LTOA/DocumentAndInformationof_LTMTOA/PetitionBeforeCERCforGrantofRegulatory_ATSofKrishnapatnamUMPPPartB_and_PartC1Page18To80.pdf

45

communities are opposing projects planned in their areas and challenging the project’s

validity in the courts. These and numerous other reasons are causing projects to fail their

scheduled date of commissioning operations.

Social and environmental matters of projects are dealt with by separate Ministries and their

executive authorities. Banks have completely left the assessment of social and

environmental impacts and risks of the projects they finance to the competence of agents

appointed by project developers and government agencies. They are overlooking the fact

that the various authorities, independent consultants and businesses have come under the

scanner for serious flaws in due diligence and implementation of norms. As the case studies

presented here elaborate, the entire chain of proceedings in the process of setting up

projects - land acquisition, conducting of the public hearing, consultation with affected

community, assessing impacts on human and environmental life, rehabilitating and

resettling affected families and the granting of clearances - have inherent flaws and become

open to dishonest and corrupt practices.

Social Impacts of Projects

Till 2013, independent India did not have a comprehensive legislation to govern land use

and acquisition of land or formulate resettlement and rehabilitation measures for project-

affected persons. The colonial Land Acquisition Act (LA Act) 1894 continued to regulate

acquisition of land for both public and private sector projects, even though it did not contain

mechanisms for consultation with landholders, fixing land value or grievance redressal of

affected communities. Even under the new law, ‘Right to Fair Compensation and

Transparency in Land Acquisition, Rehabilitation and Resettlement Act’ enacted in

September 2013, for which the ground rules are yet to be formed, the powers relating to

land acquisition are vested in the District Collector and decisions are based on executive

authorisation rather than a mandate derived from a comprehensive legislation. Local

democratic institutions have no role in the decision making process of projects proposed in

their area. Numerous people’s groups and mass organisations including the National

Alliance of People’s Movements (NAPM) have argued that the ‘public purpose’43 clause used

in the new law continues to allow for grabbing of land and resources by corporations.

Project proponents are required by the Environmental Impact Assessment Notification 2006

to conduct social impact assessments as supplementary to the environment impact

assessments. These assessments make little sense as this process is de-linked from the

preparation and implementation of the Resettlement and Rehabilitation Plan for project-

43

Through the ‘public purpose’ clause in the LA Act 1894, the British government enforced the principle of Eminent Domain to acquire land from private owners for construction of public and social infrastructure. The Indian State broadened the definition of ‘public purpose’ through the 1984 amendment to the LA Act 1894, thereby allowing the state to acquire land for private projects. The Parliamentary Standing Committee on Rural Development on the draft land acquisition, rehabilitation & resettlement bill, in its May 2012 report, noted that this definition of ‘public purpose’ was in direct contradiction to the objectives proclaimed in the preamble of the draft bill and recommended that ‘public purpose’ be limited only to the public and social sector.

46

affected communities. Also for the lack of an appropriate body to monitor social impacts,

the Ministry of Environment and Forests (MoEF) plays the role, even though it is not

structurally equipped to handle social concerns. Environmental clearances granted by the

MoEF contain conditions relating to social security and improvement of local community. In

the case of Lavasa, the 47 conditions laid in the environmental clearance includes social

measures such as having a separate budget for community development activities, income

generating programmes and vocational training for individuals to take up self-employment

and jobs. Such conditions are rather futile as the Ministry of Environment and Forests

neither has expertise, human resource nor training to oversee the implementation of these

measures or the mechanisms to monitor the outcome of the measures.

Cases such as that of the Renuka Dam project in Himachal Pradesh demonstrate that

clearances are granted by the MoEF before social impact assessments are conducted or

completed. Moreover, the social impact assessment studies are outsourced by project

proponents to private consultancies who deliver poor and sub-standard reports; in many

cases underestimating impacts, using false information, neglecting whole sections of

affected populations and copy-pasting from previous reports. Improper assessment of

impacts does not allow the devising of corrective measures to offset the impacts of large

projects on communities.

The absence of mechanisms to obtain consent from land losers and appraise impacts of

projects on communities, agriculture, livelihood and local economy has given rise to several

community led oppositions to projects, thereby affecting progress of projects. Of the cases

studies presented in this report, all six have faced problems with the affected community on

the issue of land acquisition and all six demonstrate a wide range of violations in the process

of land acquisition and rehabilitation.

In five out of the six cases44 where information is available - GKEL, Athena Demwe Lower,

Sasan Power, Lavasa Hill City and Lafarge, impacts from the project on human and

environmental life have not been assessed sufficiently. Also, in the five cases, communities

have alleged that their consent was not sought through the mandatory consultation

process. Four of these projects - GKEL, Lavasa hill City, Lafarge Surma, and Sasan Power are

currently facing legal cases, filed by the affected communities, for wrongful acquisition of

land.

The process of land acquisition has become aggressive, with affected families either coerced

or forced into parting with land. Middle-men, usually local thugs with political leverage, are

being employed by project proponents to ensure completion of land acquisition. Lavasa

Corporation has been charged with using real estate agents who mediated the purchase of

lands through corrupt practices. Communities have contested the acquisition, as lands had

44

Both of this information is not known in the case of the Krishnapatnam UMPP.

47

been transferred to Lavasa Corporation without their knowledge and permission. The land

acquisition process for Lavasa Hill City is mired in more than one illegality. Lands belonging

to the Maharashtra Krishna Valley Development Corporation (MKVDC) were allotted to the

project without necessary permissions; over 600 acres of ceiling agricultural land was

acquired from farmers in violation of state procedures and about 190 ha of land belonging

to Adivasis was transferred to the project without state permissions. All three irregularities

have been acknowledged by the State Government and the matters are pending with the

respective authorities. While the matter of illegal allotment of Krishna Valley Corporation is

being challenged before the Bombay High Court, the State Government has ordered Lavasa

Corporation to return lands which were taken from Adivasis without following due

procedure. The issue of diverting ceiling lands for the project is pending before the district

and State authorities. The land acquisition process for the Krishnapatnam UMPP was

delayed beyond schedule owing to protests by project-affected communities.

Lands belonging to the indigenous communities of East-Khasi Hills in Meghalaya, which are

protected under the 6th schedule of the Indian Constitution and Meghalaya Land Transfer

Regulation Act 1971, were transferred to Lafarge Surma without their knowledge by corrupt

local authorities. These indigenous lands, partly leased and partly bought through a

subsidiary company, were placed as mortgage by Lafarge Surma to International Finance

Corporation, Asian Development Bank, German Development Bank, European Investment

Bank and Netherlands Development Finance Company in return for project loans. A case

filed by the indigenous communities against this transfer and mortgage of their lands by

Lafarge is pending before the Guwahati High Court.

Villagers of Sidhi who are affected by the Sasan Power project were paid very low prices for

the land that was acquired from them. Houses of families who refused to part with land

were broken down using bulldozers and men from these families were arrested by the

police, forcing a majority of the families to accept the compensation cheques. Many of

these cases against protesting individuals are pending in the local police stations. Adivasi

families of Gidda Kadi, one of the villages affected by the Sasan project, ave filed cases

against the acquisition of their lands in the Bhopal High Courts.

The award fixed for lands acquired for the GKEL project is Rs. 3.5 Lakhs plus solatium at 30%

for an acre of land and Rs. 5 Lakhs plus solatium at 30 per cent for an acre of land with a

house on it. The 2009 benchmark valuation for Mangalpur Gram Panchayat, where the

project is sited, and the mean average rate for agricultural land in Mangalpur in the 3 years

prior to acquisition are far higher than these rates. The Comptroller and Auditor General of

India (CAG)45 which investigated irregularities in land acquisition process for projects in the

State of Odisha has reported that there was under-assessment of compensation due to

erroneous fixation of market value of land in the GMR Kamalanga case. Moreover, irrigated

45

Odisha State Audit Report (Civil) for the year ended 31 March 2010. Comptroller Auditor General of India.

48

lands located within the Rengali Irrigation Project area were acquired from farmers for this

private sector power project in complete violation of national laws and the clearance

granted by the MoEF. The GKEL project has also acquired lands in excess of the extent

stipulated by the MoEF. There are cases pending at the District Courts and Bhubaneswar

High Court against acquisition of land for GKEL, filed by affected families.

The District Collector of Dhenkanal, Odisha has stated on record that the socio-economic

survey submitted by GKEL power project is inconsistent with the state guidelines. Likewise

the Resettlement and Rehabilitation Action Plan put out by GKEL does not propose any

concrete measure to rehabilitate affected families. The ‘Action Plan’ contains vague

information, with disbursement of compensation for land being the only tangible measure.

A glaring example of the vagueness is the section titled ‘Vocational Training and Self-

employment schemes’ which only states that ‘some options may be considered’. The

highlight of the plan seems to be identification and reporting of the number of affected

persons along with distribution of Identity Cards that acknowledge them as Project Affected.

In the case of Sasan Power Limited, out of the 376 houses in the rehabilitation colony built

for the affected families as few as 20 are occupied as the families of Sidhi, with an average

size of 6 members, do not fit within the 10x12 ft single-roomed houses.

Atleast in five cases - GKEL, Athena Demwe Lower, Sasan Power, Lavasa and Lafarge, it is

known that affected communities stand to lose or have already lost their customary

livelihoods. According to GKEL’s MoU with the Government of Odisha and the Rehabilitation

and Periphery Development Advisory Committee (RPDAC) plan, the project was to employ

local labour for 90% of unskilled and semi-skilled work, 60% of skilled work and 30% of

supervisory and managerial positions. However, only about 10-15% of the workforce at

GKEL comprises of local labour. The Comptroller and Auditor General of India (CAG) is

currently investigating employment positions in projects by independent power producers

in Odisha State due to increasing concerns of locals being neglected for jobs in such

projects. The CAG, at present is also verifying whether projects, including the GMR

Kamalanga Energy Limited, have abided by the employment clause stated in their MoUs.

Similarly by predominantly employing migrant workers, Sasan Power Limited has violated

the Madhya Pradesh Rehabilitation Policy 2002 which demands mandatory employment in

the project for one person of every displaced family and Sasan Power’s own Resettlement

Action Plan which guarantees the same.

In five out of the six cases, the projects have adversely impacted Adivasi/ indigenous

communities. Customary and traditional rights, such as religious grounds and burial sites of

the Adivasi communities which are intrinsically connected to their culture and identity, have

been violated by the projects. The policies and legislations framed to safeguard and enhance

the rights of Adivasi communities such as the 5th and 6th schedule of the Constitution, the

Forest Rights Act 2006 (Scheduled Tribes and Other Traditional Forest Dwellers- Recognition

49

of Forest Rights Act), Meghalaya Land Transfer Regulation Act 1971 and Panchayats

(Extension to Scheduled Areas) Act 1996 (PESA) have been blatantly violated. In GMR

Kamalanga Energy, Athena Demwe Lower HEP, Sasan Power and Lavasa Hill City, forest

lands which are intrinsic to the lives of Adivasi communities were acquired without seeking

the consent of gram sabhas as mandated by the MoEF and without recognising individual

and community rights as per the provisions of the Forest Rights Act.

Environmental Impacts of Projects

The Ministry of Environment and Forests is under immense pressure to expedite the

granting of environmental and forest clearances. Industry bodies such as the Federation of

Indian Chambers of Commerce and Industry (FICCI) argue that the long wait for clearances is

‘deterring’ India’s infrastructure and developmental projects. In late 2012 the Ministry of

Finance proposed the setting up of a National Investment Board (NIB) to fast-track decisions

on projects within a stipulated time frame. The board now renamed as the Cabinet

Committee on Investment (CCI) was notified by the Government on 02 January 2013. The 20

January 2013 CCI meeting considered 12 coal mining projects out of which six did not have

clearance from the MoEF. The committee directed the projects back to the Ministry and

stipulated that decisions be taken within one month from then.

The committee is pushing for faster clearances with a Ministry that is already clearing

projects at a pace faster than it is equipped to judiciously handle. The Expert Appraisal

50

Committees46 of the MoEF take up project applications for clearance in bulk and clear an

average of fifteen projects in one sitting. Information sought under Right to Information Act

2005 revealed that the EAC (Mines) had approved 410 mine plans in the first six months of

2009. Taking note of this information, a 2009 Delhi High Court order47 had prescribed that

EACs limit the number of applications taken up for consideration in one meeting to five.

However, with the Cabinet Committee on Investment demanding instantaneous decisions

from the MoEF, judicious review of risks and impacts associated with a project will no longer

hold priority.

This graph48 depicting the decisions made by the EAC (Coal Mines) between January and

June 2013 reveals that no proposal is declined by the Committee. Similarly, EAC (Thermal

Power Projects) reviewed 6 projects between January and May 2013; all 6 were

recommended for clearance. The EAC (River Valley Projects) reviewed 5 projects between

February and May 2013; 3 were recommended for clearance and 2 were deferred by the

Committee requesting Project Proponents to submit further information. This information

tells that regardless of the scope and impacts of a project, they are either recommended for

clearance or deferred by the Committee, requesting the Project Proponent to submit

additional information for future appraisal.

Another concern that has been raised is the credibility of the decisions made by EACs, as in

several instances the committee has comprised of individuals with vested interest. In 2009

the 12 member Expert Appraisal Committee for Mines was chaired by a person who at that

time was also the Director of four mining companies. The Expert Appraisal Committee on

River Valley and Hydroelectric Projects prescribed a river basin study of Lohit River for 6

mega projects, including the Athena Demwe Lower HEP which constitutes 44 per cent of the

proposed hydro power on Lohit River. The EAC however decided that the clearance for

Demwe Lower will not be linked to the completion of the study. The Chairman of the EAC, P.

Abraham, who facilitated this decision, was also the Director of PTC India, one of the

promoters of the Athena Demwe project. He was asked to resign from his post as Chairman

in June 2009 after several organisations raised the matter of conflict of interest with the

MoEF. But the clearance granted to the Demwe Lower project stood its ground. In the two

years that P. Abraham chaired the committee, several other projects of companies he was

associated with also came before the EAC for clearance.

It is also known that the Ministry of Environment and Forests grants clearances to projects

due to pressure from other Ministries, governments and industry. In the Lafarge Umiam

Mining case for example, the MoEF issued an order to stop all on-site work in 2007 when it

46

Expert Appraisal Committees are constituted under the EIA notification 2006 to examine projects that apply to the Ministry for Environmental and Forest for clearance. 47

Writ petition (Civil) No. 9340/2009 before the Delhi High Court between Utkarsh Mandal vs Union of India. http://www.indiankanoon.org/doc/1910152/ 48

The graph is sourced from EIA Resource and Response Center. http://ercindia.org/

51

discovered that the company had obtained environmental clearance for limestone mining in

Khasi Hills by falsely claiming the project site was non-forested lands. While the company

had deliberately misled the authorities into believing that the mining area was not forested,

for five whole years between 2001 and 2006, the MoEF conducted no due diligence to verify

this basic information submitted by the company. Lafarge Umiam challenged the MoEF’s

stop order in the Supreme Court of India. Under immense pressure from France and Spain

where the parent companies are head quartered, Bangladesh where the cement plant was

sited, the international financial institutions which had provided loans to the projects, and

the Indian Ministries for Finance and Commerce, the MoEF agreed to grant post-facto forest

clearance to the project in 2010 along with the imposition of a fine. Although the Supreme

Court took cognisance of the project’s violation of the Environment Protection Act, its final

verdict permitted Lafarge Umiam to continue mining.

However, the affected communities in Khasi Hills continue to oppose the project and there

is a case pending before the Guwahati High Court against irregular acquisition of land for

the mining activity. As a result, despite prevailing closure of the mine for over three years

and a brief closure of the cement plant in Bangladesh, the project is far from being free of

trouble.

The Stage I forest clearance to Athena Demwe Lower HEP was granted by MoEF despite

internal reports recommending against such clearance, under pressure from the Finance

Ministry which cited the deterioration of the large loans given by banks to the project. The

wildlife clearance for the project was granted despite recommendation against clearance

from experts within the National Board for Wildlife. Similarly the MoEF denied permission

for mining in Chhatrasal mine allotted to Sasan Power in January 2012 stating that the 1000

ha were forests of ‘good quality’. Under pressure from the Empowered Group of Ministers,

the MoEF granted Stage I clearance to the mine in November 2012. Over 7000 acres of

quality forestlands have been diverted for the Sasan Power coalmines alone.

Lavasa Corporation is another case where a township was constructed over 5000 acres of

land in Pune district of Maharashtra without the mandatory clearance from MoEF.

Conditional clearance was granted to the project with the slapping of a heavy fine and filing

of criminal charges against the project promoters.

In four out of the six cases presented here, the Ministry of Environment and Forests (MoEF)

has granted environmental and forest clearance to projects due to pressure from external

agencies, in spite of recognising adverse and grave impacts to sensitive ecosystems and

natural habitats. In three cases, clearances were granted post implementation of project

and after major environmental violations were exposed. The Environment Protection Act

does not have provisions for granting of clearance post the operation of a project!

52

Environmental and social impacts of a project have to be assessed as per the Environmental

Impact Assessment Notification 2006. The mechanisms for the same however are

questionable as some of the cases presented here reveal. The Feasibility Report, Detailed

Project Reports (DPR) and Environmental Impact Assessment (EIA), on the basis of which

clearances are processed and granted by the MoEF, are carried out by independent private

consultants hired on project basis by project developers. The authenticity of information

and quality of assessment in innumerable EIA reports has been severely critiqued by local

communities and environmental and social experts alike. The private consultants are known

to use standard formats of reports for different types of projects and only change part

information to cater to specific projects. EIA reports in the past have been found to be a

shoddy copy-paste effort, sometimes even containing irrelevant information pertaining to

an older project. SV Enviro Labs which was exposed in 2011 for lifting paragraphs directly

from a report on mining in Assam for its EIA report on proposed laterite mining in Andhra

Pradesh is one such case. The increasing frequency of fraudulent EIA reports prompted the

MoEF to issue a circular49 in October 2011 declaring the project developers as directly

responsible for information submitted in the EIA reports. According to the circular, “If at any

stage, it is observed or brought to the notice of this Ministry that the contents of the EIA

report pertaining to a project have been copied from other EIA reports, such projects shall

be summarily rejected and the proponent will have to initiate the process afresh”. There is

no evidence so far to suggest that this measure has improved the quality of reports.

Project proponents are undermining impacts of projects in the EIA reports for easier

granting of clearances. The EIA report for Athena Demwe Lower did not factor downstream

impacts of the hydro project, which can adversely affect large tracts of agricultural lands,

communities, fishing and the surrounding ecology, or factor cumulative impacts of multiple

hydro projects on River Lohit. The Krishnapatnam UMPP is seated on marine sand which

does not contain rock strata to allow construction. Layering of ground to make it suitable for

construction of an ultra mega power project is cost intensive and will lead to inflation of the

project cost. This information was not disclosed in the project’s DPR or EIA. To avoid

obtaining forest clearance from the Ministry of Environment and Forests, the EIA report for

the Lafarge mining project claimed that the project was sited on land with no forest cover.

Environmental Resources Management India, a Delhi-based consultancy had brazenly lied in

the EIA report for Lafarge submitted to the MoEF. In the case of GMR Kamalanga Energy’s

thermal power plant, a 2012 study Negotiating Power found that the environmental

clearance was sought on the basis of false information. While the project’s EIA report,

prepared by SS Environics, claims that no irrigated land was acquired, 455.35 ha of ayacut

land under the command area of Rengali Irrigation Canal and another 16.72 acres of land

which was an intrinsic part of the Rengali Irrigation Project was acquired for the project.

49

MoEF Circular dated 05 October 2011. Ownership of EIA report and other documents by the project proponent. http://moef.nic.in/downloads/public-information/OM_IA_ownershipEIA.pdf

53

Recently in January 2013, SS Environics, GKEL’s EIA consultant, was implicated by the

Central Bureau of Investigation (CBI) for allegedly bribing a MoEF official for clearances of

projects. The CBI is currently investigating past projects related to SS Environics. In all six

cases, crucial information has been withheld by project proponents in the Environmental

Impact Assessment reports and in four of the six cases, project proponents deliberately

provided false information in the report to evade national procedures enacted to safeguard

and protect the environment and conserve India’s pristine forest regions.

A September 2013 report by the Comptroller Auditor General of India (CAG) on

Compensatory Afforestation in India found “serious shortcomings in regulatory issues

related to diversion of forest land, abject failure to promote compensatory afforestation,

the unauthorised diversion of forest land in the case of mining and the attendant violation

of the environmental regime”. The report also details “numerous instances of

unauthorised renewal of leases, illegal mining, continuance of mining leases despite

adverse comments in the monitoring reports, projects operating without environment

clearances, unauthorised change of status of forest land and arbitrariness in decisions of

forestry clearances”. According to the CAG, “the MoEF failed to appropriately discharge its

responsibility of monitoring of compliance of conditions of the Forest Conservation Act

1980 relating to diversion of forest land. Despite such gross non compliance with statutory

conditions and orders of the Supreme Court, no action was initiated by MoEF. In fact the

MoEF had invoked penal provision only in three cases during the period August 2009 to

October 2012 and even this action was limited to issue of show cause notices”.

Fraudulent EIA reports and unlawful environmental clearances have been challenged across

the country for over 20 years. However, the matter has gained interest of the authorities

only in the last few years while in the meantime hundreds of projects have been granted

environmental clearance and become operational. Institutionalised corruption affects

regulatory processes, constituted to uphold the Constitution and legislations, by creating

breaches for unlawful transactions. The reliance of banks solely on external mechanisms,

which are not water tight, to assess social and environmental risks are having serious

economic, environmental and social repercussions for the country and grave financial losses

for banks. Financial institutions have to proactively plan sectoral investments along with

rigorous management of social and environmental impacts from projects they finance.

1.3 FINANCIAL RISKS IN POORLY ASSESSED PROJECTS

Contrary to popular understanding that companies or project proponents setting up large

scale projects bring in substantial amount of funds, this research finds that much of the

funds are put forth by banks. A look into the Debt Equity Ratio (DER) of projects tells us that

the average portion of debt in large sized projects is 75 per cent of the total project cost. In

many cases, the remaining portion of equity is also tied up with financial institutions which

54

buy stakes in the project. The six cases also show that a majority of the loans are from public

sector banks, with SBI in the lead. Information on project finance loans are limited and in

several cases, as little as Debt Equity Ratio and names of lenders are made public.

Table 1: Financial information of the six case study projects

Project Cost

(in Cr)

DER Lenders (known)

GMR Kamalanga

Energy

5733 75:25 State Bank of India, Infrastructure Development Finance

Corporation, Andhra Bank, Bank of Baroda, Canara Bank,

Central Bank of India, IDBI Bank

Athena Demwe

Lower HEP

13145 75:25 Power Finance Corporation, Rural Electrification Corporation

Sasan Power 19400 75:25 State Bank of India, Power Finance Corporation, Rural

Electrification Corporation, Punjab National Bank, Life

Insurance Corporation, Axis Bank, Union Bank, IDBI, India

Infrastructure Finance Company-India, Bank of Baroda,

Andhra Bank, Corporation Bank, United Bank, India

Infrastructure Finance Company-UK, US Exim Bank, Bank of

China, China Development Bank, Exim Bank of China

Lavasa

Corporation

168000 Not

known

ICICI Bank, Axis Bank, Bank of India, Allahabad Bank,

IndusInd Bank, Andhra Bank, United Bank of India, Jammu &

Kashmir Bank, Deutsche bank, Union Bank, L&T

Infrastructure Finance Company Limited

Lafarge Surma

[Lafarge Umiam

+ Lafarge

Maushun]

1515 Not

known

International Finance Corporation, Asian Development Bank,

German Development Bank, European Investment Bank, the

Netherlands Development Finance Company, Arab-Bangla

Bank, Standard Chartered Bank, HSBC, Commercial Bank of

Cylon PLC, Uttara Bank Limited, Standard Chartered-Dhaka,

Citibank-Dhaka, Trust Bank-Dhaka, Citibank-Mumbai and

Standard Chartered Bank-Mumbai

Coastal Andhra

Power

(Krishnapatnam

UMPP)

17400 75:25 Rural Electrification Corporation, Life Insurance Corporation,

UCO Bank, Union Bank, Andhra Bank, Corporation Bank,

Punjab National Bank, Indian Overseas Bank, Andhra Bank,

State Bank of Bikaner and Jaipur, State Bank of Hyderabad,

Vijaya Bank, Punjab and Sind Bank, Yes Bank and Indian Bank

Any sustained delay to a project’s progress is a risk on the loan sanctioned by banks. In the

project finance mode, loan and interests are repaid from the revenue generated by the

project. Projects embroiled in illegalities, violations and legal suits or facing resource crunch

or opposed by affected communities due to adverse impacts are facing slow or no progress.

Out of the six cases discussed here, five are facing civil, writ or arbitration cases and public

interest litigations before courts and other authorities. Five of the projects are delayed, two

of which have not even begun construction six years after initiation and three are still

undergoing construction.

55

There have been several instances where projects financed by us were ordered to be closed

due to environmental considerations. Neglect or poor management of social and

environmental issues arising or likely to arise from projects has been the primary reason for

this. Management of social and environmental impacts by units have to be continuous and

proactive. These have a cost aspect which also has to be suitably factored into the project

costs. These two, environmental on the one hand and social/ health costs on the other are

generally not included in the project cost while implementation or running the same has

often resulted in active environmentalists/ NGOs/ local interest groups intervening leading

to delays/ postponement and even abandoning of the project causing serious discomfiture

to lenders.

11 March 2008. SBI Circular on Credit Policy and Procedures

Table 2: Status of the six case study projects

Project Date of

Initiation

Scheduled Date

of

Commissioning

Status Financial

Closure

Restructure

of Loan

Loan Quality

GMR Kamalanga

Energy

July 2006 June 2011 Commissioned

first unit in

January 2013

May 2009 No No

Information

Athena Demwe

Lower HEP

July 2007 April 2016 Construction

yet to begin

Oct-Dec

2010

No Reports of

Deterioration

Sasan Power February

2006

May 2012

(extended to

June 2014)

Synchronised

first unit in

April 2013

April 2009 Yes (Twice) No

Information

Lavasa

Corporation

2006 Phase 1 in 2010

and all four

phases in 2021

Construction

of Phase I is in

progress

Before

2008 for

phase I

Yes Deteriorated

Lafarge Surma 1997 2006 In operation - Yes Deteriorated

Krishnapatnam

UMPP

2006 September 2013 Construction

yet to begin

July 2010 No Reports of

deterioration

Except for GMR Kamalanga Energy Limited and Sasan Power, the other four projects have

openly reported deteriorating loan quality. The loan quality in the case of Sasan Power is

unexplained but the two-time restructuring of the loan and the escalating project cost is

indicative of a financial predicament. While facing cases before the Supreme Court for

violation of major environmental legislations, both Lavasa Corporation and Lafarge Surma

reflected losses.

The Athena Demwe Lower HEP had secured all loans by the last quarter of 2010 but is yet to

begin construction. The Demwe Lower HEP reveals serious lapses in risk assessment by

public sector banks which sanctioned and transferred large loans to a project which did not

even have the most basic clearances from the Government. While the date of sanctioning of

loans to Athena Demwe for the Lower HEP is not known for all concerned banks, when the

56

Rural Electrification Corporation had sanctioned loans on 06 January 2010 the project had

neither environmental nor forest clearance. The case of Athena Demwe narrates a reversal

of logic. Instead of sanctioning loans subsequent to following due diligence and the sanction

of clearances by relevant Ministries, clearances are being requested to save the

deteriorating quality of loans granted in injudicious haste. When Sasan Power achieved

financial closure in April 2009, the project did not have clearances from MoEF for mining at

the allocated coal blocks.

The power projects around the country best demonstrate the effects of poor and haphazard

planning. To grab ultra mega power projects (UMPP) in the competitive bidding process,

companies quoted low prices allowing little margin to manage costs when impacted with

adverse changes. While Reliance Power won the bid for three projects – Sasan Power,

Coastal Andhra Power and Jharkhand Integrated Power, Tata Power won the bid for Mundra

UMPP. Each and every one these four UMPPs are currently before the Central Electricity

Regulatory Commission (CERC) for revision of tariff of power.

Reliance Power acquired two coal companies holding three coal mines in Indonesia to

supply coal for its Krishnapatnam UMPP. The implementation of a new coal export policy by

the Indonesian Government in 2011 which more than doubled the price of coal has caused

the Coastal Andhra Power project to be indefinitely deferred. Coastal Andhra Power, the

Special Purpose vehicle for the Krishnapatnam UMPP, claims that the project is unviable

with the new coal prices and that lenders were unwilling to further lend to the project. The

state power procurers who were to benefit from the project have imposed a fine of Rs. 400

Cr for failing to implement the project and threatened to encash the bank guarantees

provided by the company. Reliance Power is now pursuing a petition with the Central

Electricity Regulation Committee (CERC) for revision of tariff not only for the Krishnapatnam

UMPP but also for its Sasan UMPP.

Unlike the Krishnapatnam and Mundra UMPP, Sasan UMPP is not only dependent on

domestic coal but has coal blocks in excess of requirement allotted to the project. The Rs.

19,400 Cr Sasan Power project began with a debt component of Rs. 13,848 Cr, the largest

project finance loan in the country at the time of the project’s financial closure. While the

entire debt was secured by April 2009 from Indian banks, hurried plans for refinancing were

announced by mid 2010. The US Exim Bank, Bank of China, China Development Bank and

Exim Bank of China refinanced Rs. 10,300 Cr through vendor credit. In January 2013 when

Reliance Power filed for revision of tariff with the CERC, it stated that the project was

affected due to a change in law and by the depreciation of the rupee.

Interestingly, the US Exim Bank initially denied the loan to Sasan Power on the grounds

that the annual carbon dioxide emissions from the plant were far higher than the total

emissions of all the projects approved by the Exim Bank in 2009. The US Exim Bank has a

carbon policy which requires the bank to consider the green house gas emissions from a

57

project prior to sanctioning loans. Indian banks on the other hand are in no position to

appraise a project on the basis of such crucial impacts.

Indian corporates, operating in India and abroad, have been increasingly accessing

international debt markets to raise capital. While this is presumably being done to take

advantage of the low interest rate in the international markets, in an environment of fluid

exchange rate markets, corporates run the risk of incurring losses from adverse movement

in exchange rates for their un-hedged exposures. The un-hedged exposures and an eventual

increase in interest rates could put pressure on the corporates and eventually spill-over to

their lenders.

Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead,

16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India

In March 2013 Reliance Power reported to again restructure the loan to the Sasan project.

Delay in commencing commercial operations required extension in the repayment schedule.

And going by media reports, Sasan’s outstanding loans amounts to Rs. 23,500 Cr (US Exim

Bank, Bank of China, China Development Bank and Exim Bank of China, PFC, IIFCL, SBI, REC,

and PNB). The project cost has escalated from Rs. 19,400 Cr to over Rs. 23,000 Cr in four

years. The project does not yet have stage II Forest Clearance for mining from the Ministry

of Environment and Forests!

With an enormous cost of Rs. 1,68,000 Cr, Lavasa Hill City project was initiated in 2006. The

first phase of the planned city progressed hastily till mid 2010 when the project’s non-

compliance to environmental laws resulted in an order to stop work from the MoEF.

Starting then, a stream of irregularities and blatant violations which include irregular use of

the Special Planning Authority (SPA) status, construction without permission, illegal

chopping down of trees and illegal acquisition of adivasi and ceiling lands were exposed by

the affected community and other citizen’s organisations. As of September 2010, the

company had 55 outstanding litigations filed against them. Lavasa Corporation defaulted in

the repayment of interest on loans to banks and in the same period ending 2011, Hindustan

Construction Company, the promoters of Lavasa, posted a net loss of Rs. 130 Cr and a

consolidated debt of Rs. 8100 Cr. Several attempts to restructure the loan with the

consortium of lenders at the Corporate Debt Restructuring Cell to prevent it from being

treated as a non-performing asset failed, forcing HCC to restructure the loan with individual

bankers. The terms of restructuring this loan include a two-year moratorium on the

principal amount and interest rate concessions for the first few years.

Plagued by numerous controversies and the negative stop-work order from the

Environment Ministry, the pace of work at Lavasa Hill city did not pick up. Additionally, the

threat of more negative orders from any of the tens of pending cases lurks over Lavasa.

Work on the second phase has begun even while the first phase, which was scheduled to be

completed by 2010, is still under construction. The delay in completion of the project,

58

imposition of various large fines and accumulation of loans has also substantially increased

the cost of the project.

In the case of GMR Kamalanga project which is sited in a Critically Polluted Area, the

International Financial Institution (IFC) channeled the loan through domestic financial

institutions thereby skirting its own environmental and social safeguard principles. The

affected community and environmental groups allege that the project is in violation of IFC’s

environmental and social safeguards (termed ‘Performance Standards’) and the project

faces a complaint filed by the affected community before the Compliance Advisor

Ombudsman (CAO) of the International Finance Corporation (IFC). The result of the

complaint can be adverse for the project and its lending. Apart from cases against

acquisition of land, the communities have also complained to the MoEF regarding the

fraudulent EIA and violations of the environmental clearance. As per the October 2011

MoEF circular, in case the environmental clearance granted is based on false information in

the EIA report, the environmental clearance could stand cancelled.

In the cases of Athena Demwe Lower, Sasan Power, Lavasa Hill City and Lafarge,

deteriorating quality of loans sanctioned by financial institutions were used as an argument

to pressure for clearances. It is not in the interest or mandate of the Ministry of

Environment and Forests to clear a project merely because a consortium of banks

sanctioned hundreds of crores to a project without due assessment! Lenders to the

Krishnaptnam UMPP refused to extend further installments on the sanctioned loan to the

project after the project cost sky-rocketed owing to increase in coal price imported from

Indonesia. The project is stalled and seeking revision of tariff with the Central Electricity

Regulatory Commission (CERC).

Indian Banks are not only lending to projects which are violating fundamental rights of

people and crucial laws of the country, but are continuing to support such projects after the

violations and adverse impacts are exposed. When Lafarge Surma was taken to Court by the

Indian Government for violating one of the most crucial national environmental legislations

and defaulted on repayment of loan to international financial institutions due to a stop-

work order from the Supreme Court of India, Indian banks unconditionally bailed out the

project with short term loans to the company. The banks provided loans to Lavasa

Corporation in the absence of a robust mechanism to assess social, environmental and

financial risks. But even if one were to accept that the loans were provided before the

violations came to light, on what grounds have banks approved another Rs. 600 Cr for work

on the second phase of the Lavasa Hill City project?

If banks continue their association with such projects in their capacity as lenders, they are

nothing but a party to the violations. This inclination of banks to sanction loans in spite of

grave adverse impacts of the projects is an evident message to companies and project

proponents that they will have unconditional and free access to finance, regardless of the

59

risks and violations. By taking statutory clearances for granted in the process of sanctioning

loans to projects, financial institutions are reflecting an utter disregard for constitutional

and legal statutes instituted by the democratic state.

The case studies also corroborate that the assessing, monitoring and regulating of social and

environmental impacts from projects by financial institutions is utmost critical to protecting

the loans sanctioned by financial institutions to the project. Regardless of the reasons a

project cannot operationalise on schedule, the loans sanctioned to the project stand to be

impaired. In such cases, are the losses borne by the financial institution or the project

proponent or shared between both? And how do banks negotiate recovery of loan with

project proponents?

60

Chapter TWO

2.1 THE PROJECT FINANCE BUG

With regard to funding ‘development’ and infrastructure projects, project finance has been

the catchphrase of the decade. It is an ‘innovative’ financing technique that is increasingly

preferred and used for long term financing of large infrastructure and industrial projects.

According to the International Project Finance Association (IPFA), project finance is defined

as the “financing of long-term infrastructure, industrial projects and public services based

upon a non-recourse or limited recourse financial structure where project debt and equity

used to finance the project are paid back from the cash flow generated by the project.” In

other words, unlike traditional or corporate financing where lenders provide capital to the

company on the basis of sufficient assets on its balance sheets, project finance loans are

sanctioned to a Special Purpose Vehicle on the basis of the projected cash flow of the

particular project. Repayment of loan is not based on the assets or balance sheet of the

sponsoring company but on the projected revenues that the project being funded will

generate on its completion. Non-recourse or limited recourse refers to a secured loan50 for

which the borrower is not personally liable. So, in case of a default the lender can seize the

collateral but the lender’s recovery is limited to the collateral.

In the project finance mode, project proponents typically create a legally independent

subsidiary company, referred to as a Special Purpose Vehicle (SPV), with the narrow purpose

of executing a single project - a power plant, a refinery, a highway corridor, a dam, an

airport or a mine. The project is financed by the SPV through equity from multiple sponsors

and large amounts of debt from a consortium of banks. The creation of an SPV and financing

through non-recourse debt protects the assets of the parent company in case of default of

loan or bankruptcy, thus allowing optimum risk allocation in favour of the parent company.

Project Finance is a fairly new phenomenon in the Indian context. A major push for adopting

project finance as a method of financing came in the 1990’s but it wasn’t until early 2000

that it became the mode preferred by corporations. The country’s pace of growth and

infrastructure development alone cannot account for the startling increase in the volume of

project finance loans in a short span. In 2005 alone, India's market share in project-financed

transactions in the Asia-Pacific region increased from 2.8 per cent to 12.5 per cent.

According to Thomson Financial, State Bank of India had moved up from the fifteenth

position in 2004 to the first in 2005 in the Asia-Pacific project finance league tables51. State

Bank of India (SBI) had helped some 16 Indian infrastructure deals worth USD 2.1 Billion

during that period. This was the first time an Indian bank ranked first in project-financed

50

A loan backed by the pledging of assets by the borrower. 51

A league table compares institutions or companies, banks in this case, by ranking them in order of ability or achievement to analyze financial data. Companies which collect this kind of data include Dealogic and Thomson Reuters. Thomson Reuters league tables list top financiers in a particular industry. Dealogic's league tables are rankings of investment banks in terms of the dollar volume of deals that investment banks work on.

61

transactions in the region. It had been just one year since SBI had set up the Central

Processing Cell (CPC) in 2004 at its Mumbai Corporate Office where projects larger than Rs.

2 Cr would directly be taken up for consideration and decided in a month. The CPC was set-

up to speed up project financing and sanction of loan proposals.

Within another four years in 2009, India ranked on top in the global project finance market,

ahead of Australia, Spain and the United States, according to a Project Finance International

(PFI) study52. The domestic Indian market had raised USD 30 Billion (Rs. 1.38 Lakh Cr)

accounting for 21.5 per cent of the global project finance market. This was a steep rise from

the USD 19 Billion the Indian market had raised in 2008. In 2009 State Bank of India alone

accounted for 67 per cent (USD 20 Billion) of the total debt in the Indian market through 36

deals and 35.2 per cent of the total volume of debt for the Asia-Pacific region. In this period,

the SBI had funded or arranged funding for Sasan Power, Adani Power, Sterlite Energy,

Vodafone and Unitech among others. The PFI study also revealed that in another first of its

kind, investment bank SBI Capital Markets, a subsidiary of State Bank of India, topped the

global loan chart beating top French, British and US banks. IDBI Bank, Infrastructure

Development Finance Company (IDFC) and Axis Bank were acknowledged as leading

financiers in the Asia-Pacific region.

Loans to projects floated by Special Purpose Vehicles, which are technically delinked from

the parent company, suggest that the loans are given in the absence of substantial

collateral. The structuring of loans for projects in this mode does not seem to require the

conditional clauses that marked traditional corporate financing. If repayment is primarily

structured around the prospective revenues generated by the project, what happens to the

loan in case the project does not progress as planned?

2.2 WHAT IS A BAD LOAN WORTH?

A bank’s strength and its healthy cash flow cycle are dependent on retained earnings which

can be reinvested into business. Loans are assets reflected in a bank’s account books. A loan

where instalment or interest is not paid for 90 days is deemed a non-performing asset

(NPA). Once an account is classified as an NPA, banks cannot recognise interest from it.

Apart from affecting profits in the current period, NPAs affect the net interest income (NII)

and net interest margin (NIM)53 of the bank. Sustained NPAs have an effect on the overall

competence of the bank - its Capital Adequacy Ratio (CAR)54, profitability, and brand value.

52

The study ranked 224 financial institutions with the sole mandate of lead arrangers of loans. The tables do not include property or real estate sector transactions, corporate loans and those guaranteed by sponsors or governments. 53

Net interest income is the difference between revenues generated by interest-bearing assets and the cost of servicing (interest-burdened) liabilities. Net interest margin is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. 54

CAR or Capital to Risk Assets Ratio (CRAR). is the ratio of a bank's capital to its risk. The Reserve Bank of India

62

Paralleled with growth in industry and infrastructure, the NPA of Indian banks, particularly

that of the public sector banks (PSB), have been witnessing a steady rise. Warning bells rang

in October 2011 when Moody's Investors Service downgraded the State Bank of India's Bank

Financial Strength Rating (BFSR) to 'D+' from 'C-'. This downgrade caused an immediate

plunge of over 4 per cent in the share market price of the bank. Evidence of the bank’s

increasing non-performing asset and deteriorating asset quality existed before this blow

took SBI by shock. In March 2011, the Minister of State for Finance, Shri Namo Narain

Meena, reported the gross NPA of Public Sector Banks for the period ending March 2011 at

Rs. 71,047 Cr to the Parliament. The gross NPA of State Bank of India for the same period

constituted Rs. 33,946 Cr or 32 per cent of total gross NPAs of Indian PSBs.

Five months after this downgrade, the State Bank of India publicly declared that it would

‘start to publish photographs and names of wilful defaulters in publications as a last resort

to get them to pay their dues’. In April 2011, customers of the Corporation Bank who had

defaulted on repayment found their photo displayed on life-sized hoardings around cities.

This imaginative strategy was meant to shame only individual wilful defaulters into paying

back the loan money. According to Ramnath Pradeep, Chairman, Corporation Bank, the

banks’ strategy was not ‘illegal’ and can be applied only to individuals, since in the case of

corporate borrowers ‘it is not possible to publish photographs’. State Bank did not even

breathe about its corporate defaulters at that time.

RBI defines a 'wilful defaulter' as a borrower who has defaulted repayment obligations to

the lender even while holding the capacity to honour the said obligations or as one who has

not utilised the finance for the specific purposes for which finance was availed. It is true that

banks are finding it difficult to recover loans in the corporate as well as agriculture and retail

segments. But a look at the NPA figures for SBI for the same period ending March 2011

reveals that out of Rs. 33,946 Cr, NPAs in the personal retail segment stood at Rs. 4870 Cr or

only 14 per cent of the total. Where then is the rest of the money trapped?

“The perception that agricultural advances or priority sector lending carry more credit risk

than the non-priority sector is entirely misplaced and needs to undergo a change. The

smaller borrowers are per se not a cause of stress to the banks; rather it is a bias against

them that turns them into weak accounts.”

Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead

16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India

A majority of NPAs are contributed by corporate customers. In September 2011 the

Parliament was informed by the Minister of State for Finance, Shri Namo Narain Meena that

as of September 2010, over 5600 companies had defaulted to the tune of Rs. 51,000 Cr in

tracks banks to ensure that they can absorb a reasonable amount of loss and also monitors their compliance with statutory capital requirements.

63

loans taken from public sector banks. According to the Reserve Bank of India and Credit

Information Bureau (CIBIL)55, this included 4043 suit filed56 accounts amounting to Rs.

34,558 Cr and 1628 non-suit filed accounts amounting to Rs. 17,363 Cr.

Crisil, a global analytical company, reported that 188 companies in India had defaulted in

payment of interest and/ or repayment of principal in 2011-12, as against 105 in the

previous financial year. A classic case in point being the Kingfisher Airlines, which alone

caused SBI an exposure of Rs. 1700 Cr.

Bad loans (or non-performing assets) in Indian banks had risen from Rs. 68,220 Cr in 2008-

09 and Rs. 81,813 Cr in 2009-10 to Rs. 94,084 Cr in 2010-11. By March 201357 the bad loans

reached Rs. 1,94,000 Cr!

Banks are known to go soft on corporate customers and not take hard stands for realisation

of loans in case of default. In cases of financial predicaments large corporations are also

allowed by banks to restructure their loans. Any change in the terms and conditions of the

loan or credit, especially in respect of its servicing, is called restructuring of loan.

Restructuring allows banks to not classify the asset as NPA even in case of default. This

technique used by banks to cite lower NPAs and exclude corporations from being in the

defaulters list is referred to as ‘evergreening’ of NPAs. Bad loans are restructured by banks

with easier terms such as moratorium on payment, lowered interest rates and longer

repayment periods to bail out defaulting corporations. Corporate Debt Restructuring (CDR)

is a specialised institutional mechanism for restructuring large exposures involving more

than one lender under a consortium of banks. In February 2012, the Indian Intelligence

Bureau (IB) warned that the ‘proportion of bad loans of Indian banks could increase from 5

to 10 per cent of their total loans mainly on account of restructured loans’. More than half

the bad loans fell in the ‘restructured’ category.

Restructured loans are technically not non-performing assets (NPA) but in most cases, it is

only a matter of time before restructured loans become NPAs. Banks had resorted to

restructuring a large number of impaired loans during the financial crisis in 2008-2009. The

restructuring programme, which was based on financial projections, has largely proved to

be incorrect today and it is speculated that many of those restructured accounts are now

classified as NPAs.

Indian banks are seeing a record amount of loans being restructured; with restructured

assets standing at 4.68 per cent of the total loans in March 2012. According to data from

the RBI, restructured loans were at Rs. 75,304 Cr in March 2009, Rs. 1,36,426 Cr in March

55

The RBI maintains a list of non-suit filed borrowers of banks and financial institutions (FIs), while Credit Information Bureau India Ltd (CIBIL) maintains database on suit-filed accounts of Rs. 1 Cr and above. 56

Suit filed account is one where the lender has filed a legal suit against the borrower. 57

Circular Letter No.27/42/2013/54. All India Bank Employee’s Association (AIBEA). 03 December 2013.

64

2010, Rs. 1,37,602 Cr in March 2011 and Rs.

2,18,068 Cr in March 2012. These figures show

that in the three years between March 2009

and March 2012, restructured standard

advances grew by nearly 300 per cent.

Data from the RBI also indicates that banks are

using write-offs to reduce NPAs. The total

reduction in NPAs for all banks in India between

2008 and 2013 is Rs. 3230 Billion58. Out of this,

Rs. 869 Billion was due to upgradation, Rs. 1297

Billion was due to write-offs and only Rs. 1064

was due to actual recovery.

To evade NPAs from reflecting in their books, banks also resort to certain adjustments which

camouflage asset quality deterioration. Industry experts have concerned that such

adjustments are made on a mutual understanding between corporate clients and banks

whereby borrowers make some payment to the bank at the end of every quarter. Once

reflected in the accounts of the quarter, this payment is reversed to the borrower.

While it is undeniable that disclosing list of defaulters helps to keep track of such cases and

ensure that further lending to a defaulter is avoided, why are banks providing cover to their

corporate clients whose loans constitute a major bulk of bad loans?

Banks contract bulk business from corporate accounts. For this and other inexplicable

reasons, corporate accounts even with deteriorating asset quality are accommodated. Debt

restructuring as a way out can only apply to genuine repayment problems arising out of

situations which are beyond the control of the management. But the recent spate and

volume of debts being restructured lead us to believe that the restructuring mechanism is

misused by several corporations to manage their financial crisis.

In August 201259, the RBI Deputy Governor, KC Chakrabarty, said, "While clearly there is

cause for concern given the pace and quantum of restructuring over the last few years, the

concerns are aggravated by the fact that the restructuring is neither being permitted in a

transparent and objective manner by banks... Nor is it being resorted to in a non-

discriminatory manner".

58

“Write offs were initially introduced as a tool for banks to manage their tax liabilities on impaired assets. However, they subsequently emerged as a tool for banks to manage their reported gross NPA numbers.” Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead 16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India 59

Corporate Debt Restructuring - Issues and Way Forward. Address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the Corporate Debt Restructuring Conference. August 2012.

65

Data from the RBI also

supports the argument that

banks are going easy on

their corporate borrowers

even while facing most

strain from them. The ratio

of restructured accounts to

gross advances is the highest

for the industries sector at

8.24 per cent (with medium

and large industries sector

standing at 9.34 per cent).

The ratio for agriculture stood at 1.45 per cent and services stood at 3.99 per cent (with

micro and small services being 0.94 per cent). While the ratio stood at 2.24 per cent for

priority sector60 advances, it stood at 5.83 per cent for non-priority sector loans. According

to the August 2012 RBI report, “Statistics on restructured advances shows that the medium

and large segments account for over 90 per cent of restructured accounts while the share of

micro and small segments keeps dwindling over the years”.

The ground reality is that advances to smaller borrowers, with genuine needs get

overlooked and slip into NPA which enables building of a perception that the quantum of

non-performing assets is more in the case of small borrowers and hence promotes a rush

towards large-ticket advances, ignoring the basic fact that the lower NPAs amongst larger

borrowers is primarily on account of extensive restructuring/ write offs of such accounts.

Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead

16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India

Another matter of great distress is that the

share of bad loans and restructured loans is

higher for public sector banks as compared to

their private sector competitors. Out of the

total bad loans of Rs. 1,94,000 Cr in Indian

banks in March 2013, the share of bad loans in

public sector banks is Rs. 1,64,461 Cr or 85 per

cent! As of August 2012, the credit growth rate

for private sector banks at 19.88 per cent was

higher that the credit growth rate for public

sector banks which stood at 19.57 per cent.

60

Priority sector includes agriculture, small scale business, small business/ service enterprise, micro credit, education loan, housing loan.

66

However, restructured accounts grew at a compound annual growth rate of 47.86 per cent

in public sector banks as against 8.12 per cent for private sector banks. Further, as on March

2012, the ratio of Restructured Standard Advances to Total Gross Advances is highest for

PSBs at 5.73 per cent, while the ratio is significantly lower for private and foreign banks at

1.61 per cent and 0.22 per cent, respectively. According to KC Chakrabarty, “public sector

banks bearing a disproportionate load of restructured assets indicate that the PSBs have not

been as judicious as the private sector and foreign banks in the use of restructuring as a

credit management tool”.

Between 2009 and 2013, the impaired assets ratio (which is the ratio of gross NPAs,

restructured accounts and cumulative write offs to total advances) rose from 6.8 per cent to

12.1 per cent in the case of PSBs. In contrast, the ratio fell for new private sector banks and

foreign banks and stood at 5.3 per cent and 6.4 per cent respectively in March 2013.

Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead

16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India

This data from the RBI establishes that public sector banks demonstrate an unprofessional

bias towards their corporate borrowers and that restructuring of accounts is increasingly

being resorted to avoid classification of accounts as NPA. This bias is also suggestive of

corrupt practices within public sector financial institutions; which however can thrive only in

the absence of stringent in-built mechanisms for due diligence and risk analysis.

Based on a July 2012 report of the RBI Working Group to review the existing prudential

guidelines on restructuring of advances by banks and financial institutions, the Reserve Bank

announced new norms for restructuring of loans in January 2013, which increased the

provisioning on restructured loans. Provisioning is an expense set aside as allowance for bad

loans. The new norms will come into effect in 2015.

Big business houses that secured huge loans from public sector banks post 2008 financial

crisis, but defaulted on repayments or charted an escape route through multiple

restructuring of bad loans, have now come under Central Bureau of Investigation’s scanner

for suspected wilful misappropriation of public money, running into thousands of crores.

CBI opens probe into firms defaulting on public sector bank loans,

16 August 2013, The Hindu

The Central Bureau of Investigation (CBI) initiated an enquiry of defaulters of big loans from

public sector banks in August 2013. According to the CBI Chief, Ranjit Sinha61, “a bulk of the

NPA is from the top 30 accounts which is learnt to be running into thousands of crores”. The

CBI is also scrutinising cases of loan restructuring by companies. Speaking at the 5th Annual

Conference of Chief Vigilance Officers of Banks and Financial Institutions in August 2013, the

61

CBI starts inquiry against big loan defaulters. 21 August 2013, Times of India.

67

CBI Chief, Ranjit Sinha62 pointed out that “there appears to be reluctance on the part of

banks to declare bad accounts as frauds despite there being clear cut manifestations”.

With rapidly deteriorating asset quality, the banks’ profit margins are affected, they go

through capital crunch and fail to maintain the mandated Capital Adequacy Ratio. This can

affect the resilience of banks and expose them to succumb in unforeseen circumstances.

While private banks primarily look to the market for recapitalisation, Government of India

pumps capital into public sector banks to help them regain a safe capital to risk assets ratio.

The process of nationalisation of banks in India guaranteed that the Indian Government will

fulfil all requirements of PSBs in the event of a breakdown. For example, the chain of events

following concern over State Bank of India’s weakening asset quality, the downgrade by

Moody's Investors Service in October 2011 and plunging of the bank’s market share value,

culminated temporarily the very same month with a commitment from the Government of

India to infuse Rs. 3000 - 4500 Cr in SBI. While SBI’s asset quality had deteriorated primarily

due to indiscreet use of project financing for its corporate accounts, the means for revival of

asset quality is through tax payer’s money!

Budgetary allocations for capitalisation of PSBs have been on the rise. The Government

infused more than Rs. 15,517 Cr in 2012-13, Rs. 12,000 Cr in 2011-12 and Rs. 20,000 Cr in

2010-11 in state-owned banks to help them maintain a capital adequacy ratio of more than

8 per cent. Along with in-principle approvals for need-based capital infusion to PSBs for the

next five years, the Union budget of 2013 committed to infusion of Rs. 14,000 Cr in 2013-14.

According to C. P. Chandrasekhar63, Professor at the Centre for Economic Studies and

Planning, Jawaharlal Nehru University, ‘the Government has thus far infused Rs.743 billion

into the public banking system, with much of it having been provided since 2010”.

2.3 BANKING SECTOR ‘REFORMS’

The banking sector in India was nationalised in two phases in 1969 and 1980 to enhance

their role in the advancement of the economy. During this period, twenty large commercial

banks were nationalised allowing the Government of India control of over 90 per cent of the

banking industry. The ‘liberalisation’ policy adopted by the Indian Government in 1991, as a

result of GATT (General Agreement on Trade and Tariffs) and Structural Adjustment

Programme, compelled the formation of a committee to explore banking sector reforms.

The first such committee, formed in August 1991 and headed by M. Narasimhan64, brought

out its report in November 1991. This was followed by the formation of another committee

62

Press Release. 21 August 2013. Central Bureau of Investigation. http://cbi.nic.in/pressreleases/pr_2013-08-21-1.php 63

The “Remaking” of Indian Banking, 29 November 2013, C. P. Chandrasekhar, The Hindu 64

M. Narasimham has served as Governor of the Reserve Bank of India, Secretary in the Ministry of Finance, India's Executive Director at the World Bank and later at the International Monetary Fund.

68

headed by M. Narasimhan in 1998 to review the interim progress of banking sector reforms.

The Narasimhan Committee of 1991 recommended for increased autonomy in banking,

deregulation of interest rates, reformation of RBI’s role- segregation of its role as regulator

and owner of banks, structural reorganisation of banks including merging of banks, creation

of asset reconstruction companies to take over bad loans from banks, proper system to

identify and classify Non-performing Assets (NPA), reduced Statutory Liquidity Ratio (SLR)65

and Cash Reserve Ratio (CRR), raising of capital adequacy norms, review of banking laws and

opening up of sector to private domestic and foreign banks.

The implementation of recommendations of the Committee, which began in 1992, had far-

reaching implications resulting in the granting of an autonomous status to banks, divesting

of shares held by RBI66 in Indian banks, eliminating role of Government of India in regulating

banks (leaving the RBI as sole regulator), merging of several Indian banks, and implementing

Securitisation and Reconstruction of Financial Assets and Enforcement of security Interest

Act 2002. The Narasimhan Committee was however criticised for targeting enhanced

growth without focus on equitable growth or providing for poverty alleviation measures.

One of the immediate outcomes was the consent from the Reserve Bank of India for the

setting up of private banks. These private banks are referred to as the new private banks67,

to tell apart from the old private banks68 that existed before the 90’s. Subsequently, foreign

banks were also permitted to set up direct operations in the country. According to the 2012

records of the Ministry of Finance there are 26 public sector banks69, 20 private banks, 82

regional rural banks, and 30 foreign banks operating in India. In addition, development

financial institutions (DFI)70 and public financial institutions (PFI)71 promoted by the

Government of India provide financial service, usually long term loans at concessional

65

SLR is the amount a bank is required to maintain in the form of cash, gold and Government and other approved securities. CRR is the amount a bank is required to hold in the form of cash with the RBI. 66

The shares were transferred to the Government of India. 67

The new private banks include Axis Bank, Centurian Bank of Punjab (acquired by HDFC in 2008), Development Credit Bank, HDFC Bank, ICICI Bank, Induslnd Bank, Kotak Mahindra Bank and Yes Bank. 68

The old private banks include Bank of Punjab (merged with Centurion Bank and later acquired by HDFC), Catholic Syrian Bank, City Union Bank, Dhanlaxmi Bank, Federal Bank, ING Vysya Bank, Jammu & Kashmir Bank, Karnataka Bank, Karur Vysya Bank, Lakshmi Vilas Bank, Nainital Bank, Ratnakar Bank, South Indian Bank, Tamilnadu Mercantile Bank and United Western Bank (acquired by IDBI in 2006). 69

Public sector banks include State Bank of India, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce, Punjab & Sind Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India (UBI), Vijaya Bank and IDBI Bank Limited. 70

DFIs include Industrial Finance Corporation of India (IFCI), ICICI, Life Insurance Corporation (LIC), Unit Trust of India (UTI), IDBI, Rural Electrification Corporation (REC), National Bank for Agriculture and Rural Development (NABARD), Housing and Urban Development Corporation (HUDCO), Industrial Investment Bank of India (IIBI), Power Finance Corporation (PFC), Infrastructure Development Finance Corporation (IDFC) and State Financial Corporations (SFC). 71

A 1974 amendment to the Companies Act 1956 allows the Government of India to notify certain DFIs as Public Financial Institutions.

69

interest rates, refinancing and investment options in particular sectors which are neglected

or avoided by other financial institutions.

2.4 REWRITING ‘DEVELOPMENT FINANCE’ - THE CHANGING TRENDS

The banking sector ‘reforms’ of the 1990s changed the scope of finance and financial

institutions in India. The role and significance of banks today is very different from that in

the times of regulated economic growth of the pre-liberalisation era. Industry is de-licensed,

barriers ‘impeding’ growth are being removed and the public sector is rapidly being

privatised. Sensitive sectors, those which essentially serve larger public interest, such as

infrastructure, power, mining, food and water have been opened up for private capital. The

banks operate in an atmosphere where accelerated growth is the priority and wildly erratic

competitive markets are influencing the economy. Besides, the terms of lending to projects

have been re-designed and huge sums are bet on sheer brand value of a company, the

political clout of its promoter and the ‘credibility’ of a corporation.

Over the last decade Indian banks have tremendously boosted their capacity to fund

‘development’ and infrastructure projects both within the country and in other developing

countries. Alongside, global markets have been allowed to dip into our economy by

facilitating foreign direct investment and external commercial borrowings72. Borrowings by

Indian companies from overseas banks, meant to take advantage of lower interest rates,

come with its share of conditionality. The August 2013 Central Electricity Authority report

on performance of power equipment imported from China found the equipment to be

substandard. Low interest loans from Chinese banks plays an important role in the import of

such equipment by Indian power producers.

The project finance epidemic is also encouraging public sector development financial

institutions to lend to infrastructure and ‘development’ projects at the cost of overstepping

their very purpose and mandate. For instance, HUDCO (Housing and Urban Development

Corporation Limited) was set up in 1970 as a fully-owned enterprise of the Indian

Government for ‘supporting and promoting housing projects aimed at low-income families

in urban and rural areas’. Similarly the Rural Electrification Corporation Limited (REC) was

set up in 1969 as a public sector enterprise under the Ministry of Power to ‘finance and

promote rural electrification projects all over the country’. REC’s end is to ‘provide financial

assistance to State Electricity Boards, State Government Departments and rural electric

cooperatives for rural electrification projects.’ In 2011 HUDCO financed three private power

generation and related projects and REC regularly finances large private sector power

projects including Athena Demwe Power, Sasan Power and Krishnapatnam UMPP.

Institutions such as the HUDCO and REC were established to mobilise resources in the

interest of strengthening public infrastructure and facilities, especially in rural areas.

72

ECB is an instrument that facilitates Indian companies to borrow from financial institutions outside India.

70

Facilitating production of power by private companies is not the mandate of either

institution. Likewise NABARD73, whose mission is to ‘promote sustainable and equitable

agriculture and rural prosperity through effective credit support and related services’, was

pulled up by the RBI in late 2012 for providing low interest soft loans to large private

companies under schemes that were meant for small scale enterprises.

Indian bankers are walking down the footprints of international financial institutions (IFI),

tracing the financial trends established by them in the last two decades. The amount of

capital secured from the International Financial Corporation for projects has considerably

reduced over the years. However, by lending small amounts to a project, and its ‘credibility’

in the process, IFC is setting trends for domestic financial institutions. The World Bank

Group (WB) and the International Monetary Fund (IMF) were instrumental in breaking open

essential sectors for private industry in developing countries. Banking norms in the country

have since been eased to facilitate freer flow of finance to private corporations. Further

pushing the boundaries, the private sector lending agency of the World Bank Group, the

International Finance Corporation (IFC), has started using domestic financial institutions as

Financial Intermediaries74 (FI) to channel finance to projects. The World Bank Group for

instance is ‘committed’ to the cause of climate change and claims to be moving away from

funding fossil fuel based projects. In 2007 the IFC sanctioned a USD 1 Billion loan to India

Infrastructure Fund (IIF) to invest in the energy and utilities sector, transport infrastructure

sector and telecommunication infrastructure sector. This money was used to finance GMR

Kamalanga Energy Limited’s 1400 MW coal-based thermal power plant in Odisha, Adhunik

Power and Natural Resources Limited’s 540 MW coal-based thermal power plant in

Jharkhand and three of Essar Power’s multi-fuel power projects. Financial intermediaries are

being used in cases where association with projects would potentially taint the image of the

World Bank Group or be a violation of IFC’s environmental and social safeguard policies. The

use of FIs in project finance is creating a complex web of financial relations, masking the

source of capital and establishing nontransparent and unaccountable pools of money.

2.5 RESERVE BANK OF INDIA (RBI)

The Reserve Bank of India, established under the colonial regime in 1935, is the supreme

body with significant powers to develop the Indian Financial System. Until 1949, when the

RBI was nationalised, it operated as a shareholder's bank. The Reserve Bank of India has the

sole right to issue currency notes, is the banker to the Government, the banker to banks75, it

oversees payments system, maintains the official rate of exchange, supervises and regulates

73

As farmers suffer NABARD offers soft loans to corporates. 10 December 2012. The Hindu 74

A financial intermediary is typically a bank or financial institution or a common fund, which receives bulk amounts of money from large international banks, public sector banks or the government to disburse to various sub-projects. 75

Scheduled banks are required to maintain a cash balance equivalent to three per cent of their aggregate deposit liabilities with the Reserve Bank. Banks can borrow from the Reserve Bank in times of banking crisis.

71

financial institutions and controls credit and monetary policy.

RBI is also the exclusive authority to regulate and supervise Indian banks, especially that of

the public sector. Reserve Bank Act 1934, and the Banking Regulation Act 1949 give the RBI

wide powers of supervision and control over commercial and co-operative banks. The Board

for Financial Supervision (BFS), constituted in 1994, remains at the core of Reserve Bank’s

supervisory and regulatory initiatives76. The RBI achieves much of the regulatory work,

especially of financial institutions, through regular circulars on particular concerns. Circulars

include subjects of disclosure norms, exposure norms, lending to priority sector, external

commercial borrowings, income recognition, asset classification, wilful defaulters, norms for

raising resources, classification and reporting of fraud, non-financial reporting, debt

restructuring, securitisation, prudential norms, corporate social responsibility, etc.

The approach of the existing regulative framework, enforced primarily through circulars,

deals with different issues in isolation thereby allowing banks and corporations to

circumvent guidelines and escape with little consequence. More importantly, the existing

structure is lacking a credit risk management framework for assessing and managing

environmental and social risks in project finance and ‘development finance’ transactions. A

study by Boston Consulting Group released in August 2011 rightly pointed out that Indian

banks need ‘a more enabling regulatory environment to be at par with global (banking)

standards’. The absence of a lending framework to evaluate environmental and social

impacts of projects impedes understanding of the role of financial institutions on loss of

livelihood, displacement, forced relocation of communities, resource depletion,

environmental devastation, climate change and global warming that plague the globe.

In December 2007 the Reserve Bank of India (RBI) issued a circular77 which asked banks to

act responsibly and to contribute to sustainable development. The circular, in a first,

referred banks to existing mechanisms such as the Equator Principles and stressed on the

need for Indian banks to evolve institutional mechanisms to ensure sustainability. RBI

proposed that banks commit to sustainability, accountability, transparency, to do no harm

and bear full responsibility for the environmental and social impacts of their transactions.

Though the circular is an initiative in the right direction, it served no further purpose. The

RBI agrees on the basic premise that ‘responsible banking is the new approach born out of

the new market realities’, that ‘all these (environmental and social) impacts have

ramifications to businesses’ and that ‘there is much that banks can do to assist efforts to

achieve sustainability’. Banks are ‘asked’ to integrate concepts of Corporate Social

Responsibility (CSR) and sustainability with their business strategy. The ten point action plan

at the end of the circular calls for commitment to sustainability, responsibility,

accountability, transparency and to ‘do no harm’, without suggesting a framework within

76

Primary objective of BFS is ‘to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies’. 77

Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting- Role of Banks.

72

which these goals can be achieved. Expecting banks to achieve sustainable and responsible

banking through CSR initiatives is akin to expecting corporations with a solid CSR policy on

their website to not harm people and environment on the ground.

Conflict of Interest at the Reserve Bank of India

The Bank's affairs are governed by a central board of directors. The constitution of this

Board is still governed by the colonial Reserve Bank of India Act 1934 and members of the

board are appointed by the Government of India for a period of four years. The Board,

headed by a Governor, has four Deputy Governors and fifteen non-official members. The

non-official members include four representatives from local Boards headquartered at

Mumbai, Kolkata, Chennai and New Delhi, one from within the Government, and a

maximum of ten experts from various fields.

In the present Board of Directors of the RBI78, five out of the ten positions in the expert

category are occupied by persons directly representing corporate interests. The non-official

members include Azim Premji who is the Chairman of Wipro Limited and member of the

Indo-UK and the Indo-France CEO’s Forum, G.M. Rao who is the Chairman of GMR Group,

Nachiket M. Mor who has been on the Boards of ICICI and Wipro, Y.C. Deveshwar who is ex-

Chairman of ITC and member of the UK-India CEOs Forum and Kiran Karnik who is ex-

President of NASSCOM and an Independent Director on the Board of a few companies.

Past board of directors at the Reserve Bank of India also show similar trends and include

Kumar Mangalam Birla of Aditya Birla Group, Ashok Ganguly of Hindustan Lever, Bhai

Mohan Singh of Ranbaxy, D. Jayavarthanavelu of Lakshmi Machine Works, D. S. Brar of

Ranbaxy, Jamshed Jiji Irani of Tata Sons, Lakshmi Chand of Essel Group, Narayana Murthy of

Infosys Technology, Suresh Krishna of Sundaram Fasteners and TVS Group, Suresh Kumar

Neotia of Ambuja Cement, Sanjay Labroo of Asahi Glass, Ratan Tata of Tata Group, Kushal

Pal Singh of DLF and H. P. Ranina, a corporate tax lawyer.

Individuals who hold large stakes and interests in private corporations are at the same time

occupying the highest positions at the Reserve Bank of India, the supreme body to govern

the Indian financial system. A case in point is Kumar Mangalam Birla, Chairman of the Aditya

Birla Group who was on the Board of the RBI when Aditya Birla Nuvu of the Aditya Birla

Group applied for a new banking license with the Reserve Bank of India. The corporations

which seek financial benefits from public sector banks have their representatives posted at

the board of the RBI, which regulates the banks. Apart from the duties and powers

designated to a Director, the position holds discretionary powers which could very well be

used for vested interests. In the influential position as Director of RBI, individuals also gain

greater power and authority to push for relaxation of norms to enable growth on behalf of

the corporate houses they represent.

78

Refer to Annexure 1 for complete list and profile of RBI Directors.

73

Chapter THREE

3.1 PUBLIC SECTOR BANKS - A PANDORA’S BOX!

For the purpose of this study, eleven public sector banks and financial institutions79 are

considered for detailed analysis. The banks include the State Bank of India (SBI), Punjab

National Bank (PNB), Bank of Baroda (BoB), Bank of India (BoI), Canara Bank (Can), Union

Bank of India (UBI), Indian Bank (IB), Corporation Bank (CB), Central Bank of India (CBI),

State Bank of Mysore (SBM) and Life Insurance Corporation (LIC).

Table 3: Basic statistics of the eleven public sector banks

Bank Market Cap80

(in Cr)

Earnings

Per Share81

(in Rs)

Revenue

(in Cr)

Net

Income

(in Cr)

Aggregate

Deposit

(in Cr)

Total

Loan

(in Cr)

Total

NPA

(in Cr)

SBI 1,38,451.30 184.31 1,20,873 11,713 10,43,647 8,67,579 39,676

PNB 26,537.90 154.02 40,631 4,884 3,79,588 2,93,775 8,720

BoB 28,696.30 127.40 33,096 5,007 3,84,871 2,87,377 4,465

BoI 18,270.10 49.85 31,802 2,678 3,19,413 2,49,733 5,894

Can 17,691.90 74.10 33,779 3,283 3,27,054 2,32,490 4,032

UBI 10,776.30 34.07 23,477 1,787 2,22,869 1,77,882 5,450

IB 7,953.60 39.57 13,463 1,836 1,20,804 90,324 1,851

CB 6,003.50 101.67 14,510 1,506 1,36,142 1,00,469 1,274

CBI 5,799.00 5.95 20,545 535 1,96,173 1,47,513 7,273

SBM 2,277.60 78.88 5,598 369 - - 1,503

LIC 12,846.00 - - - - 2,96,325 3,692

* Figures provided for market cap are the average of daily figures between April & September 2012 sourced

from Business Today. http://businesstoday.intoday.in/bt500/index.jsp?compid=1&type=COMP&year=2012 The other information is sourced from the 2011-12 annual reports of the respective banks.

Researchers of this report filed applications82 under the Right to Information Act 2005 with

eleven public sector banks - State Bank of India (SBI), Punjab National Bank (PNB), Bank of

Baroda (BoB), Bank of India (BoI), Canara Bank (Can), Union Bank of India (UBI), Indian Bank

(IB), Corporation Bank (CB), Central Bank of India (CBI), State Bank of Mysore (SBM) and Life

Insurance Corporation (LIC). The information provided by the banks points to alarming

trends in project finance and sanction of loans within public sector banks. It corroborates

with arguments such as PSB’s undeserving bias towards private sector corporations, steep

increase in non-performing assets on corporate loans and over exposure to risky sectors.

79

Despite recognising the need to study in detail the trends within public and private sector banks, this report being a pilot initiative focuses only on public sector banks. 80

Market capitalisation (or market cap) is the total value of the issued shares of a publicly traded company; it is equal to the share price times the number of shares outstanding. 81

Earnings Per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock. EPS is an important variable in determining a share's price. 82

Refer to Annexure 2 for questions posed to banks and the responses provided.

74

State Bank of India is India’s largest commercial bank by assets, profits, deposits, branches

and employees. The amount of money lent by State Bank of India to companies, especially

to the private sector, which grew over five times from Rs. 58,467 Cr in 2003-04 to Rs.

2,96,362 Cr in 2010-11, is unparalleled in the industry. Table 4 lists the volume of loans

sanctioned by four different public sector banks, including SBI, to Public Sector Undertakings

(PSU)83 and Private Sector Companies (PSC).

Table 4: Loans sanctioned by LIC, SBM, CBI and SBI to public sector undertakings (PSUs) and

private sector companies (PSC) [Amount in Crores]

Financi

al Year

LIC SBM CBI SBI

Total loan

to PSUs &

PSCs

% of

loans to

PSUs

% of

loans to

PSCs

Total loan

to PSUs &

PSCs

% of

loans to

PSUs

% of

loans

to PSCs

Total loan

to PSU &

PSCs

Loan

to PSCs

2010-11 1931 Nil 100 8233 73 27 64558 296362

2009-10 2720 Nil 100 9081 87 13 52177 230521

2008-09 4235 33 67 8154 78 22 50645 205723

2007-08 5776 47 53 8870 78 22 - 158214

2006-07 3658 93 7 - - - - 160956

2005-06 1761 97 3 - - - - 133000

2004-05 - - - - - - - 74350

2003-04 - - - - - - - 58467

In the five years between 2005-06 and 2010-11, Life Insurance Corporation scaled up loans

to private sector companies from 3 to 100 per

cent. In 2010-11, the entire bulk of its Rs. 1931

Cr loan to companies went to the private

sector while the public sector undertakings

which received up to 97 per cent of loans in

2005-06 did not receive any loans in the last

years.

In the year 2010-11, Union Bank of India (UBI)

gave out Rs. 36,549 Cr in loans to companies

with 49.64 per cent to public sector

undertakings and 50.36 per cent to private

sector companies. In the same year, Bank of

India (BoI) loaned Rs. 1,29,810 Cr to companies,

out of which as much as 77.37 per cent went to

private sector companies.

83

Public Sector Undertakings are companies where the government holds the majority of shares. Private sector companies are those floated by private individuals or business houses.

75

In their response to RTI queries, LIC stated that they provide loans only to public limited

companies84 in the private sector. SBI however

not only provides loans to both public limited

and private limited companies in the private

sector, the share of loans to private limited

companies have greatly increased since 2003-

04. Out of the total of Rs. 2,96,362 Cr to private

sector companies in 2010-11, Rs. 1,36,577 Cr

(46 per cent) was sanctioned to private limited

companies. The NPA on loans to private limited

companies is also greater than the NPA on loans

to public limited companies in the private

sector. In 2010-11, out of the total NPA of Rs.

9217 Cr on loans to private sector companies,

Rs. 5828 Cr (63 per cent) were from loans to

private limited companies.

Table 5: SBI’s non-performing assets in public sector undertakings and

private sector companies

Financial Year State Bank of India [Amount in Crores]

Total NPA on loans to

private sector companies

Total NPA on loans to public

sector undertakings (PSUs)

2010-11 9217 6

2009-10 6822 235

2008-09 4150 163

2007-08 3423 91

2006-07 3107 149

2005-06 3430 33

2004-05 5334 90

2003-04 5620 109

In the eight year period when loans sanctioned by State Bank of India to private sector

companies increased fivefold from Rs. 58,467 Cr to Rs. 2,96,362 Cr, the non-performing

assets on its loans to private sector companies nearly doubled from Rs. 5620 Cr in 2003-04

to Rs. 9217 Cr in 2010-11. On the other hand, the bank’s non-performing assets on its loans

to public sector undertakings reduced drastically from Rs. 109 Cr to Rs. 6 Cr. The bank’s total

NPA in public sector undertakings for the eight years is Rs. 876 Cr as compared to Rs. 41,103

Cr in private sector companies.

84

Private sector companies can be private limited or public limited. A private limited company is owned by individuals and its shares cannot be traded on the stock market. A public limited company can trade on the stock market to raise capital and its shares are freely transferable.

76

Information from Indian Bank and State Bank of Mysore resonate similar trends of rising

NPAs on loans to private sector companies. For five straight years between 2006-07 and

2010-11 Indian Bank’s NPA on loans to public sector undertakings were nought. The non-

performing assets in Union Bank of India and Bank of India are much larger than that for

Indian Bank and State Bank of Mysore as shown in Table 5.

Table 6: IB and SBM’s non-performing assets in public sector undertakings and private

sector companies [Amount in Crores]

Financial

Year

Public sector undertakings Private sector companies

Indian Bank SBM Indian Bank SBM

2010-11 Nil 3 740 251

2009-10 Nil 3 510 208

2008-09 Nil 3 459 102

2007-08 Nil 3 486 133

2006-07 Nil - 546 164

2005-06 - 179

2004-05 - 187

Life Insurance Corporation refused to provide the information on its non-performing

assets; Canara Bank, Central Bank of India and Punjab National Bank claimed not to have

separate figures for NPAs on loans to companies. Bank of Baroda provided annual figures

for total NPAs without any further sectoral classification. Corporation Bank provided

information for this section but used terms of public sector undertakings and private

sector company interchangeably with public limited company and private limited

company, reflecting either a lack of clarity on catergorisation of loans or a deliberate

attempt to misrepresent facts.

77

Table 7: Non-performing assets in Union Bank of India and Bank of India

Financial

Year

NPA [Amount in Crores]

UBI BoI

2010-11 3623 4357

2009-10 2671 4481

2008-09 1923 2190

2007-08 1657 1783

2006-07 1873 1930

2005-06 2098 2219

2004-05 - 2878

2003-04 - 3451

The figures given by SBM show that loans sanctioned to companies have not jumped in

short periods of time and

the bank has remained

fairly consistent in the

amount and percentage of

loans sanctioned to public

sector undertakings and

private sector companies

for the period between

2007-08 and 2010-11.

However, table 8 shows

that the losses suffered by

SBM between 2005 and

2011 on account of loan

default correspond proportionately to the non-performing assets on loans sanctioned to

private sector companies. This amount is also the loss in capital liquidity at the bank for that

financial year. State Bank of Mysore is the only bank among eleven to provide figures for

losses suffered by bank on account of loan default.

Table 8: Losses suffered due to loan default by State Bank of Mysore [Amount in Crores]

Financial

Year

NPA in public sector

undertakings

NPA in private

sector companies

Losses suffered on

account of loan default

2010-11 3 251 396

2009-10 3 208 295

2008-09 3 102 239

2007-08 3 133 270

2006-07 - 164 306

2005-06 - 179 309

2004-05 - 187 -

78

Table 9: Sectoral increase and decrease in loans and NPAs in the eight year period between

2003-04 and 2010-11 along with loans and NPA for 2010-11 at SBI [Amount in Crores]

Sector Loans NPA Loans in

2010-11

NPA in

2010-11

Mining of Coal > 16 times > 3 times 880 21

Mining / Extraction/Quarrying (incl coal) > 2 times > 2 times 11,999 209

Manufacturing of Food Product > 7 times > 3 times 25,446 968

Manufacturing of Beverages > 5 times > 5 times 3,352 313

Manufacturing of Tobacco Products > 8 times < 12 times 470 2

Manufacturing of Textiles > 5 times > 1.04 times 30,690 954

Manufacturing of Apparel: Garment, Fur > 5 times > 5 times 5,451 413

Tanning, Manufacturing of Leather & Leather

Products

> 3 times < 3 times 2,016 35

Manufacturing of Wood & Plywood > 5 times > 4 times 902 59

Manufacturing of Paper & Paper Products > 6 times > 6 times 4,924 573

Publishing, Printing & Recorded Media > 2 times > 1.4 times 870 102

Power Plants (coal, petrol, nuclear) > 37 times > 22 times 22,298 159

Manufacturing of Chem & Chem Product > 2 times > 1.3 times 9,890 564

Manufacturing of Medicinal Products > 6 times > 1.1 times 7,493 108

Manufacturing of Rubber & Plastic Products > 5 times > 2 times 7,246 307

Manufacturing of Non Metallic Products > 5 times > 2 times 8,192 183

Manufacturing of Basic Metals (Steel & Non

Ferrous)

> 8 times > 2 times 46,515 1,561

Manufacturing of Fabricated Metal Products > 3 times > 1.03 times 3,142 163

Manufacturing of Machinery & Equipments > 12 times > 6 times 14,918 498

Manufacturing of Office & Computer

Machinery

> 2 times > 5 times 702 126

Manufacturing of Electrical Machinery &

Apparatus

> 4 times < 0.6 times 10,291 224

Manufacturing of Radio, TV & other

Communication Equipment

< 0.13 times < 3 times 101 2

Manufacturing of Surgical, Optical & Watches > 5 times > 2 times 628 41

Manufacturing of Motor Vehicles & Trailers > 6 times > 3 times 4,660 108

Manufacturing of other Transport Equipment > 2 times < 2 times 4,528 46

Manufacturing of Furniture > 5 times > 5 times 9,514 731

Recycling of Metal Waste > 10 times < 3 times 90 2

Electricity, Gas, Steam and Hot Water Supply > 8 times < 11 times 22,994 68

Distribution of Water > 88 times > 25 times 214 4

Construction (Infrastructure & other) > 7 times > 5 times 45,995 598

* > refers to the number of times the loan has increased

< refers to the number of times the loan has reduced

79

While State Bank of India’s loans to the private sector in the eight years between 2003-04

and 2010-11 grew over five times, the share of loans grew 37 times in the power industry,

16 times in coal mining industry, 8 times in steel and electricity industry, 7 times in

construction and infrastructure and food manufacturing industry, 5 times in textiles industry

and 2 times in mining and extraction and chemical industry.

Table 10: Distribution of SBI’s loans to private sector companies in selected sectors.

[Amount in Crores] Financial

Year

Mining

of coal

Mining /

extraction/

quarrying

(incl coal)

Manufa

cturing

of food

product

Manufa

cturing

of

textiles

Power

plants

(coal,

petrol,

nuclear)

Manufa

cturing

of chem

& chem

product

Manufacturi

ng of basic

metals (steel

& non

ferrous)

Electricity,

gas, steam

and hot

water

supply

Constru

ction

(infrastr

ucture

& other)

Total85

(loan to

private

corporati

ons)

2010-11 880 11999 25446 30691 22298 9890 46515 22994 45995 305534

2009-10 942 12471 22102 24883 23603 10264 34647 13845 36478 252820

2008-09 2930 8461 18474 22747 15672 10495 27748 10853 36479 219631

2007-08 867 8001 14018 19110 4293 11381 20327 7605 23695 161348

2006-07 613 4143 9697 15934 7328 9897 18015 5851 13085 133635

2005-06 415 2824 7925 12041 6875 8891 12895 3733 10332 101905

2004-05 335 5263 6077 8465 942 6908 8815 3715 8230 77426

2003-04 56 5570 3877 6320 601 4823 5580 2772 6427 53534

SBI has expanded massively and most

prominently in power and allied coal mining

sector along with distribution of water,

recycling of metal waste, manufacturing of

machinery and equipments, manufacturing

of basic metals, construction and

infrastructure and manufacturing of food.

The same period in which SBI’s loans to the

power sector grew 37 times the sector was

facing a multitude of problems mainly linked

to the unpredictability, unavailability and

high cost of coal. Coal mining is fraught with

scams and large sized power projects around

the country stand stalled with no clear-cut

road map for progress. The crisis in the

inflated power industry is reflected in the

steep rise of non-performing assets in the

sector on SBI’s books.

85

Please note that this total indicates the total of loans provided by SBI to the different sectors mentioned and are marginally different from the figures for total loans by SBI to private sector companies provided in Table 4.

80

Ironically, the banks were found to be lending more to sectors that had high impairments,

pointing to possible lacunae in credit appraisal standards. For example, while the

Compounded Annual Growth Rate (CAGR) of credit for the period 2009-2012 for the

banking sector was 19 per cent; the segments like iron and steel, infrastructure, power and

telecom witnessed much higher credit growth despite the impaired assets ratio for these

segments being significantly higher.

Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead,

16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India

The highest ratio of non-performing assets of Rs. 1561 Cr on loans to private sector

companies in 2010-11 lies in the manufacturing of steel and non-ferrous metals sector

followed by Rs. 968 Cr in food manufacturing, Rs. 954 Cr in textiles, Rs. 598 Cr in

construction, Rs. 564 Cr in chemical manufacturing, Rs. 209 Cr in mining and extraction, Rs.

159 Cr in power, and Rs. 68 Cr in electricity. However, the NPAs in the period between 2003-

04 and 2010-11 increased the most, 25 and 22 times, in distribution of water and power

sector followed by a 6 time rise in paper and paper products and manufacture of machinery

and equipment, 5 time rise in construction and infrastructure, beverage, garment, office and

computer machinery and furniture industry. The NPAs tripled in the coal mining and food

manufacturing industry, doubled in mining and extraction and steel industry, and marginally

increased in the textiles and chemical industry.

Table 11: Distribution of SBI’s NPA on loans to private sector companies in selected sectors

[Amount in Crores] Financial

Year

Mining

of coal

Mining /

extraction/

quarrying

(incl coal)

Manufa

cturing

of food

product

Manufa

cturing

of

textiles

Power

plants

(coal,

petrol,

nuclear)

Manufa

cturing

of chem

& chem

product

Manufacturi

ng of basic

metals

(steel & non

ferrous)

Electricity,

gas, steam

and hot

water

supply

Constru

ction

(infrastr

ucture

& other)

Total

NPA

2010-11 21 209 968 954 159 564 1561 68 598 9123

2009-10 27 47 728 966 18 427 735 88 533 6637

2008-09 13 82 517 688 12 441 614 58 1884 6219

2007-08 17 89 489 401 30 463 597 28 165 3720

2006-07 9 74 352 504 25 421 458 7 145 3430

2005-06 96 137 391 734 6 334 555 9 193 3920

2004-05 12 61 424 833 3 503 799 864 229 5866

2003-04 8 124 347 909 7 443 741 758 111 5013

The exposure to different sectors varies with banks and for instance, NPAs in the gems and

jewellery sector is very high in certain banks. The figures show highest growth of NPAs in

construction and infrastructure, followed by chemical industry, iron and steel,

manufacturing, textiles, paper and paper products. Bank of Baroda and Life Insurance

Corporation of India responded that they do not maintain ‘sectoral bifurcation of data’ or

‘industry-wise distribution of loan and NPA information. The Union Bank responded to the

81

question with information pertaining to agriculture, small scale industry, other priority and

non-priority sectors indicating that they do maintain information on loans to different

sectors of the industry. Punjab National Bank, Canara Bank, Bank of India, Indian bank,

Central Bank of India and Corporation Bank provided partial information on their sector wise

exposure of NPAs.

3.2 STONEWALLING INFORMATION - A COMPLETE LACK OF TRANSPARENCY

In November 2010, the Central Information Commission (CIC) had ordered the Reserve Bank

of India to disclose the names of top 100 defaulting industries of the country to an applicant

and also upload the same on the bank’s website. While passing this order, the Information

Commissioner had stated that the disclosure of this information was in larger public

interest. However, reluctant to reveal the list of defaulters the RBI petitioned the Delhi High

Court and obtained a stay on the order passed by the CIC. A similar attempt by researchers

of this report to get information on loans to companies, defaulting industries, action taken

against defaulting industries, NPA on project loans, policies to guide project loans, social and

environmental guidelines for sanctioning project loans, etc from various public sector banks

has been met with stiff resistance. All financial institutions, State Bank of India, Punjab

National Bank, Bank of Baroda, Bank of India, Canara Bank, Union Bank of India, Indian

Bank, Corporation Bank, Central Bank of India, Life Insurance Corporations, with the

exception of State Bank of Mysore, refused to divulge complete information.

Applications86 under the Right to Information Act 2005 were filed with 11 public sector

banks on 14.09.2011 and 10.02.2012. Much of the questions were unanswered by the

Public Information Officers (PIO) who sought refuge under the exemptions listed under the

RTI Act. Appeals to the First Appellate Authority of the banks were met with similar hostility

and cases are currently pending with the Central Information Commission (CIC). State Bank

of Mysore was the only bank where the First Appellate Authority responded stating that ‘the

conclusions arrived by the PIO were not correct’ and that ‘available information should be

made available’ to the applicant.

Interestingly, different banks provided information to different questions, different parts of

questions and quoted different sections to deny information, implying the arbitrary usage of

sections within the Act to deny information. While Punjab National Bank denied providing

the amount of loans that are sanctioned annually to companies, Bank of Baroda, Canara

Bank, Bank of India, Union Bank and Indian Bank claimed to not have ‘centrally’ available

information on the volumes of loans provided to companies. Similarly Central Bank of India

claimed to not maintain separate records of loans to private sector and public sector

undertakings.

86

Refer to Annexure 2 for details of RTI application.

82

If it is indeed true that the above mentioned banks do not maintain data of the volume and

number of loans provided to public sector and private sector companies, then it is shocking

that banks are operating and continuing to provide large project finance loans to companies

in the absence of a consolidated understanding of their exposure on such loans. For

instance, Bank of Baroda did not provide information on total loans advanced to companies

‘as the same needs to be compiled from all branches of the bank’. Bank of Baroda also does

not have figures of non-performing assets for different sectors and industries. It goes to

show that there is no mechanism within banks for standardised and scientific classification

of loans and non-performing assets.

This hostility by both financing institutions and project proponents in providing information

on loans, date of sanctioning, the terms, interest rates, repayment periods, etc is most

evident while attempting to understand the financial records of individual projects. For

example, in the case of the Athena Demwe Lower hydro electric project which has a total

project cost of Rs. 13,144.91 Cr, there is almost no information on where this money is

coming from. What is known is that the Power Finance Corporation has sanctioned a loan of

Rs. 2300 Cr and that the project got a loan from Rural Electrification Corporation. There is

no publicly available information indicating which other financial institutions contributed to

the remaining portion of debt. In some cases such as GMR Kamalanga Energy,

Krishnapatnam UMPP and Lavasa Hill City, media reports inform of the total project cost

and the number of banks that contributed to the debt portion of the costs. This however, is

the maximum extent of information available to the public at large or project-affected

communities.

The Reserve Bank of India maintains a list of information that cannot be disclosed as per

their Disclosure Policy87. Under the section on banking operation and development,

‘Information on investment proposals, till the action is complete’ is listed as exempted

under the Right to Information Act. The exhaustive list of exemptions in the same section

does not include information on loan details to projects.

In August 2010, the RBI refused to disclose names of the top 100 industrialists who had

defaulted on repayment of loan to banks in response to a Right to Information application.

The Central Information Commissioner (CIC), in the matter, ordered the RBI to provide the

information to the appellant and directed the RBI to suo motu disclose complete

information on such industrialists every year. Refusing to oblige, the Reserve Bank of India

filed a writ petition against the CIC’s order in the Delhi High Court.

Speaking up against the weakening of banking regulation, increasing default of loan by

corporations and the RBI’s refusal to disclose names of defaulters, the All India Bank

87

www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2347

83

Employee’s Association (AIBEA) in December 201388 disclosed figures for bad loans,

restructured loans, write offs and the names of top 50 corporate defaulters in public sector

banks. The Association also declared that they would publish a booklet with the the names

of the top 30 defaulters in each Bank. Names of some of the top defaulters of Bank loans

are given overleaf.

Moves such as publishing photos of individual defaulters in newspapers and bill boards,

when banks are keeping all details of loans to companies under wraps, with little will to

check the large defaulters, can only be seen as a tactic to divert public attention from the

bigger implications of poor banking policies. The practice of withholding all information

under the pretext of commercial secrecy with the intention of protecting corporate clients

leads to unaccountability and disposes institutions to malpractice and corruption.

In November 2011, the Economic Offences Wing (EOW) of the Central Bureau of

Investigation (CBI) charged senior officers of public sector financial institutions and banks

for having received bribes from a financial services company Money Matters, which

mediated with banks for large sized corporate loans. The CBI alleged that these loans

were sanctioned by over-stepping mandatory regulatory conditions for loan approvals.

The LIC Housing and Finance Limited, Bank of India, Central Bank of India and Punjab

National Bank were indicted by the CBI for irregularly approving loans to companies such

as Lavasa Corporation, Oberoi Realty, Ashapura Minechem, Suzlon Energy, DB Realty,

Emaar MGF Land, Mantri Realty and Kumar Developers.

Financial institutions and banks around the world have developed and implemented policies

on disclosure and access to information which require them to publicly disclose details of

their loans to all projects funded by them. Banks disclose loan details along with brief

descriptions and environmental and social information of the project on their websites.

Most banks disclose such information after the signing of the loan document. However,

certain international banks are also in the practice of placing information pertaining to

projects in public domain for a short period of time to seek public opinion after which a

decision is taken on sanctioning of loan to the project. Indian banks not only do not have

disclosure policies but are forcefully violating central norms for information disclosure to

withhold information on corporate loans.

88

Circular Letter No.27/42/2013/54. All India Bank Employee’s Association. 03 December 2013

84

Chapter FOUR 4.1 DEMOCRATICALLY ACCOUNTABLE AND PUBLICLY TRANSPARENT INVESTMENT

The cases studies presented in the first chapter raise critical concerns on banking policies in

India. It is evident from the cases discussed in this report that in their lending practices with

regard to projects, public and private financial institutions in India,

have adopted a passive position on environmental and social concerns;

are not honestly and satisfactorily assessing social and environmental impacts and risks;

demonstrate little regard for national policies and norms meant to safeguard social and

environmental interests; and

are not monitored and regulated by a central policy to ensure that investment is

democratically accountable and publicly transparent.

Banks are typically seen only as financing institutions; they are disassociated with the

activities of the projects they finance and therefore are a green sector. But are banks really

the green sector they are considered to be, if the flow of finance from them is reason for

irrevocable social, economic and environmental damage? In the relentless pursuit of

expanding business, financial institutions are evading responsibility and accountability and

are functioning outside of the democratic strictures espoused in the country.

Large projects by their sheer size, and due to unpredictable markets, socio-political

circumstances and poor implementation, have inherent risks associated with it. Being key

stakeholders of the projects which are made possible through their financing, banks must

have a responsibility to finance only those projects that fulfil both regulatory requirements

as well as social and environmental norms.

Most of the asset quality deterioration for SBI has happened on projects under

implementation or under construction, which have not been able to keep up the time lines

because of environmental clearances and fuel supply, etc.

Interview with Economic Times, 03 September 2013, Pratip Chaudhuri, Ex-Chairman/

Managing Director, State Bank of India

Such impacts however cannot be merely viewed within the environmental and social

context alone as the case studies have shown that these risks have the ability to affect the

economic interests and long-term viability of the project. These risks can transform into cost

escalations and result in unforeseen increase of the total project cost. For lenders, it is

unquestionably an economic incentive to ensure that projects adhere to the necessary

environmental and social norms as projects made unviable due to violations can potentially

become a financial burden. In the project finance mode, banks would first and foremost

want projects to achieve early financial closure and begin operation to generate cash flow

so that debt can be repaid. Any sustained delay in the project’s advancement translates to a

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risk on the balance sheet of the lender. On account of delayed projects such as Athena

Demwe Lower HEP, Sasan Power, Lavasa Hill City, Lafarge Surma and Krishnapatnam UMPP,

several banks are stressed with non-performing assets and restructured loans.

Should the growth opportunities or the growth prospects become low, I do not think it

affects the debt market as much as it would the equity markets, because the equity market

participants give a price earning multiple depending on the growth prospect, but in the debt

market we are more concerned about their ability to service the debt.

Interview with Economic Times, 03 September 2013, Pratip Chaudhuri, Ex-Chairman/

Managing Director, State Bank of India

4.2 GLOBAL MECHANISMS FOR ACCOUNTABLE AND TRANSPARENT INVESTMENT

The need for investment to be responsible and ethical goes back as early as 1600’s when

religious groups campaigned against investing in businesses with destructive practices. In

the latter part of the twentieth century, colossal damage to environment and human life,

accentuated by incidents primarily rooted in negligence or incompetence such as the Three

Mile Island nuclear accident in 1979, Bhopal gas tragedy in 1984, Chernobyl nuclear disaster

in 1986 and the Exxon oil spill in 1989, cast doubts on corporate practices and prompted

scrutiny of the banks funding the projects. Subsequently, responsible finance, ethical

investment and sustainable development acquired a structure in the form of procedures,

policies and guidelines.

Faced with severe criticism from governments and civil society institutions in the third

world, in the 1970’s the World Bank Group was forced to institutionally frame policies to

assess environmental and social impacts of projects they financed. Public pressure for

accountability in World Bank’s funding, propagated by the Narmada Bachao Andolan (NBA)

and the international campaign against the Sardar Sarovar dam on River Narmada, resulted

in the formation of the World Bank Inspection Panel in 1993. The Morse Committee set up

by the Bank to independently review the Bank’s role in the Sardar Sarovar Project reported

severe human and environmental damage caused by the dam in violation of the Bank’s

policies. The bank’s practice of transferring large amounts of money without scrutinising

social and environmental implications of projects was criticised by the Committee.

In 1998 IFC launched a set of environmental and social review procedures and Safeguard

Principles, which in 2006 was adapted into a Sustainability Framework with policies and

procedures on social and environmental sustainability and performance standards which

defines roles and responsibilities for managing projects. These standards include

assessment and management of environmental and social issues, labour and working

conditions, resource efficiency, community health, safety and security, land acquisition and

involuntary resettlement, indigenous people, biodiversity conservation and natural

resources and cultural heritage. In 1999, the World Bank Group instituted the Compliance

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Advisor Ombudsman (CAO), an independent recourse mechanism for International Finance

Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA), to deal with

complaints from project-affected communities with the goal of ‘enhancing social and

environmental outcomes on the ground’.

The UN Global Compact (UNGC)89 was initiated by the United Nations in 2000 as “a strategic

policy initiative for businesses that are committed to aligning their operations and strategies

with ten universally accepted principles in the areas of human rights, labour, environment

and anti-corruption”. This was meant as a joint financial sector initiative to discuss “financial

investment banks and fiduciaries’ social responsibility implementation” requiring signatories

to commit to the UN Global Compact and its ten principles of human rights, labour,

environment and anti-corruption. The ‘Principles for Responsible Investment’ (PRI) was

launched in 2006 by the UNGC and the UN Environment Programme Finance Initiative

(UNEPFI) in collaboration with the New York Stock Exchange (NYSE). PRI is a set of voluntary

guidelines for investment entities to address environmental, social, and corporate

governance (ESG) issues by placing “financial social responsibility at the core of investment

decision making’.

The Equator Principles (EPs) was launched in 2003 as a “credit risk management framework

for determining, assessing and managing environmental and social risk in Project Finance

transactions”. The financial institutions which adopt EPs commit to provide loans only to

projects which comply with the prescribed social and environmental policies and

procedures. The EPs were initially adopted by ten90 global financial institutions. Other

international initiatives on accountable and transparent investment include the Global

Reporting Initiative (1997), Collevecchio Declaration on Financial Institutions (2003) and the

London Principles on Sustainable Finance (2002).

4.3 VOLUNTARY GUIDELINES LACK TEETH

Globally professed voluntary guidelines such as the UNGC, PRI and Equator Principles are

based on the premise that institutions which adopt the principles will self regulate and

monitor their investment to ensure that no harm or damage is done to human and

environmental life. The experience in the last 20 years has shown that this trust on self

regulation and commitment is both mistaken and undeserving. International banks which

are signatories to UNGC or EP have violated the principles on their investment projects in

India and other countries.

For instance, several Global Compact companies such as Aventis, Nike, Rio Tinto, Norsk

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http://www.unglobalcompact.org/docs/news_events/8.1/GC_brochure_FINAL.pdf 90

ABN AMRO Bank N.V., Barclays plc, Citi, Crédit Lyonnais, Credit Suisse First Boston, HVB Group, Rabobank Group, The Royal Bank of Scotland, WestLB AG, and Westpac Banking Corporation.

87

Hydro and Unilever have violated91 one or more of the Principles of the Compact. Similarly,

many of the 98 Indian businesses registered with the UNGC are repeat violators of

environmental and social norms.

Madras Aluminium Company (MALCO) has committed environmental, labour and

human rights violations92 in Mettur, Tamilnadu; Tata Power has committed

environmental and human rights violations93 in its Mundra UMPP, Gujarat;

Hindustan Unilever Limited (HUL) has committed labour rights and environmental

violations94 in its thermometer factory in Kodaikanal, Tamilnadu; Hindustan

Construction Company has committed environmental and human rights violations

at the Lavasa Hill City, Maharashtra; Jindal Steel acquired mining rights95 in

Jharkhand through corrupt means.

The Indian financial sector businesses registered with UNGC include the Infrastructure

Development Finance Corporation (IDFC), Rural Electrification Corporation (REC) and Power

Finance Corporation (PFC).

IDFC, REC, and PFC have sanctioned loans to projects such as the Athena Demwe

Lower HEP, Sasan Power, GMR Kamalanga Energy which have committed

environmental, labour and human rights violations.

Barclays bank96 which was one of the private banks responsible for developing the Equator

Principles had associated with the Sardar Sarovar dam project. The project involves ‘the

flooding of one of India’s most productive agricultural regions and the forced relocation of

an estimated 2 Million people’. In 1993, the World Bank withdrew its funding from the

Narmada dam project in response to uncompromising resistance by villagers and their

efforts which exposed serious violations by the Bank. The Narmada project was in breach of

the Barclays bank’s own Social and Environmental principles, the Equator Principles and

Indian laws! The IDFC, the only Indian financial institution to sign on to the Equator

Principles, has not only sanctioned loans to the problematic GMR Kamalanga Energy project

but also acted as an intermediary to channel finance for the IFC to the project.

Mechanisms such as the UNGC or EP or PRI are voluntary guidelines and for that very reason

hold no capacity and authority for actual implementation. They are at best frameworks 91

The UN's Global Compact, Corporate Accountability and the Johannesburg Earth Summit. 24 January 2002. Bruno, Kenny. CorpWatch. 92

The Indian People’s Tribunal report on environmental and human rights violations by Chemplast Sanmar and Malco industries at Mettur, Tamil Nadu. 93

The Real Cost of Power - Report of the Independent Fact-Finding Team on the Social, Environmental and Economic Impacts of the Tata Mundra UMM, Kutch, Gujarat. June 2012. 94

The Indian People’s Tribunal Report on the Alleged Environmental Pollution and Health Impacts caused by the Hindustan Lever Mercury Thermometer Factory at Kodaikanal. June 2003. 95

Indian Billionaire Naveen Jindal in Trouble, Again. 12 June 2013. Forbes. 96

The Future of Responsible Lending In India. May 2009. Sophie A Hadfield-Hill.

88

which can be voluntarily adopted but in the absence of enforcement and monitoring, banks

cannot be held accountable for non-adherence to the standards. Moreover, becoming

signatories to such voluntary frameworks allows financial institutions to pay lip service to

the cause, preserve its public image and oppose a binding regulatory mechanism.

On the other hand, the World Bank Group’s investments are subject to the adherence of

their safeguard policies. Even so, mechanisms such as the CAO within the World Bank are

soft laws which provide limited recourse. Ironically, the World Bank Group has globally been

amongst the most criticised for involvement in projects which entail massive human rights

and environmental violations. The World Bank’s expertise in formulating policies for

protection of environmental, social and corporate governance has not necessarily translated

into good practices. Alongside the periodical review of their Sustainability Frameworks,

which has slowly raised the bar of standards adopted, the Bank has also innovated newer

means to finance projects in violation of its own policies and safeguards. IFC’s large scale

investment into Financial Intermediaries (FIs), which absolves transparency and

accountability, is one such example.

The protection of a country’s limited natural resources and the rights of its people cannot be

left to the discretion of voluntary guidelines and standards set by international institutions.

It is however necessary to follow global leads in the direction of responsible banking to

develop a country-based framework to ensure that public-sector and private-sector funds

are not utilised for economically, environmentally and socially unviable projects.

4.4 REGULATION OF SOCIO-ENVIRONMENTAL NORMS IN LENDING IN INDIA

Indian banks are far behind the global scenario with regard to assessing environmental and

social impacts of projects they invest in. A 2009 study97 which looked into the future of

responsible lending in India found that “awareness of international lending standards

among Indian banks was minimal”. The study found that “whilst 46 per cent had heard of

the Equator Principles, only 27 per cent (14 respondents)98 were well informed, and as 8 of

these were respondents from foreign banks, this figure is disturbingly low”. It was also

pointed out that Indian bankers “blame ignorance for their continued irresponsible funding

of projects”. Forty one per cent of respondents were also in favour of the Indian

Government regulating the Equator Principles. The study mentions a CEO of a bank

commenting, “if we were told to sign it then we would agree to sign, if we have someone

telling us then we will do it, if it is regulated then we would have to”.

97

The Future of Responsible Lending In India: Perceptions of the Environment and Sustainability. May 2009. Sophie A Hadfield-Hill. Department of Geography, University of Leicester. 98

Respondents in this study include senior bank management - directors, managers, executive officers, who are in decision making positions.

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The Veil of Internal Guidelines

A common counter to the argument demanding a sustainable banking framework for Indian

banks is the existence of internal guidelines within banks to ensure due diligence of projects

with respect to risks, including social and environmental. ‘Internal’ guidelines, as the name

suggests, are guidelines with no mechanisms for oversight by an external body such as the

RBI or Parliament and do not allow for real transparency and accountability. Very few,

including Government authorities, are privy to a bank’s financial information or their

guidelines. Moreover, an aggressive and competitive financial environment poses threats of

singling out individual banks if they adopt internal guidelines with stringent monitoring of

responsible implementation of projects.

Information sought under the Right to Information Act 2005 shows that most banks have

internal loan policies or Credit Risk Management99 policies apart from following the

guidelines stipulated by the RBI. These policies vary in size and strength but are uniform in

ignoring social and environmental risks. For instance, Union Bank of India has a loan policy

covering basic tenets of credit including credit administration, method of assessment, etc.

The due diligence procedure spelt out by Union Bank verifies only the project proponent’s

credit reports, industry analysis, financial statements and market rating. State Bank of

Mysore’s loan policy guides on issues such as exposure levels, credit appraisal standards,

credit monitoring and supervision, risk management, review of loans, take over norms and

NPA management. Indian Bank and Corporation Bank provided similar policies. LIC

responded that they do not have an independent Credit Risk Management policy while

State Bank of India, Central Bank of India, Punjab National Bank, Bank of Baroda, Bank of

India and Canara Bank stated that the Credit Risk Management policy was for internal

circulation only.

Responses to the RTI from the 11 banks also indicate that they do not have a policy to

specifically deal with Project Finance. Bank of India responded that they follow the

guidelines set by RBI and other competent authorities. This response holds no ground given

that the RBI does not have specific guidelines or circulars to deal with project finance. There

are only two brief and vague references to project finance in RBI circulars; in the December

2007 RBI circular on Corporate Social Responsibility, Sustainable Development and Non-

Financial Reporting- Role of Banks and in the July 2012 RBI circular on Loans and

Advances100. In response to this question, the Union Bank of India and State Bank of Mysore

provided the bank’s general loan policies which however did not contain any specific

reference to project finance loans. Corporation Bank stated that “Only technically feasible

and financially viable projects are considered for bank finance. Before disbursing the credit

99

Credit risk is defined as the risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. 100

RBI Master Circular – Loans and advances – Statutory and Other restrictions. 02 July 2012. http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7380

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limits, the bank ensures the obtension of all statutory and legal clearances/ permission/

licenses and compliance of mandatory requirements”.

Life Insurance Corporation of India responded with a set of 6 broad ‘guidelines’ for

sanctioning loans to companies in the private sector.

1. Loans to private (limited) companies/ private entities/ private organisations are not

considered.

2. Loans are given to public (limited) companies in the private sector for Greenfield and

Brownfield project including infrastructure projects, refinancing of existing loans as

well long term working capital and capex requirements.

3. Loans for projects and refinancing are considered on a consortium basis with other

financial institutions and are based on the appraisal done by the lead banker in the

consortium.

4. Loans are also granted to Special Purpose Vehicles floated by public sector companies

and public limited companies, in consortium with other lenders, for the purpose of

construction of roads, power projects, ports, etc.

5. The quantum of loan to be sanctioned is determined according to IRDA guidelines and

on the basis of capital employed in the company.

6. The terms and conditions for disbursement of loan and repayment of the same would

be as per the loan agreement/ financing documents and in line with the terms of

sanction.

The LIC guidelines for sanctioning of loans to companies are in effect generic and serve little

purpose. For example, that LIC does not consider loans to private limited companies is an

organisational decision and not a guideline. State Bank of India provided a brief description

of the procedures followed for project finance loans.

Procedures followed by State Bank of India while sanctioning Project Finance to private

sector companies

In-principle approval is for prima facie acceptability of projects and an indication of

willingness of the Bank to finance the project if found acceptable on detailed due

diligence. On approval of the same, broad terms of loan are advised to borrower.

On receipt of a reference from the Branch/ company/ syndicator with basic

information about the project, a view is taken on the project and a brief note on the

major terms to be offered is put up for in-principle approval.

On receipt of acceptance from the company of the in-principle term sheet along with

the Detailed Project report (DPR), Financial Model and other project related

documents/ information, the proposal is appraised on the viability/ feasibility

parameters keeping in view its risk profile and ensuring its conformity to the Bank/

RBI guidelines/ instructions in this regard. Detailed discussions are also held with the

company representatives/ consultants on project issues.

Final approval is accorded by the appropriate credit committee of the Bank.

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The information from the 11 banks also reveals that either the banks do not have internal

guidelines to assess social and environmental risks or have weak watered-down guidelines

that are applicable to project finance. Out of the eleven banks which were asked for their

internal guidelines to assess social and environmental risks, State Bank of India101 was the

only one which had and agreed to provide it. Central Bank of India, Union Bank of India and

Bank of Baroda refused to provide the information and sought refuge under section

8(1)(a)(d)102 and 7(9)103 of the Right to Information Act.

Both Indian Bank and Canara bank responded that the question- “Does Canara Bank/ Indian

Bank have environment and social guidelines with regards to project finance? If yes, please

provide copies of the same”, was vague and could not be answered. Bank of India

responded that it followed the guidelines prescribed by RBI. Again, RBI does not have a

specific guideline to deal with social and environmental safeguards! Life Insurance

Corporation of India (LIC), State Bank of Mysore (SBM), Punjab National Bank (PNB) and

Corporation Bank responded that they do not have environment and social guidelines with

regards to project finance. Responses from LIC, Corporation Bank and PNB include-

“While considering funding of projects, LIC insists on prior clearance from the Ministry of

Environment and Forests (MoEF) and adherence to the conditions stipulated therein,

whenever required. LIC also insists on the project fulfilling the Resettlement and

Rehabilitation (R&R) obligations before sanction/ disbursement of loans.”

“Only technically feasible and financially viable projects are considered for finance at

Corporation Bank. The Bank ensures compliance of all statutory guidelines/ permissions/

licenses with regard to environmental and social guidelines while sanctioning credit.”

“While appraising a project, PNB looks into the following social and environmental issues –

i.) Impact on increase in level of savings and income distribution in society and standard of

living. ii.) Project contribution towards creation and rate of increase of employment

opportunity, achieving self sufficiency, etc. iii.) Project contribution to the development of

the region, its impacts on environment and pollution control.”

101

Refer to Annexure 3 for SBI’s Circular on Credit Policy and Procedures Department; 11 March 2008. 102

Section 8(1)(a) states that ‘there shall be no obligation to give any citizen information, disclosure of which would prejudicially affect the sovereignty and integrity of India, the security, strategic, scientific or economic interests of the State, relation with foreign State or lead to incitement of an offence’ Section 8(1)(d) states that ‘there shall be no obligation to give any citizen information including commercial confidence, trade secrets or intellectual property, the disclosure of which would harm the competitive position of a third party, unless the competent authority is satisfied that larger public interest warrants the disclosure of such information’ 103

Section 7(9) states that ‘information shall ordinarily be provided in the form in which it is sought unless it would disproportionately divert the resources of the public authority or would be detrimental to the safety or preservation of the record in question.’

92

State Bank of India’s circular from the Credit Policy and Procedures department dated 11

March 2008 is a basic frame to assess social and environmental risks for project finance

loans. The circular justifies the need for such guidelines as on “several instances projects

financed (by SBI) were ordered to be closed due to environmental considerations. Neglect

or poor management of social and environmental issues arising or likely to arise from

projects has been the primary reason for this.” The circular calls for recording “significant

environmental and sustainability implications while assessing projects”. This is proposed

through a form for filling in relevant information as an annexure to the proposal for loan.

The circular checks

- For necessary approvals such as site clearance from Ministry of Environment & Forests,

No Objection Certificate (NOC) from Pollution Control Board & Atomic Energy Division,

mining plan approval from Indian Bureau of Mines/ Ministry of Coal, forestry clearance

under Forest (Conservation) Act 1980, clearance from Chief Controller of Explosives,

commitment regarding availability of water & power from concerned authority;

- If the project is mired in a court case;

- If there were any issues raised during the public hearing;

- Whether Resettlement & Rehabilitation (R&R) plan for affected/ displaced persons is

finalised; socio-economic welfare measures for the nearby villages;

- For details of pollution (air, water, noise, solid waste) control measures, existing/

proposed and efficiency of each of the systems.

When it comes down to it, this method of collecting social and environmental information

through a check list is rather futile if the bank does not conduct due diligence to verify the

claims of project proponents.

The Corporation Bank, Life Insurance Corporation of India and State Bank of India, which

were the only banks which responded positively to the RTI query on internal guidelines for

social and environmental risks, indicated that only projects already cleared by the respective

Ministries are considered for loans. Although consistent with RBI’s position, this claim is

hollow, as on one hand there is no possible way of verifying if information on loans to

projects is not made public and on the other particular cases show that loans are sanctioned

prior to the granting of clearances. The 2009 Leicester University study on the Future of

Responsible Lending in India had reported that “four Indian financial institutions admitted

to providing funds to infrastructure projects which had not been passed by the MoEF”.

Indian banks are severely lagging at developing a framework to ensure sustainable

development and mitigate social and environmental risks. They are also non-signatories to

the prescribed international best practices. In the absence of sufficient information on risks

and issues anticipated in a project and norms and guidelines to comprehensively assess

those risks, informed decisions are not being taken by loan sanctioning authorities in Indian

banks.

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Chapter FIVE

5.1 CONCLUSION

With an aggregate deposit of Rs. 59,090,82 Cr in scheduled commercial banks in 2011-12,

banks in India are seen as an easy avenue by large companies to procure loans for projects.

On an average, 70 to 80 per cent of the total cost of a project is met through loans provided

by banks. Public sector banks enjoy the confidence of a disproportionately large section of

the people along with boundless financial and other support from the Government. This

extensive confidence is misused by the banks’ management who do not seem to be

operating in the interest of the bank’s investors. Defying the very rationale behind the

nationalisation of banks, the banks have gradually moved away from public sector lending

to private sector lending. Analysis of loan data from the 11 public sector banks studied in

this report show that loans to private corporate projects are jumping at an aberrant pace.

Loans to private sector companies by the State Bank of India have jumped 500 per cent in

the seven years between 2004 and 2011.

The data from public sector banks clearly establish that banks are greatly exposed to loans

in the private sector. SBI’s non-performing asset in 2010-11 was Rs. 6 Cr for public sector

companies and Rs. 9217 Cr for private sector companies. Loans from banks are highest to

the private sector and so are the non-performing assets and restructured accounts highest

on their private sector corporate loans.

Restructured accounts, especially on corporate loans, are growing two times faster in public

sector banks as compared to private sector banks. This extensive difference in the

restructured accounts of public and private sector banks indicate that the safeguarding of

interests within public sector banks is immensely weak. With a disproportionate share of

restructured accounts which can potentially turn into bad assets, Public Sector Banks are in

a relatively weak market position.

The All India Bank Employee’s Association (AIBEA) in December 2013 blamed lack of

adequate regulation for the current financial distress, “In the name of reforms and

liberalisation, banking regulations are being de-regulated. One of the main adverse effects

of this de-regulation is the increase in bad loans in banks, where big borrowers (are allowed

to) take loans from banks and not repay.” The Association demanded that names of

defaulters of over Rs. 1 Cr be published; that wilful default of loan be made a criminal

offence; that collusion and nexus be investigated; that recovery laws be amended to speed

up recovery of bad loans; that stringent measure be taken to recover bad loans; and to not

incentivise corporate delinquency.

The exponential growth in the Indian industrial and infrastructure sector projected for the

coming decade will rely largely on investment from financial institutions. The post

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globalization era of growth and development, where the private sector is encouraged and

supported over the public sector, holds newer implications for financial institutions.

Ingenious adjustments are being made to allow the private sector greater access to public

resources and public coffers while the ensuing accountability is spread thin. Norms are

being diluted, loopholes are exploited and checks are being reduced in number to facilitate

this ‘growth’. Without a firm, democratically accountable and transparent system to

regulate and oversee the rapid flow of finances into projects, the price we pay as a country

for the interim damage can be far heavier than the benefits of growth itself.

The Ministry of Environment and Forests is attempting to deal with the rapid increase in the

number of projects awaiting clearances alongside pressure from the Commerce and Finance

Ministries to clear greater number of projects in shorter spans. After a decade of

complaining about the ‘green norms’ which are ‘stalling’ infrastructure and development

projects, the Finance Ministry initiated plans for a central board which could potentially

supersede the authority of the separate ministries. Formation of the Cabinet Committee on

Investment (CCI), which can set deadlines for the granting of project clearances by

Ministries, effectively means that a project has to be cleared at all costs and that the

clearance is only a matter of time. It is ironic that with projects growing massively in size,

the time period for clearances is being unwisely cut short. This shelving of regulatory

mechanisms is also contributing to uncontainable large-scale corruption as seen in the

recent 2G spectrum and coal-gate scams.

Large tracts of private, agricultural, community, forests, government and other lands are

being diverted rapidly to private sector ‘development’ and infrastructure projects without

proper assessment of its impact on communities, livelihoods, local economy and

environment. Governments are facilitating this transfer of land to private sector projects

under the guise of ‘public purpose’ without safeguarding the interests of the citizens. Given

the lack of a central framework to comprehensively deal with assessment of impacts,

acquisition of land, change of land use and resettlement and rehabilitation measures,

project-impacted communities are forced to endure unreasonable arrangements.

Companies are making use of the huge gaps in the Indian regulatory system to push through

projects with adverse impacts and huge financial risks. Even in instances where the project

proponents and parent companies are taken to task for destructive impact of projects, no

responsibility is placed on the lenders, whose money made the project possible. This weak

link in regulating finance has lead to a catch-22 situation. As long as financiers ensure

unbridled flow of funds, project proponents feel no need or pressure to address

environmental and social issues. And banks continue to finance projects regardless of the

potential harm it can cause because they do not have any guidelines to direct them

otherwise.

Social and environmental safeguards for financial institutions lending to various mega

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projects are largely nonexistent in India. Lack of grievance redressal mechanisms in banks

also impedes any channel of communication between affected communities and lenders.

Exploiting this gap in lending regulation in India, International Financial Institutions are

making use of national financial institutions as financial intermediaries (FI) to channelize

unaccountable and non-transparent lending to projects which are in violation of their

internal safeguard principles.

The six cases presented in this report draw clear lines between socio-environmental issues

and financial stress. After already refinancing loans to Sasan Power in 2010-11, Reliance

Power yet again restructured the loan in 2013 because it failed the date of commissioning

the project. During the proceedings of court cases for environmental and social violations,

both Lavasa Corporation and Lafarge Surma reported deteriorating loan quality, defaulted

on payment of interest and principal to lenders and subsequently restructured their loans

with lenders.

The Krishnapatnam UMPP and Athena Demwe Lower HEP achieved financial closure in 2010

and portions of the sanctioned loan have already been transferred to the projects. Both

these projects are yet to even begin construction. Instead of sanctioning loans to projects

which have met the statutory requirements, banks are sanctioning loans to projects which

not only have not gone through due process of seeking clearances but are in violation of

several crucial legislations meant to safeguard human and environmental interests. As the

cases of Athena Demwe Lower HEP, Sasan Power, Lavasa Hill City and Lafarge illustrate,

deteriorating quality of loans sanctioned by financial institutions are used as arguments to

pressure for clearances. The responsibility to safeguard loans lies with financial institutions

and the responsibility to safeguard human and environmental life lies with the Ministry of

Environment and Forests. The Ministry of Environment and Forest cannot be pressured to

grant clearance to a project merely because banks need to recover the huge loans

sanctioned to it.

Unless financial institutions and banks holistically appraise risks associated with a project

right at the beginning, they will be taken by surprise at every setback and be forced to make

leeway to simply be able to see returns from the loan at some point in the future.

By masking bad loans, obfuscating loan information and deliberately blocking access to

information on their corporate clients, banks are active party to the creation of a sacrosanct

bubble where loans to so-called ‘development’ and infrastructure projects have become

unquestionable. The result: increase in bad loans and poor financial performance within

banks! The All India Bank Employees Association in December 2013 disclosed that non-

performing assets in banks reached Rs. 1,94,000 Cr. The share of NPAs in public sector banks

alone is Rs. 1,64,461 Cr.

It is the right of all citizens to be informed of where and how public money is spent. Money,

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especially public money, cannot be doled out freely without accountability. The complete

lack of information available on the projects financed by the banks also deters discussion on

the developmental impacts of such lending.

Depletion of natural resources and degradation of the natural environment are irreversible.

The short-sighted coal mines of the 20th century which used unscientific methods for mining

out coal from under the earth had not foreseen that the town of Jharia would continue to

burn underground a century later. Thousands of Adivasi and other marginalised

communities from Jharia in Jharkhand live on hot earth with little but the remnants of coal

to fill their stomachs. They are waiting to be rehabilitated, as they have for many

generations now.

Financial institutions have to presume responsibility for the impacts of projects made

possible through their lending. And environment and social equity has to be the common

concern of the people of a region. Banks across the world are being targeted, charged and

boycotted for encouraging dirty, polluting and harmful projects through their lending.

Lending decisions which have far reaching consequences cannot be left solely to the

intelligence of individual executives at banks. Instead of waiting to go the full circle, Indian

banks should proactively endorse safeguard policies which regulate their investments to

projects. Resources of the banking sector, especially that of public sector banks, are valuable

and need to be utilised with foresight and prudence. Sustainable development is the

collective responsibility of the Government, its people and the industry.

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5.2 RECOMMENDATIONS

Legislative Recommendations

1. In order to regulate and monitor corporate loans and project finance loans, the Parliament

must pass and implement a legislation on the lines of ‘Public Accountability, Transparency

and Compliance with Social, Environmental and Sustainability Safeguards for Development

and Infrastructure Projects in Lending’. The legislation must aim to ensure that-

Loans are not sanctioned to projects which negatively impact human and environmental

life;

Lending is democratically accountable and publicly transparent;

Lending is monitored and regulated through robust mechanisms;

Banks are held liable for lending in violation of the principles and standards prescribed by

the aforesaid legislation.

2. The transparency and accountability clauses will apply to all corporate loans. The social,

environmental and sustainability safeguard clauses will apply to project specific loans.

3. The legislation should apply to all financial institutions operating in the country - public,

private and foreign.

4. The legislation should mandate that lending be in compliance with the aforesaid legislation

and should stipulate punitive action for financial institutions violating the legislation.

5. The aim of the social, environmental and sustainability safeguards prescribed in the

legislation must be to guide financial institutions with identifying, assessing, regulating and

monitoring environmental and social impacts of projects. The safeguards must stipulate

appropriate and adequate due diligence mechanisms to ensure accurate assessment of

environmental and social issues in a project prior to lending. The due diligence mechanism

must be independent of the submissions made by the project proponent.

6. The legislation should mandate the compliance of a project to both

I. The Indian environmental and social norms and policies;

II. The safeguards prescribed by the aforesaid legislation.

This compliance by projects must be a precondition for financial closure.

7. The Legislation should prescribe a Universal Disclosure Policy for financial institutions that

mandates proactive disclosure of information on loans to projects. Information on loans

must include a minimum of the date of financial closure, the date of loan sanction, period of

repayment, interest on loan and updated repayment status. Financial institutions must

immediately publish names of companies defaulting on loans.

8. The legislation must incorporate an independent mechanism to evaluate compliance by

financial institutions with the legislation. This independent mechanism must involve a body

jointly set up by the RBI and the Ministry of Finance, which includes auditors from CAG,

banking, legal and environmental experts, social scientists and representatives of national

bank employees’ trade unions.

9. The implementation of this legislation must not in any way be tied to or combined with

Corporate Social Responsibility (CSR) initiatives and similar measures of financial institutions.

The transparency and accountability measures and the environmental and social safeguards

stipulated in this legislation must be independent of CSR initiatives.

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10. The legislation must require financial institutions to unconditionally withdraw its lending in

case any aspect of conflict of interest, bribery, corruption or nepotism is established with

regard to a project.

11. The legislation must mandate a decentralised mechanism for grievance redressal to address

complaints at two levels-

i. Grievance Redressal Authority at the centre - jointly appointed by the Ministry of Finance

and Parliamentary Accounts Committee (PAC)

ii. Grievance Redressal Committees within financial institutions

The members of the Authority and Committees must include social scientists, members of

social organisations, legal and technical experts as members.

Regulatory Recommendations

1. The Reserve Bank of India must issue a circular to financial institutions stipulating-

A universal categorisation of projects by size [Large/ Medium/ Small] and impact104 [Red/

Orange/ Green].

A scientific and standardised classification of corporate and project finance loans on the

basis of whether it is sanctioned to a public sector undertaking or a private sector

company. Further, the classification must specify whether a private sector company is a

public limited company or a private limited company.

2. The Reserve Bank of India must issue a circular to financial institutions stipulating that banks

show no bias whatsoever towards private corporate clients in the sanctioning of loans. The

circular must instruct the Board of Directors of banks to penalise banking officials responsible

for biased decisions.

3. The Reserve Bank of India must issue a circular prohibiting financial institutions from ‘ever-

greening’ non-performing assets and camouflaging defaults by private corporate clients.

4. The Reserve Bank of India must black list companies which repeatedly default and/ or

restructure loans with financial institutions. This list must be made public.

5. The RBI must issue a circular to financial institutions stipulating that parent companies be

held liable for default of loan by their subsidiary Special Purpose Vehicles (SPV).

6. The Ministry of Finance must immediately ensure that senior management at banks are

trained on the tenets of social and environmental concerns and impacts, to facilitate well-

informed and judicious decision making during sanctioning of loan.

7. The Ministry of Finance must ensure that appointments to the Board of Directors at the

Reserve Bank of India, appointments to the Reserve Bank’s regional boards, and

appointments of senior executives at nationalised banks do not conflict with their personal

and/ or business interest.

8. The Ministry of Finance must implement strict measures to prevent revolving door of

personnel between nationalised institutions and private corporations.

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Industries are classified by the Ministry of Environment & Forests as red, orange and green on the basis of

environmental impacts.

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ANNEXURE 1

List of Board of Directors at the Reserve Bank of India

Name Detail Dr. Raghuram Rajan Raghuram Rajan who took charge as the Director of RBI in September 2013

has in the past been the Chief Economic Adviser in the Indian Ministry of Finance and the Chief Economist at the International Monetary Fund. Rajan has also chaired a Government of India committee on financial sector reforms in 2008.

Dr. K.C. Chakrabarty1

Deputy Governor Dr. Chakrabarty has been the Chairman & Managing Director (CMD) of Punjab National Bank and Indian Bank. He was also the Chairman of the Indian Banks’ Association (IBA).

Shri Anand Sinha1

Deputy Governor Shri. Sinha has been associated with the Reserve Bank of India for 34 years. He was previously an Executive Director before taking charge as a Deputy Governor.

Shri H.R. Khan1

Deputy Governor Shri. Khan has been associated with the Reserve Bank for 32 years. He was the Chairman of RBI group on Rural Credit and Microfinance, based on which the RBI issued guidelines to expand banking outreach through Business Facilitators and Business Correspondents for spearheading financial inclusion in the country.

Dr. Urjit R. Patel1 Deputy Governor

Dr. Urjit Patel is an expert on economics and public finance in India, international trade, financial intermediation and regulation of infrastructure utilities. He has been an Advisor (Energy & Infrastructure) at the Boston Consulting Group, on deputation from the International Monetary Fund (IMF) to the RBI and a consultant Ministry of Finance.

Dr. Anil Kakodkar2

Non-official Director Dr. Kakodkar, is an Indian nuclear scientist and mechanical engineer. He was the Chairman of the Atomic Energy Commission of India and Secretary to the Government of India, Department of Atomic Energy. Before leading India's Nuclear Programme, he was the Director of the Bhabha Atomic Research Centre.

Shri Kiran Karnik2

Non-official Director Shri. Karnik has been the President of NASSCOM and was responsible for bringing Satyam Computers back on track after it suffered the corporate fraud. He serves as an Independent Director on the Board of a few companies.

Prof M.V. Rajeev Gowda2

Non-official Director

Prof. Rajeev is Chairperson, Centre for Public Policy and Professor of Economics and Social Sciences at the Indian Institute of Management, Bangalore. His work focuses on Indian Political economy and how people & societies make decisions about risks.

Dr. Nachiket M. Mor3 Dr. Mor has worked with the ICICI Bank and was a member of its Board of Directors. He has also served as a Board Member of Wipro, Board Chair of the Fixed Income Money Market and Derivatives Association of India and as a member of the High Level Expert Group on Universal Health Coverage appointed by the Planning Commission.

Shri Y.H. Malegam3 Non-official Director

Shri. Malegam has been the President of Institute of Chartered Accountants of India. Currently he is a member of the Financial Sector Legislative Reforms Commission. He is also Director of National Stock Exchange of India, the Clearing Corporation of India Limited and of several large public limited companies.

Shri Azim Premji3

Non-official Director Shri. Premji is the Chairman of Wipro Limited. He is a member of the Prime Minister’s Councils for National Integration and for Trade & Industry in India. He is also a member of the Indo-UK and the Indo-France CEO’s forum.

100

Prof. Dipankar Gupta3

Non-official Director Prof. Gupta used to teach at Jawaharlal Nehru University. In 1998 Professor Gupta started KPMG’s Business Ethics division in Delhi and led this practice for over 5 years.

Shri G.M. Rao3

Non-official Director Shri. Rao is the founder and Chairman of GMR Group, a leading Indian infrastructure developer.

Ms. Ela Bhatt3

Non-official Director Ms. Bhatt is the founder of the Self-Employed Women's Association of India (SEWA).

Dr. Indira Rajaraman3

Non-official Director Dr. Rajaraman was a Member of the Thirteenth Finance Commission. She had held the Reserve Bank of India Chair at the National Institute of Public Finance and Policy and was on the Economics faculty of the Indian Institute of Management, Bangalore.

Shri Y.C. Deveshwar3

Non-official Director Shri. Deveshwar was Chief Executive and Chairman of the Board at ITC. He led Air India as CMD between 1991 and 1994. He serves on the National Executive Committees of some of India's premier trade and industry bodies and is a member of the UK-India CEOs Forum instituted by Government of India and the United Kingdom.

Prof. Damodar Acharya3

Non-official Director

Prof. Acharya is an engineer and educationist. He has been Director of the Indian Institute of Technology Kharagpur since July 2007. His career includes experience at IIT Kharagpur, as Vice-Chancellor, Biju Patnaik University of Technology, Rourkela, and Chairman, All India Council of Technical Education (AICTE).

Shri. Rajiv Takru4 Shri Rajiv Takru serves as Secretary with the Department of Financial Services (DFS) in the Ministry of Finance.

Shri Arvind Mayaram4

Non-official Director Shri. Mayaram serves as Secretary, Department of Economic Affairs (DEA). He is former Officer of the Indian Administrative Service and has previously held other posts in the ministry of finance and Department of Rural Development. Mayaram had played a key role in developing public private partnership (PPP) policy among others.

1 Nomination made as per 8 (1)(a) of Reserve Bank of India Act, 1934- a Governor and [not more

than four] Deputy Governors to be appointed by the Central Government; 2 Nomination made as per 8 (1)(b) of Reserve Bank of India Act, 1934- four Directors to be nominated

by the Central Government, one from each of the four Local Boards as constituted by section 9; 3 Nomination made as per 8 (1)(c) of Reserve Bank of India Act, 1934 - ten Directors to be nominated

by the Central Government; 4 Nomination made as per 8 (1)(d) of Reserve Bank of India Act, 1934- two Government official to be

nominated by the Central Government.

Source: http://www.rbi.org.in/scripts/AboutusDisplay.aspx

101

ANNEXURE 2 Information provided by various banks to applications under the Right to Information Act 2005

Q.No Question to Banks SBI PNB BoB BoI Can UBI IB CB CBI SBM LIC

1 Total amount of loans given to companies in the last 6 years

Y 8(1)(d) 7(9) Y (part)

7(9) Y (part)

No Y Y (part)

Y Y

- Percentage of loans to public sector companies and private sector companies

No 8(1)(d) 7(9) Y (part)

7(9) Y (part)

No Y 7(9) Y Y

- Losses suffered due to loan default No 8(1)(d) 7(9) No 7(9) Y (part)

No No 8(1)(a) Y*

8(1)(d)

2 Number of notices issued to public sector companies for defaulting loan in last 6 years

7(9) Y (part)

7(9) 8(1)(d) (j)

7(9) No No Y * 8(1)(d) Y* 8(1)(d)

- Measure taken against defaulters Y Y 7(9) Y (part)

7(9) No Y (part)

Y* 8(1)(d) Y* 8(1)(d)

- List of defaulters 8(1)(d) (e)(j)

Y 7(9) 8(1)(d) (j)

7(9) No 8(1)(d) (e)

Y* 8(1)(d) Y* 8(1)(d)

3 Number of notices issued to private sector companies for defaulting loan in the last 6 years

7(9) Y 7(9) 8(1)(d) (j)

7(9) No No Y* 8(1)(d) Y* 8(1)(d)

- Measure taken against defaulters Y Y 7(9) Y (part)

7(9) No Y (part)

Y* 8(1)(d) Y* 8(1)(d)

- List of defaulters 8(1)(d) (e)(j)

Y 7(9) 8(1)(d) (j)

7(9) No 8(1)(d) (e)

Y* 8(1)(d) Y* 8(1)(d)

4 Provide the Non-performing Assets at the end of each financial year for the period between 1990 and 2011

Y (part)

7(9) Y (part)

Y (part)

7(9) Y (part)

Y (part)

Y 7(9) Y No

- for public sector companies Y 7(9) 7(9) No 7(9) No Y Y 7(9) Y* 8(1)(d)

- for private sector companies No 7(9) 7(9) No 7(9) No Y Y 7(9) Y* 8(1)(d)

5 Provide sector-wise (Industry wise distribution of exposures) non-performing assets at the end of each financial year for the top 12

Y Y (part)

No Y (part)

Y (part)

Y (part)

Y (part)

Y Y Y (part)

8(1)(d)

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sectors for the period between 1990 & 2011

6 Provide a list of all ‘industry research’ conducted in the last ten years

Y Y 7(9) Y 8(1)(d) 7(9) No 8(1)(j) 8(1)(a) (d)

Y’ Y

7 Provide copy of Credit Risk Management Policy

Y 8(1)(d) 8(1)(d) 8(1)(d) 8(1)(d) 8(d) Y Y 8(1)(a) (d)

Y Y

8 Provide copy of internal guidelines on prudential exposure to reduce credit risk (for capital market)

8(1)(d) 8(1)(d) 8(1)(d) No Y Y No Y 8(1)(a) (d)

Y Y

9 What are the procedures followed while sanctioning project finance to a private corporation? Provide respective documents and internal guidelines for sanctioning loans.

Y 8(1)(d) 8(1)(d) Y No Y No Y 8(1)(a) (d)

Y’ Y’

10 Are there environment and social guidelines with regards to project finance? If yes, please provide copies of the same.

Y Y 8(1)(d) Y No 7(9) No Y 8(1)(a) (d)

Y Y

Abbreviations SBI - State Bank of India Can - Canara Bank BoB - Bank of Baroda CBI - Central Bank of India UBI - Union Bank of India IB - Indian Bank PNB - Punjab National Bank BoI - Bank of India CB - Corporation Bank LIC - Life Insurance Corporation of India SBM - State Bank of Mysore Y - Information was provided; Y’ - information was provided after appeal; Y*- Part of the information sought was provided while the remaining was ignored; N - Information was not provided

Grounds for refusal of information

Section 7(9) of the RTI Act - Information shall ordinarily be provided in the form in which it is sought unless it would disproportionately divert the resources of the public authority or would

be detrimental to the safety or preservation of the record in question.

Section 8(1) of the RTI Act - Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen,—

(a) information, disclosure of which would prejudicially affect the sovereignty and integrity of India, the security, strategic, scientific or economic interests of the State, relation with foreign

state or lead to incitement of an offence;

(d) information including commercial confidence, trade secrets or intellectual property, the disclosure of which would harm the competitive position of a third party, unless the competent

authority is satisfied that larger public interest warrants the disclosure of such information;

(e) information available to a person in his fiduciary relationship, unless competent authority is satisfied that larger public interest warrants disclosure of such information;

(j) information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of

the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest

justifies the disclosure of such information.

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ANNEXURE 3

SBI Circular on Credit Policy and Procedures

The Chief General Manager,

State Bank of India,

Circles/ CAG/ MCG

CPP/NJ/CIR/113 March 11, 2008

Dear Sir,

Project Finance: Submission of additional information.

There have been several instances where projects financed by us were ordered to be closed due to

environmental considerations. Neglect or poor management of social and environmental issues

arising or likely to arise from projects has been the primary reason for this. Management of social

and environmental impacts by units have to be continuous and proactive. These have a cost aspect

which also has to be suitably factored into the project costs. These two, environmental on the one

hand and social/ health costs on the other are generally not included in the project cost while

implementation or running the same has often resulted in active environmentalists/ NGOs/ local

interest groups intervening leading to delays/ postponement and even abandoning of the project

causing serious discomfiture to lenders.

2. In view of the above, there is a need to consider and record the significant environmental and

sustainability implications while assessing projects. Operating units should incorporate in their

proposals certain minimum information on these aspects so that fully informed decisions can be

taken by the appraising/ sanctioning authorities. Further due attention to these aspects would

enable a proper assessment of the extent of compliance of the project with environmental/ social/

statutory requirements and assist in taking an informed decision on the extent of exposure to be

taken. The association with such projects from the corporate Social responsibility point of view also

is to be kept in mind.

3. It has therefore been decided that all proposals seeking project finance should invariably include

an annexure (as enclosed). Apart from ensuring that the project proponent is aware of the

obligations to environment and society, this would also assist the integration of social and

environmental aspects of the project into the assessment of projects. Such information would also

help in identification and mitigation of environmental and social impacts due to the project.

4. Please arrange to issue instructions to the Branches and their Controlling Offices in your Circle/

Business Group for meticulous compliance thereof.

Yours Faithfully

Sd/-

For Managing director and Chief Credits & Risk Officer

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Annexure to the SBI Circular

A. Whether the following approvals have been obtained?

I. Site clearance from Ministry of Environment & Forests

II. NOC from Pollution Control Board

III. NOC from Atomic energy Division

IV. Mining plan approval from Indian Bureau of Mines/ Ministry of Coal

V. Forestry clearance under FCA 1980

VI. Clearance from Chief Controller of Explosives

VII. Commitment regarding availability of water and power from the concerned authority

B. Is there any court case relating to the project or related activities? If so, details thereof.

C. Summary details of public hearing: date of hearing/ issues raised by the public/ response of the

project proponents/ suggestions made by public hearing.

D. Details about population to be displaced. Whether resettlement& Rehabilitation (R&R) plan has

been finalised? If yes, acceptability levels observed and salient features of R&R plan for oustees.

I. Site where the displaced people are proposed to be resettled & facilities provided thereof.

II. Compensation package including funds earmarked.

III. Agency/ authority responsible for their resettlement.

IV. Period by which resettlement of Project Affected People will be over.

E. Amount, if any, earmarked for socio-economic welfare measures for the nearby villages other

than R&R plans.

F. Details of pollution (air, water, noise, solid waste) control measures existing/ proposed and

efficiency of each of the systems.

G. What major occupational and community health and safety hazards (surface and U/G fire,

inundation, explosion etc) are anticipated/ what provisions have been made/ proposed to conform

to health and safety requirement? Details of personal protective equipment provided/ to be

provided to the workers. Information on radiation protection measures, if applicable.

105