The central government is actively promoting the Acquire, Operate, Maintain, and Transfer (AOMT) model to monetize intra-state transmission assets, aiming to unlock public capital and channel private investment into necessary power grid expansion. This strategy is highlighted in a recent concept note detailing the regulatory and financial framework for monetized transmission assets, particularly in light of the massive investment required to strengthen the country’s power system.
The Need for Monetization and AOMT Model
The National Electricity Plan (Transmission) 2032, published in October 2024, assesses the investment required in power transmission infrastructure until 2032 at INR 9.16 lakh crore. A significant portion—over 50 percent—of this capacity addition is needed at the state level. Asset monetization, especially of existing brownfield transmission assets, is seen as essential for states to meet these significant investment needs and generate proceeds for new infrastructure.
The AOMT model, guided by principles issued by the Ministry of Power in 2022, offers a mechanism where:
- The government retains ownership of the assets.
- A private entity operates and maintains the assets for a limited period.
- The private investor makes an upfront payment.
- At the end of the transfer period, the assets are mandatorily returned to the sponsoring entity at a nominal cost of only Re 1.
This approach provides short-term liquidity, reduces public sector scope, and leverages private sector expertise for operations and maintenance.
Regulatory Framework and Tariff Certainty
For most intra-state transmission assets, which were historically developed under the Regulated Tariff Mechanism (RTM), investors require long-term certainty on regulatory parameters. The Central Electricity Regulatory Commission (CERC) has outlined a framework to address this, ensuring the tariffs for monetized RTM assets will continue to be determined by State Electricity Regulatory Commissions (SERCs) on a cost-plus basis.
Key components of the proposed tariff determination framework include:
Return on Equity (ROE):
ROE may be allowed on normative equity (30 percent of the capital base) or actual equity, whichever is lower. To ensure continuity, SERCs may either adopt a fixed ROE rate through the concession period (the preferred approach) or a formula-based rate (G-Sec rates plus a margin) fixed for 5-year periods.
O&M Expenses:
Separate norms for Operation and Maintenance expenses are required for the Special Purpose Vehicle (SPV) holding the monetized assets, as they lack the scale of the State Transmission Company (Transco). These norms will be fixed by the SERC, based on a technical study, and will remain constant for the transaction period.
Proceeds Adjustments:
Proceeds received by State Transcos from asset monetization should not be adjusted against their Annual Revenue Requirement (ARR) by the SERC.
Tax Implications and Transaction Structure
The monetization transaction is proposed in three steps:
- Hive-off of assets from the Transco to a new SPV.
- Transfer of 100 percent shareholding in the SPV to a private investor through competitive bidding.
- SPV shareholding bought back by the Transco at the end of the concession period.
A high-level assessment of the tax implications suggests that the Demerger mode (Option 2) for hiving off assets may result in lower Long-Term Capital Gains (LTCG) tax compared to the Slump Sale (Option 1) or Direct Asset Transfer (Option 3). The De-merger option is preferred as it is deemed “Tax Neutral” subject to certain conditions of the Income Tax Act.
The concept note highlights that the AOMT model is likely to result in lower overall tax leakage compared to the alternative Toll-Operate-Transfer (TOT) model.