Shares of Power Finance Corp. (PFC) and Rural Electrification Corp. (REC) surged on Monday amid media reports that the Cabinet was due to consider a bailout plan for the debt-laden power distribution companies (discoms).

The Cabinet Committee on Economic Reforms (CCEA) today will likely propose a three-year transitional finance mechanism in a bid to provide liquidity support to discoms by way of a grant, reports said. 

Several years of populism, corruption and mismanagement have driven power discoms into losses that had accumulated to Rs 926bn by the end of FY11, reports said.

The financial implication of transitional finance mechanism will come to ~ Rs 15bn per year.
   
The grant will only be given if losses are reduced by at least 25%, reports said.

States will be required to issue five-year bonds with a 10-year repayment term, reports said, adding that the financial implication of these bonds works out to Rs 250bn.

Discoms are saddled with a humongous debt of close to Rs 2 lakh crore.

State governments may also have to consider hiking power tariffs as some of the state electricity boards (SEBs) have been charging the same rate for over 15 years.

The Power Ministry had reportedly floated a Cabinet note on the issue earlier as well, but the same had to reworked due to some reservations expressed by the Finance Ministry. 

Banks and financial institutions (FIs) are estimated to have an exposure of over Rs 1 lakh crore to various power discoms.

Indian Bank, Union Bank of India, Bank of India, Oriental Bank of Commerce and Canara Bank are among those with the highest exposures, according to a report by Bank of America Merril Lynch.

State Bank of India (SBI) and leading private banks have no exposure to the distributors, according to the report.

Shares in power sector lenders like REC and PFC and power producers like Tata Power rose on Monday on hopes that the CCEA would approve the bailout plan for discoms.

At 2:05 pm (IST), REC was up ~5%, while PFC gained ~3%. 

The BSE Power sector index is up ~2% with an advance-decline ratio of 13:4.

Adani Power was up 8%, while BHEL was up 6% and Lanco Infra by 10%. Crompton Greaves rallied 5% while Suzlon too was up 7%. 

JSW Energy and Torrent Power were up ~4% each. Reliance Infrastructure rose by 3% while Siemens was up 2.5%.

Power Grid Corp., NTPC and GMR Infra were trading with minor losses.