Renewable energy sector: M&A issues and incentives

By Gaurav Singhi and Ruhi Goswami, Shardul Amarchand Mangaldas & Co

In recent times, the government of India has reiterated the potential of renewable energy (RE) to meet the growing demand for power in the country. In its February 2015 report on India’s Renewable Electricity Roadmap 2030, the Niti Aayog (National Institution for Transforming India) has recognized this potential and the need for new initiatives from the central and state governments to support the participation of power sector stakeholders (including the RE industry), developers, public and private finance and consumers.

Gaurav Singhi
Gaurav Singhi

Due to the growing importance of RE as a commercially viable source of power, there has been an increase in M&A activity in the RE sector in India in the past few years. This sector has shown immense promise for investment both by national and international players. Despite the competition prevalent in this sector, fragmentation of the market has helped to retain the interest of strategic players to acquire projects or enter into joint ventures with existing players. Given the enormous demand for power in India, investors and strategic acquirers continue to consider the RE sector as an attractive sector for investment.

While acquisitions in the RE sector are on the rise, there are certain issues that the potential acquirers grapple with at the time of evaluating such deals. On the other hand, there are certain incentives from a policy perspective which should increase M&A activity. Some of the issues and positive developments which will impact the M&A activity in the RE sector are outlined below.


A significant problem in this sector is the financial capacity of electricity distribution companies (discoms). Most of the state government owned discoms are in financial distress and ridden with heavy debt, resulting in a two-pronged problem for RE generation companies. The cost of supplies is high for the RE sector as compared to the conventional sources of power (thereby increasing the sale price), making it unattractive for the discoms to pick up the RE generated at such high prices. The discoms’ financial distress also leads to delayed payments to the RE generators. On account of these two issues, sellers have to often take a haircut in the enterprise valuation at the time of proposed sale to potential acquirers.

Ruhi Goswami
Ruhi Goswami

Separately, land acquisition for setting up renewable energy projects has been the developer’s Achilles’ heel. Land identification and acquisition takes a considerable amount of time, leading to substantial delays and increased costs. Such delays and increased costs have a negative impact on the valuations at the time of acquisition by prospective acquirers. Further, disputes in Indian courts with respect to land acquisition and related issues are common. For foreign investors in this sector, land acquisition and related issues are generally high risk items leading to expectation of high returns on their investments. As a result, often there is a mismatch between expected returns and actual returns in this sector.

Positive developments

However, there are certain positive indicators which will give a boost to M&A in the RE sector. A welcome move made by the government was introducing the following two concepts in the draft National Renewable Energy Act, 2015: renewable purchase obligation (RPO) and renewable generation obligation (RGO). As per the RPO, certain identified entities are obligated to purchase a certain amount of their energy requirements from renewable sources. This will in turn increase the RE demand and increase interest of potential acquirers to enter the RE field. As per the RGO, thermal power producers will be obligated to generate a certain percentage of their installed capacity through RE technology. Once in force, this obligation will increase M&A activity as thermal power companies will look to acquire small-sized renewable energy players to fulfil this legal obligation.

The government in the recent past has been playing an important role in promoting the use of RE sources. In this connection, the government has offered various incentives, such as generation-based incentives, cheap rates of finance and other monetary and economic benefits. Such incentives from the Indian government have resulted in potential acquirers considering the RE sector as viable and attractive for acquisitions and investments in the future.

Promising outlook

Given the demand and potential growth of the RE sector, foreign strategic acquirers will have a significant role to play in the RE sector, where domestic players are less vibrant, even though they have immense resources and talent. Foreign acquisitions coupled with policy initiatives and incentives made available in the RE sector will provide a great impetus to the investment climate, resulting in this sector emerging as an attractive option for both Indian and foreign investors.

Gaurav Singhi is a partner and Ruhi Goswami is a senior associate at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.


Express Towers, 23rd Floor,

Nariman Point,

Mumbai – 400 021

Tel: +91 22 49335555

Fax: +91 22 49335550

Executive Chairman: Shardul Shroff


Managing Partner – Mumbai: Akshay Chudasama