After a largely disappointing October-December earnings season, outside of some sectors such as IT, investors expect the market in India to remain in a narrow range ahead of the budget on Feb 28. Traders will also track domestic institutional investors' flows, who have been on a selling spree in recent months as retail investors continue to cash in a recent rally by selling their equity mutual funds. Investors will be looking to see whether next year's budget will provide fiscal reform measures or whether the government will increase spending ahead of the general elections by 2014. A fiscally disciplined budget could see the markets once again resume gains, the Sensex having fallen 2.15% so far this month. — Reuters

Tata Power is evaluating global opportunities for growth in the conventional and nonconventional energy space. In an interview to Sanjeev Sharma, Anil Sardana, managing director of Tata Power Ltd, talks about the thrust on clean power sources and the company's future plans.

Q: What is Tata Power’s strategy for growth in the power sector?

Tata Power is India’s largest integrated power utility with business presence across the power value chain (generation — both conventional and nonconventional, transmission, distribution, trading and fuel and logistics). The company’s gross generation capacity has touched 7,699 megawatts, making it the largest private power producer in India. The company is also one of the largest renewable energy players in the country with significant capacity in wind and solar.

The company has ambitious plans to keep fuelling its multifold growth across the power value chain. The company aims to generate 26,000 MW, 4,000MW of distribution and secure 50 mtpa of fuel resources by 2020. Towards this end it has various projects in the pipeline. Tata Power has also been evaluating various opportunities to grow globally both in conventional as well nonconventional energy space.

Q: Which international markets are Tata Power actively exploring opportunities in?

Tata Power has prioritized 7 countries in three geographies for a purposeful international play. These included South Africa and other Sub-Saharan African countries, Indonesia, Vietnam, Turkey and the Middle East. The firm is in the process of deploying resources in these geographies to understand the market dynamics and scout for opportunities. Tata Power’s existing Indonesia presence includes 30% equity stakes in two major Indonesian thermal coal producers, PT Kaltim Prima Coal and PT Arutmin Indonesia, and a related trading firm owned by PT Bumi Resources Tbk.

Tata Power has acquired 26% stake in PT Baramulti Sukses Sarana Tbk (BSSR), Indonesia, through its 100 per cent subsidiary Khopoli Investments Ltd. (Khopoli), and is now a 26% shareholder in BSSR. Antang Gunung Meratus (AGM), a 100% subsidiary of the BSSR, and BSSR together own about 1 billion tonnes of coal resources in South and East Kalimantan in Indonesia. In Bhutan, we have a JV with its government under which it is implementing the 114 MW Dagachhu hydroelectric project with Druk Green Power Co. The first unit is scheduled to be in commercial operation by FY 2013-14.

Tata Power through its subsidiary Khopoli Investments and Exxaro Resources Ltd (Exxaro) have formed a 50:50 joint venture to create a new energy company, Cennergi (Pty) Ltd in South Africa. The initial project pipeline focuses on renewable energy projects in southern Africa and Cennergi’s strategy is to create a balanced portfolio of generation assets. Tata Power has entered into partnership with Australian solar power firm Sunengy Pty Ltd to build a pilot plan for low-cost, floating on water, solar technology in India. The company has also invested in Exergen, Australia for clean coal technologies. Also, along with Norway-based SN Power has an exclusive partnership to develop hydropower projects and is currently evaluating opportunities in India and Nepal.

Q: What are the company’s plans for renewable energy in the global market?

Tata Power has aggressive plans of generating 26,000 MW by 2020 and intends to have a 20-25% contribution from "clean power sources" which will include a mix of hydro, solar, wind, geothermal and waste gas generation. The company has been working in different areas of renewable power generation — both grid connected as well as distributed.

Some of our clean energy projects in international space include the South African government’s department of energy, which announced Cennergi (our South African joint venture with Exxaro) as the preferred bidder for two 234 MW wind projects — the 139 MW Amakhala and the 95 MW Tsitsikamma units. Also, Tata Power along with consortium partners Origin Energy and PT Supraco won the 240 MW Sorik Marapi project in Indonesia. The environmental permits were received in May 2012. The application of a forestry permit is at the final stage of approval.

Q: How much is Tata Power investing in the proposed modernization of its 500 MW Unit 6 at the Trombay Thermal Power Station. What was the need for modernization?

Unit 6 of the Trombay Thermal Power Station is a multi-fire unit that can operate on oil and gas. Because of the unavailability of natural gas, Tata Power has become dependent on oil to run the plant. However, a shortage of low sulphur oil from local refineries and spiraling prices of oil and gas have significantly escalated the absolute cost of power generation from this unit. Consequently, this 500 MW unit, which was previously operating at a plant load factor higher than 80%, is now operating at around 50% PLF for the past two years. Tata Power’s proposal to modernize Unit 6 with additional coal firing capability will help address this shortfall. Tata Power will be investing around Rs 1,174 crore for modernization.

Q: How will this modernization help its consumers?

The proposed upgrade of Unit 6 at Trombay will have a double benefit for Mumbai consumers – (i) it will ensure higher offtake & availability of reliable and uninterrupted power supply for Mumbai; and (ii) reduction in fuel cost will bring down the tariffs in Mumbai. The expected reduction in per unit cost of electricity is estimated to come down to Rs 4.48 in FY2015-16. This is a substantial reduction as cost due to oil & spot gas makes the generation cost moves between Rs 8.50 to higher per unit. This is a substantial reduction.

The mutual funds industry in India is in a very nascent stage. Over the years, due to several innovative initiatives, the industry has managed to reach to the total assets under management of Rs 8 lakh crore. However, in comparison to the size of most developed countries, and even countries like China and Australia, India's mutual fund market is still very small in size.

Recently, when Prime Minister Manmohan Singh held the finance minister's portfolio after Pranab Mukherjee's election as president, he made a strong statement to boost the industry further, stating that the mutual fund industry needs to be re-energized. This indeed led to series of discussions between the regulator and the finance ministry, which finally culminated into a circular issued by the Securities & Exchange Board of India on September 13, 2012.

The most important aspect of this circular is the introduction of a new cadre of distributors and also the rule on Top-15 and Beyond Top-15 cities. Thus the thrust would be towards penetration of mutual fund products into smaller towns. To support this initiative, AMFI initiated a decision to reduce the distributor registration fees for individuals from Rs 5,000 to Rs 3,000 from November 2012 onwards. The fee of Rs 3,000 is for the period of three years, which amounts to only Rs 1,000 a year. For the new cadre of distributors introduced, the fee prescribed is Rs 1,500 for three years. Here the fee is only Rs 500 per year.

During the Oct-Dec 2012 quarter, we saw more than 700 new registrations. To give further impetus to the whole exercise, AMFI decided to provide further window during which we waived off the fee completely making the registration free of cost. This would mean that any individual either in the normal cadre or the new cadre can register themselves as a distributor for the first time free of cost during five months from February 1, 2013 to June 30, 2013.

All required formalities for registration: like passing the required certification, etc, need to be completed for registration. Under the new cadre we have also included the following two categories:

nIntermediaries/agents engaged in distribution of financial products, e.g., insurance agent, FD agent, National Savings Scheme products, PPF, etc registered with any other Financial Services Regulator.

nBusiness correspondents are allowed to sell only performing diversified equity funds, fixed maturity plans and index funds. These category funds are enveloped with low risks; hence the new cadre will undergo a very simple examination specially devised by NISM. With only simple products available for this cadre they would be able to reach out to more people to sell these less risky products. At present we have close to 50,000 distributors registered with AMFI and we expect that about 100,000 or more distributors may be added to the fold.

Armed with this additional force the mutual funds industry would then be in a position to grow, expand and penetrate into smaller towns. We also expect that the smaller towns will contribute more in the new cadre of distributors. As the market sentiment has improved, there is no doubt about growth of the Indian economy in the long term.

With the recent SEBI mandate to mutual fund companies to provide separate plans for investments (read direct plans), my friend, Jaya's husband Shankaran, who is an active investor in the stock markets and mutual funds got curious. He asked his wife a few questions on these plans but it was obvious she was quite uncomfortable answering them.

I then proposed I could help him to a certain extent.

To begin with, Shankaran wanted to know what would happen to some of his investments that he had made through some distributors in his folio and could these be converted under a direct plan. Yes, he could by submitting a switch request for converting them from the existing/regular plan to a direct plan. He asked: "I've made some investments partially through a distributor and partially without a distributor. Can I convert my entire investments to a direct plan?" Yes, this can be done by submitting a switch request, was my reply.

But Shankaran had many other queries like: Will NAV (net asset value) of a direct plan is different from the NAV for an existing/ 
regular plan? The answer to this is that on the effective date, i.e., January 1, 2013 when the direct plan was introduced, the NAV was same for both existing/regular and direct plans. Thereafter, there will be a difference in the NAV based on the expense ratio that will reduce due to doing away with the distributor's commission and distribution expenses. (For the uninitiated, expense ratio is total expense incurred for the scheme management).

Shankaran came back with another question: Will my future dividend investments take place automatically in the direct plan for those investments that are not routed through any distributor? My reply was: "In this case dividend investment will take place automatically in the existing/regular plan, even though the investment is not routed through the distributor".

It seems Shankaran was an old hand in the game, hence he did not quit. He continued: "For my investments done through a distributor, where the exit load period is still in force, will this load be deducted at the time of switch?" Yes, the exit load will be deducted at the time of conversion (switch) itself. After conversion, for any further switch or redemption from the direct plan, no exit load will be deducted even if the exit load period is not over. As the exit load applicability may vary from fund to fund, you may refer to the addendums issued by the asset management companies or their websites for more details. I would like to share that open ended schemes of funds and NFO of fixed maturity plans under close-ended schemes are eligible for direct plans where as exchange traded funds are not.

Shankaran also had some SIPs in his portfolio, obviously through a distributor/regular plan. Now he wanted to know if he could convert his future SIP installments to a direct plan. Yes he could, I told him. He can give a request for the conversion to direct plan. However, the terms and conditions that prevailed at the time of original registration will continue for the future SIP installments.

After a while, Shankaran said: "The value of my investments will attract capital gains if I go for redemption or switch out. But if I'm going for conversion from a regular to a direct plan, will my conversion be treated on par with redemption and switch out and capital gains are charged at the time of conversion?"

I replied that it would entail tax consequences. "According to the provisions of the Income Tax Act, 1961, tax is payable on profit made on transfer of any capital asset. As per the definition of transfer , any exchange is also treated as transfer so the exchange of regular plan with any direct plan will amount to transfer and thus depending on cost and holding period, you will have to pay short-term capital gains at the rate of 15.45% on the difference between your cost and the value realized on such shifting, if the holding period is less than 12 months. If the holding period is more than 12 months, the appreciation in your investment will be exempt from tax on such exchange."