Internal Audit Report-CO: T&D Division 201: Period: July 2010 To December 2010

Internal Audit Report- CO: T&D Division 201
Period:
July 2010 to December 2010
Internal Audit team
Nidhi Garg, Sr. Officer (F&A)
Ashwini Kumar Meena, Officer (Tech.)

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Head of the Unit: Sh. S. K. Gupta

Period coverage: July 2010 to December 2010
1. Introduction
T&D Division is looking after financing activities relating to transmission, sub-

transmission and distribution requirements of all power utilities in the country.
Main activities of T&D Division are appraisal & sanction of all categories of T&D
schemes and to determine the target of sanction and disbursement under T&D
programme. T&D Division also processes all cases of approvals, extensions,
deviations relating to T&D schemes.
The division is, administrative head of all PO/ZO with respect to T&D schemes
and responsible for coordination with various division in CO (Finance, legal,
claims etc.) for resolving any issues of the PO/ZO in these areas.
2. Organization structure of Project office
The Division is headed by General Manager & supported by following officials:-
Designation Nos.
Additional General Manager 1
Dy. General Manager 1
Chief Manager 2
Asst. Manager/ Dy. Manager 4
Sr. Officer / Officer/Assistant Officer 4
Sr Assistant / Sr. PA/Computer 4
Operator
Peon 1
Total 18
3. Scope / Coverage of Audit

• Review of Appraisal/ Sanction of schemes
• Review of slow progress, non starter schemes
• Deviation approvals and extension of schemes
• Review of Delegation of power for project sanction
• Compliances of Monitoring guidelines
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• Coordination with ZO/PO regarding T&D schemes
4. Records seen during audit

• Detailed review of scheme appraisal and sanctioned (Scheme code:
3533&3644(RRVPNL), 520006(SOUTHCO),
101006&100990(APTRANSCO), 3980&3981(Rajasthan-Bulk),
950238(MSEB), 161435,161431 (Punjab)
• Non-starter schemes informed to BOD
• Scheme sanctioned / pending for sanction
• Annual Ceiling on powers with Various Competent Authorities
• Review of balance exposure limit
5. Non production of records
Nil
6. Performance & Business Development Activities of Project Office
The details of financial comparison between various POs are given as below:
Project Office 2007-08 2008-09 2009-10 20010-11
Sanct. Disbs. Sanct. Disb. Sanct. Disbs. Sanc Disb.
ZO-Hyderabad 1283 669 577 1450 1440 996 0
ZO-Mumbai 3591 1222 4081 3408 3408 1764 0
PO-Jaipur 4422 1759 1605 888 888 1512 1521
PO-Panchkula 2146 1090 2828 2399 4638 2223 1212
PO-Bangalore 906 351 539 0 0 148 0
PO-Chennai 669 747 2622 810 685 672 188
Others 2016 824 3785 8246 5822 1042 1551
GT for T&D 15033 6662 16037 17201 16881 8357 4472
Total for REC 46770 16304 40746 41502 45357 16754 41747
% share of T&D 32 41 40 41 37 50 11
7. EXECUTIVE SUMMARY
 Incorrect calculation of net inflow

 DOP not adhered
 Monitoring of T&D schemes not done as per the monitoring guidelines
 Non releasing of claim for operational problem in ERP led to loss of
interest to REC
 Improper terms / sanction
 Insufficient monitoring of Turnkey award cost
 Non-monitoring of Evaluation Studies, to be conducted as per guidelines
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 Tax Deducted at Source / Works Contract Tax not being considered
for disbursement under the T&D loan
 Electricity Regulatory Commission’s (ERC) approval for transmission
schemes to be verified
 Schemes are being extended without proper analysis
 Improper sanction led to lower loan than eligible
 No monitoring of conditionality approved regarding AT & C losses
 Delay in sanction
 Variation in reporting of Non-starter schemes to BOD
 Pending actions towards compliance of exposure issue
 Non Utilisation of Grant from GOI for a long time
 Review of Business scenario in various states
AUDIT OBSERVATIONS
The observations of the internal audit of the ZO as described in the scope of

audit are given as below. The observations are given in following broad heads:-
• Outstanding Observations: This part contains observations,

which are pending against the Auditee from previous audits.
• Significant Observations: This part contains important

observations on areas, which need immediate action.
• Other Observations: - Remaining observations are given in three

parts i.e. Scheme Related, Personnel & Administration and Finance &
Accounts.
OUTSTANDING OBSERVATIONS
S. IA Observations Reply furnished Further views

No. by T&D of IA
Division(Dt. Division.
20.09.2010)
9. Incomplete information sent to PO – Loan
Committee conditionality found absent
The scheme code no. 3663 was sanctioned by The said clause It is reiterated
Loan Committee in its 23rd meeting held on was added at the again that the
dated 17.06.2010. The scheme was P:SI time when matter
(Bulk) and loan amount sanctioned was Rs. relaxation of regarding
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233.04 to m/s PSEB. prudential norms interpretation
for REC was under of RBI letter
While sanctioning the loan, Loan Committee process with RBI dated
approved the loan with the condition “that in and thus the 29.06.2010
case RBI stipulates any restriction in regard to clause was added with CS Div.
the exposure limit against existing REC to take care of the and Finance
Prudential Norms, the same will be made situation if Division and
applicable for undisbursed portion of loan relaxation is not also take
being sanction now.” provided by RBI to approval of
REC. However at competent
It was observed while communicating the the later stage i.e. authority
sanction T&D Division has not informed the at the time of before
condition in their communication letter to the issuing the sending /
Project Office, and it was not incorporated in sanction letter to taking a call in
the sanction letter. This has resulted in non project office, RBI the matter. Till
compliance of the terms imposed by the Loan had just the time that is
Committee. communicated the done /
approval of the decided, the
Reply has been given on 19.08.2010 as: said relaxation for position /
“We agree with the observation of IA division REC. So, sanction conclusion
regarding non-stipulation of condition “that in letter was issued stipulated by
case RBI stipulates any restriction in regard to without the clause, the Loan
the exposure limit against existing REC keeping in view Committee /
Prudential norms, the same will be made that as RBI has sanctioning
applicable for undisbursed portion of loan already relaxed the authority need
being sanction now” in sanction letter as per prudential norms to be followed
Loan Committee approval. In this regard, it for REC, inclusion on the all
may please be noted that at the time of may lead to sanctions.
sanctioning of scheme by the competent confusion.
authority on 17.06.2010, the applicability of
RBI prudential norms as proposed to be
imposed on REC was uncertain and as such
the above condition was stipulated to take
care of the situation in case the proposed RBI
prudential norms became applicable for REC
also. However, RBI vide their letter dated 29th
June, 2010 exempted REC from its Prudential
norms up to 31.03.2012 (letter of RBI
enclosed for reference). Keeping in view of
the above RBI exemption, the said condition
was no longer applicable in the instant case
and hence was not mentioned in the sanction
letter issued to PO, on 30.06.2010.
In view of the above, we may request IA
Division to settle the above para.
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10. Lack of clarity in communicating loan
sanction figure
In several internal audit observations issued in We have already The standard
the past, it was observed that Project Office requested to Legal escalation
has indicated a wrong/ less amount in the division to clause may be
sanction letter or documentation done with the standardize the further pursued
wrong/ less figures which caused loss to the relevant clause of by T&D
Corporation in terms of potential business. cost escalation division.
Normally in such cases it was observed that and IDC in the However, till
there was some communication gap between standard loan that, PO may
T&D Division and Project Office in the documents vide be suitable
communication letter issued by T&D Division note dated advised to
to Project Offices. 10.09.2010 document loan
including
While reviewing the scheme codes 3775, 3773 escalation cost
& 3765 of Chattisgarh, the similar mistake was with a
noticed. In the schemes borrower demanded condition that
for 30% cost escalation however T&D has this would be
allowed 20% cost escalation which is as per reimbursed
the guidelines. It was observed while based on
communicating the sanction figure the cost actual basis.
escalation component was described
separately as below:
Sr Sche Proje Sanct Cost

. me ct ion escalati
n code Cost Amou on*
o. nt
(1 3765 6445 5801. 20%
) .85 26
(2 3773 3869 3482. 20%
) .60 64
(3 3775 6512. 5860. 20%
) 04 836
* Cost escalation at actual (subject to
maximum of 20%) would also be
payable in addition to the loan amount
As T&D Division has not clarified the final

figure payable to the borrower or Loan amount
for which the documentation needs to be
carried out, there are possibilities of different
amounts being taken/ considered by Project
Offices at the time of issuing Sanction /
executing loan documentation.
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It is therefore recommended that while
informing sanction to the Project Office a
detailed letter describing the final loan amount
payable should be clarified or/ and respective
conditionality which requires to be
incorporated in the sanction letter /
documentation should be mentioned to ensure
the release of agreed amount, easily.
In reply to the observation T&D Division had

agreed that there is a lot of variation in the
documentation process followed by various
POs.
Earlier view of IA: T&D Division needs to

take up the matter with Legal cell to
standardize/ amend the documentation
formats to avoid loss of business caused due
to overlooking the components like IDC & cost
escalation.
SIGNIFICANT OBSERVATIONS
8. Incorrect calculation of net inflow
With a view to review the appraisal mechanism for SPA schemes, Internal Audit
Team has picked up two sample cases, one from PSEB and others for
MSEDCL.
As per REC Appraisal Guidelines for SPA: PE schemes, the scheme shall be
considered viable if the economic rate of return on the total investment made on
the scheme is 20% over the project life.
It is observed that there was inconsistent appraisal process in these two

schemes, which can be overview as below:-
Description SPA:PE – SPA:PE- Financial effect

s Scheme code scheme code
950238 161435 (PSEB)
(MSEDCL)
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Total capital Total cost (i.e. Total cost (i.e. In PSEB’s scheme, less
base amount injected amount injected figures taken towards capital
by MSEDCL by PSEB base for the 1st year by Rs
including Loan minus 142.80 lakh and Rs 570.72
plus consumer consumer lakh in second year which led
contribution) contribution) to less costing and higher
viability figures.
Marginal cost Marginal cost Marginal cost Both the schemes were for
taken 50% in 1st taken 35% in 1st two years but cost spread for
year and 100% in year, 85% in 2nd three years in PSEB scheme
2nd and year and 100% which led to marginal cost
subsequent in 3rd and reduced by Rs. 21.44 lakh 1st
years. subsequent year and Rs. 21.43 lakh in the
years. 2nd year.
OM O&M expenses Due to less O&M expenses taken less by
on total capital capital base as Rs. 10.70 lakh in 1st year, Rs.
cost pointed out 13.90 lakh in the 2nd year and
above, O&M Rs. 4.27 lakh in the
expenses subsequent years.
calculated
without
consumer
contribution
Savings Margin cost Margin cost Saving reduced by Rs.
taken in 50% in taken 35% in 1st 43.653 lakh in the 1st year and
1st year and year, 85% in 2nd Rs. 43.68 lakh in the 2nd year.
nd
100% in 2 and year and 100%
subsequent year. in 3rd and
subsequent
years.
Revenue No treatment No treatment By energizing the pump sets
through power supply, the
corresponding revenue to
Discoms have not been taken
into account in the
calculations.
Consequent upon improper calculations of capital based (i.e. after deduction of

consumer contribution), spreading cost into three years and other calculations
issues, the scheme viability calculations, which were showing more than Rs 28
lac surplus after discounting @ 20%, has been revised to negative (i.e.
-64.9952 lakh). In these circumstances, it may be concluded that the project
was not viable as per guidelines because ERR was less than 20%.
It is worthwhile to mention here that the viability of SPA scheme is worked out
based on Economic Rate of Return (considering social benefits to end users /
community) so that the scheme could be financed considering social aspects
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and directions from Govt of India to REC. While calculating ERR, the viability
has been worked considering the benefits to the end user i.e. Farmers. REC is
financing to Power Utility and if REC strictly follows the viability criteria, these
schemes could not be financed because Power Utility is not getting the required
benefits except a margin revenue towards sale of energy to these pump sets
after injecting huge capital infrastructure to reach at field. Therefore, in such
schemes, ERR needs to be verified with proper care which has not been done
in above mentioned case.
In addition to above, further issues are as under:-
a. Cost savings taken into account for calculations is based on circular

issued in 1997 which specifies connected load, cost of the fuel, working
hours and load factor. Since the technology has been advanced and other
cost including fuel cost has since been increased to a large extent, this
needs to be reviewed.
b. Actual benefits from the project need to be analysed with Projections so

that the policy / guidelines could be adjusted / redrafted.
c. The calculation part is still manual / excel based. ERP is the tool
introduced in REC which can be used for the appraisal process. The
parameters and calculations part for viability assessment is of quantitative
nature and it could be done on ERP platform which will help in the faster,
accurate and transparent appraisal.
9. DOP not adhered
As per the Delegation of Power issued vide office orders dated 27th April, 2009,
sanctioning authority for loan to central / state govt. power utilities or Central /
State PSUs are:-
Authority to whom delegated Extent of Power Annual Utilised
Financial upto
ceiling for the 31.12.20
year 10 as
informed
Screening Committee- Upto Rs. 20 crore in Upto Rs. 2149
constituted for the purpose each case 4000 crore
from time to time
CMD Upto Rs. 100 crore in Upto Rs. 7842
each case, on 8000 crore
recommendations of
the Screening
Committee.
Executive Committee Upto Rs. 150 crores in Upto Rs. 3617
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comprising of CMD, D(F), each, on the 16000 crore
D(T) and ED(T&D) recommendations of
the Screening
Committee
Loan Committee comprising In excess of 150 crore Upto Rs. 7262
of CMD, Functional but upto Rs. 500 crore 20000 crore.
Directors and one Govt. in each case, on
Nominee Director, with a recommendations of
quorum of three directors Screening Committee.
including CMD and one
Govt. Nominee Director.
To monitor adherence of the above Delegations, T&D Division is maintaining the

details of sanctions / amount in Excel sheets (manual working on computer)
which need to be captured in ERP so that it could be a permanent record and
without any additional efforts, it could be maintained and compliance could be
ensured. It will not only compile data from all divisions (minimum chances of
skipping in absence of information) but also remove duplicity.
Following issues have been obwserved:-
a) At present, there is no check in case of improper information / no

information by other Division like Generation/DDG/IC&D etc etc;
b) The loan component of RGGVY schemes have not been captured in

above calculations. The issue may be deliberated and properly captured
in above for compliance of delegations given by Board of Directors;
c) It was incidentally observed that the annual ceiling entrusted to CMD

(i.e. Rs 8000 crore) was exhausted in January, 2011 and some schemes
have been sanctioned without enhancing the limit or approval of next
delegated authority. The corresponding records were denied by the
Division stating that our audit period is upto 31.12.2010.
d) To have proper compliance, the limit utilized may be indicated in the
processing note of the scheme.
10. Monitoring of T&D schemes not done as per the monitoring

guidelines
As per the monitoring guidelines issued on 24/8/2006, frequency of the

monitoring of T&D schemes is as under:-
Category of Type of Project Office Zonal Office Corporate
scheme monitoring Office
System Brief 100% of 2% of schemes 1/2% of
Improvement monitoring schemes as on random schemes on
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per annual basis as per random basis
monitoring annual as per annual
programme of monitoring monitoring
the year. programme for programme for
the year. the year.
Detailed 100% of 2% of schemes 1/2% of
Monitoring schemes as on random schemes on
the year. the year.
Final 100% of 2% of schemes 1/2% of
Monitoring schemes as on random schemes on
the year. the year.
Village Special 100% of 2% of schemes 1/2% of
electrification Monitoring schemes as on random schemes on
Dalit Basti, per annual basis as per random basis
Kutir Jyoti monitoring annual as per annual
the year. the year.
Bulk loan Special 100% of 2% of schemes 1/2% of
schemes Monitoring schemes as on random schemes on
the year. the year.
It is observed that:-
a) There is no annual monitoring programme made and no monitoring of

T&D Schemes has been done by T&D Division, Corporate Office as
entrusted in Monitoring Guidelines which led to non compliance of REC
Monitoring guidelines;
b) If required, the requirement of monitoring by CO may be reviewed and

necessary modifications in the guidelines may be carried out considering
the practices adopted by PFC / other financial institutions / banks;
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c) Alternatively, if T&D Division feels that the monitoring is required and
could not undertaken considering human resource limitations, the same
may be considered for outsourcing to REC Power Distribution Company,
a subsidiary company of REC which is already doing third party
inspections.
11. Non releasing of claim for operational problem in ERP led to loss of
interest to REC
During audit of ZO Hyderabad, it was observed that in scheme code 760195,

760196 and 760197, the schemes were wrongly entered in the claim module as
790195, 790196 and 790197 respectively. Due to this, claims amounting to Rs
89.21 lakhs were held up and finally after discussions with T&D Division, who is
responsible for handling Project Module (Core User), the schemes were
identified for closure without further disbursements. Details of such schemes
are as under:-
S. Scheme No. Loan sanctioned (in Loan disbursed(in Difference(in

No. lakhs) lakhs) lakhs)
1 760195 249.15 159.057 90.093
2 760196 248.53 156.124 92.406
3 760197 249.23 218.084 31.146
Total 213.645
Generally, in case of such mistakes, rectification process can be taken up

through Administrator either from back end or through proper window by some
higher authorized officer. Therefore, system may be review and required
modification / provision may be incorporated to address the issue so that claim
would not delay in case of re occurrence of such mistakes.
Since Project Module is being handled by Core User / officer from T&D Division,
therefore the issue may be taken up by T&D Division in consultation with Loan
Division and IT Division.
12. Improper terms / sanction
1. Improper sanction letter: - As per REC loan policy circular dt. 02.12.05,
State/Central sector borrowers shall have to pay either upfront fee or
commitment charges for projects with loan amount more than Rs. 100 Crore.
On random basis, a sanction letter dated 4.6.2009 of a scheme (Scheme Code :

101006 of APTransco) having loan amount Rs. 210.84 crore was reviewed and
it was observed that no clause for upfront fee/commitment charges was
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mentioned in the sanction letter which may lead to non recovery of the due fee
from the party and consequently loss of revenue to the Corporation.
However, sanction letters has since been standardized and PO is responsible

for compliance but as a nodal division for T&D schemes, a copy of sanction
letter is being asked from all Project Office. The cross verification of that copy
could locate such issues, which is not in practice at present.
It is recommended that the present case may be verified for proper recovery
and subsequent corrigendum for the clause and in all cases above Rs 100
crores, a review may be undertaken to ensure proper terms and its recoveries.
2. Improper sanction of spares without verifying the details: As per REC

norms “Identified Spares / Tools & Plants may be considered for financing
provided each item and its cost is identified but no lump sum values and
unidentified T&P/spares shall be considered for financing in T&D schemes”
During audit it was observed that in scheme code 100990, 3% unidentified

spare expenses and in scheme code 101006, special T&P unidentified
expenses @1% have been included in project cost by the borrower
APTRANSCO. The same have been sanctioned by T&D division which is not
as per REC norms.
Similarly in other schemes, this has been taken care and not allowed. Different
practices need to be seen so that consistency could also be maintained while
complying the guidelines.
13. Insufficient monitoring of Turnkey award cost
According to operational guidelines for P: SI schemes, “In case of schemes to

be executed on turnkey basis through competitive bidding, the overall cost of
scheme eligible for financing by REC shall be the cost approved by the
competent authority of the utility/Regulator after award of work. In such cases,
viability as applicable, as per guidelines would be rechecked. ”
During audit of various project offices, it has been observed that the monitoring
of award cost and its subsequent action towards reduction of sanction amount in
case of lower award cost than sanctioned or necessary pursuance for higher
sanction in case of higher sanction amount, are not in practice.
During audit of T&D Division, it has been observed that no such details are
being maintained at T&D Div, CO to ensure that necessary action towards
rechecking of viability as per guidelines and necessary action towards
reduction / enhancing of loan amount has been taken.
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It may be worthwhile to mention that award cost can not be same as sanction
cost but no reduction / increase in sanction cost has been observed from
records / software in schemes where works are being executed through turnkey
contractors, which substantiate that the required action in such cases are still
absent.
Moreover, there is no provision in ERP system for capturing award cost so that
in case of reduction, the sanction cost could be restricted automatically by the
system and to regulate disbursements properly.
Furthermore, it is to be noted that in some schemes REC is financing 90% of

project cost so that borrower’s equity contribution up to some extent can be
inserted. In absence of award cost, there is a possibility of full project cost
disbursement.
Therefore, T&D Division may consider following actions:-
a) Monitoring of award cost in case of turnkey execution of projects to be

introduced both at PO and CO level;
b) In case of higher award cost, necessary action towards enhancing loan
amount after due reappraisal may be taken up for business growth of
REC;
c) Software may be suitable modified to capture award cost for proper

regulations of disbursements;
d) All previous cases may be reviewed and necessary action taken.
14. Non-monitoring of Evaluation Studies, to be conducted as per

guidelines
As per clause 10(b) of REC P:SI GuidelinesL-

“Monitoring and quality assurance of the project (with loan amount more than Rs
50 crores) during its implementation should form an integral part of projects and
this shall be gone done from third party / independent agency. The cost of the
same shall form part of the loan assistance from REC.
Evaluation of the project (as applicable) after completion shall be got done by
the borrower from a third party / independent agency, cost of which may also
form part of loan assistance from REC.”
Clause 15 ( c) further states that the final 10% of the loan will be released after
final field monitoring, evaluation as applicable and other terms and conditions of
sanction of the scheme.
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However, it was observed that such evaluation is not being carried out at PO/ZO
level and also compliance of this condition is not being ascertained by T&D
Division at CO, who administrates all the T&D schemes being a nodal head.
Due to this disbursements are being restricted by the Project Offices.
In the absence of such evaluation, the validation of envisaged objectives of the
schemes could not be ascertained. Restricting disbursement upto 90% would
not serve the very purpose of the stipulation i.e. analysis of pre and post impact
of the scheme. Moreover, restriction in disbursement would lead to unutilized
amount. It is also worthwhile to state that in such schemes, closure would be
accepted only after evaluation study.
In view of above, following may be seen:-

a) Monitoring and Quality Assurance in case of loan above Rs 50
crores has not been pursued. T&D Division may please take appropriate
action in this regard;
b) T&D Division may further pursue PO/ZO for following up

evaluation study so that both purpose i.e. loan fully disbursed as well as
impact evaluation of the scheme could be achieved.
c) During audit of PO/ZO, sometimes, it has been informed that other

Financers like PFC, Hudco, Banks etc are not stressing on such study /
quality monitoring. However, the borrowers like Discom, Transmission
Companies have their internal system wherein both quality assurance
monitoring as well as evaluation study has been ensured, however the
same are not being done from third parties or reports prepared. In view
of the same, in case T&D Division desires, the requirement of such
study / quality assurance may be reviewed and align in accordance to
current industry practice and necessary modifications in guidelines may
be carried out with approval of competent authority.
It is requested, that all such cases be reviewed and appropriate action be

taken under intimation to IA.
15. Tax Deducted at Source / Works Contract Tax not being considered
for disbursement under the T&D loan
As per REC Policy, in T&D schemes loan may be disbursed to the borrower or
turnkey contractor directly as per their request. During audit of ZOs, it was
observed that in case of release to the borrower, full amount is being disbursed
but in case of disbursement directly to contractor on behalf of borrower, the net
claim (after deduction of tax, WCT, as applicable etc) considered for releasing of
claims. The Discom has to pay taxes also to authorities, thereby, total loan
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requirement for project is inclusive of taxes which is duly taken care while
releasing loans for Generation Projects.
In absence of proper guidance to Project Offices, this practice is being

continued. It is suggested that the T&D Division may deliberate the issue and if
this is in order, the reasons for not excluding this component while sanctioning
of the scheme, may be informed to IA. As per present practice, some amount
will remain undisbursed at the closure stage. In case, non-payment of tax
portion is a conscious decision, the same may be recorded and got approved
from competent authority.
In this connection T&D Division may sort out the issue by forming proper
guidelines/terms so that it can be pursued properly without any confusion and
the utility may be intimated regarding this so that they can claim these charges
along with proper receipt from concerned statutory agency.
16. Electricity Regulatory Commission’s (ERC) approval for transmission

schemes to be verified
As per present REC policy, in case of transmission schemes, appraisal of

scheme including calculation of IRR not being worked out in case the scheme is
approved/posed to SERC subject to obtaining final approval from regulator for
cost of the project. The basic theme for this practice is that approval of
regulator will ensure revenue inflow, however in case of reduction in approved
cost, the inflow will also be affected and need to be captured by.
Some schemes were reviewed where project has already been posed to SERC
and directly sanctioned by REC accordingly without calculating IRR etc. It is
observed that neither Project Offices nor T&D Division is monitoring further
approval of ERC with the borrower for various transmission schemes and no
such records are available with the division capturing approval details etc.
including amount approved/ reduction in the scope of the scheme/ cost etc, if
any.
Therefore, in case of lower sanction by ERC, this is a case of higher sanction of

loan which definitely has financial impact on viability of the project.
T&D Division is therefore requested to ask PO/ZO to collect the approvals from
borrower and ensure that the ERC approval is in line with the REC sanctioned
schemes/cost/scope of works and if not, take further necessary action as
required in terms of laid down guidelines/ circular and advise position to IA.
17. Schemes are being extended without proper analysis
During audit of ZO Panchkula, it was observed that Scheme No 161193 P: SI

for Rs 29.72 lacs was sanctioned on 30.5.2002 and documented on 27.3.2003.
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1st disbursement was made on 31st March, 2003. The loan disbursed against
the scheme has been 18 lacs and the last disbursement was made on
15.3.2005. Thereafter the scheme is being extended at different times till 31st
March, 2010.
As per terms of sanction, the scheme was of 13 years tenure with 3 years
moratorium, thereby loan repayment was started w.e.f. March 2006 and almost
50% amount under the scheme has since been refunded. The extension of
scheme for further disbursement would result into disbursement on one side
and repayment on other side.
It was observed that extension requests are being forwarded by ZO and T&D
Division is approving the extension without any analysis/ concrete appraisal of
schemes to review present costing, viability under those cost data, existing
power system, changed demand / growth etc.
While considering sanction, viability of the schemes are verified based on some
assumptions like completion of project in 2-3 years, demand growth, certain cost
data and inflation index etc. Any extension beyond a certain period definitely
affects such assumptions and therefore the scheme needs to reappraised.
T&D Division is therefore advised to ensure compliance of laid down guidelines

while approving the extension of schemes and review all such cases where
despite extension having been given no of times, no progress/disbursement has
been reported.
18. Improper sanction led to lower loan than eligible
As per the circular dated 23/7/2008, in case of integrated SEBs for all their
schemes irrespective of the size of the scheme, loan will be approved to the
extent of 90% of the project cost. Similarly, for P:SI schemes for non integrated
entities and less than Rs 100 crore, if securitized through hypothecation of
future assets, loan has to restrict to 90% of project cost.
During audit of various project offices, it has been observed that the sanction
and its subsequent disbursements being done for SPA and P:SI are not in
accordance to policy for following reasons:-
a) In case of SPA scheme, certain amount is being asked by Discoms from

consumer, namely consumer contribution, which is generally refundable
(being security deposit). While considering for loan, Project Offices as
well as T&D Division, Corporate Office consider 90% of project cost after
deducting consumer contribution.
It is to state that the basic idea for 90% financing is to have some equity
from Discoms, which is duly complied through consumer contribution also
1
which has to be ultimately borne by Discom. Therefore, in such case,
90% of Project cost (without deduction consumer contribution) can be
considered for sanction. The present practice led to loss of business.
The T&D Division has to deliberate on definition of Project Cost. Ideally,

value of all assets created is termed as “Project Cost”. Therefore,
following may be considered:-
Loan may be least of 90% of Project Cost (without deduction of

consumer contribution) or Project Cost- consumer contribution.
Such issue observed in case of ZO Panchkula (for PSEB), PO

Bubhneswar, ZO Mumbai etc. One of the example is as under:-
(Rs in lakhs)
Scheme Scheme/ Consumer Loan Restricted To be
code project contributio Requirement to 90% by restricted to
cost n T&D 90% of
Division Project cost
B C D E F
A
161431 8156.74 1361.70 6795.04 6115.54 Lower of
7341 (90% of
project cost)
or 6795 (loan
requirement)
In above case, security provided by PSEB was 30% Government

Guarantee and 100% future assets that works out to Rs 10603 lacs,
therefore, the loan of Rs6795 lacs could have been sanctioned without
any deviation from guidelines and with proper security comfort. Present
practice or improper definition of project cost led to loss of business of Rs
680 lac in a single case. Cumulative effect for REC as a whole and
specially in those states like Bhubaneshwar, where our loan book is
already very less, improper definition heavily cost on business profile of
the company.
b) As per REC guidelines, in case of securitisation of loan by hypothecation

of assets for state sector entities, loan has to be restricted to 90% of
Project cost so that assets hypothecation would be 110% of the loan
amount. It is also observed that while sanctioning such cases, T&D
Division restricts loan to 90% of project cost but while disbursing, Project
Office further restrict the same to 90% which led to disbursement of 81%
only. It is recommended that this may be clearly mentioned in the
sanction that
i. In case of 130% security, 100% loan may be released;
1
ii. In case of 100% hypothecation, loan has to be released upto 90%
of project cost
19. No monitoring of conditionality approved regarding AT & C losses
As per the circular no. SEC-1/224/2008/13 dated July 2008, the following
conditions have been stipulated in case of T&D projects of unbundled entities,
for exposure beyond the limit of 100% of REC ‘s net worth:-
a) Where the existing AT&C losses are more than 30%, the borrowing entity
shall undertake to bring down losses by a minimum 2% per annum for
that entity till it reaches the level of 30%; and
b) Where the existing AT&C losses are less than 30%,but more than 20%,
the borrowing entity shall undertake to bring down losses by a minimum
1% per annum for that entity till it reaches the level of 20%
c) The base data for AT&C losses referred to in (a) & (b) above would be
31st March of the financial year in which the project is sanctioned.
There are many State utilities, those exposure is more than 100% of REC’s net
worth like PSEB, MSEDCL, etc. During audit, it was observed that T&D Division
does not maintain relevant record capturing such information and monitor the
compliance of condition. Further, there no such control mechanism to monitor
the AT&C losses by the Project Offices also.
As the T&D Division is a nodal division for the T&D schemes, monitoring system
needs to be developed to ensure that conditions stipulated in the sanction letter
are complied.
20. Delay in sanction
As per fair practice code the scheme shall be sanctioned and sanction letter
issued by Corporate Office and PO within 90 days.
During audit, it was observed that there were several schemes which were
delayed and lying with T&D Division. Indicative cases are as under:-
Scheme Utility Amount Date of Date of

code receipt at PO sanction letter
3324 DHBUNL 12154.64 3/9/2009
lakh
3778 DHBUNL 890.82 lakh 31/11/2009 13/5/2010
3637 PTCUL 9655.74 lakh 14/1/2010 9/9/2010
3719 PSEB 29408.74 19/2/2010 2/8/2010
1
lakh
T&D Division may take necessary action towards early sanctioning of schemes
adhering the fair practice code approved by BOD.
21. Variation in reporting of Non-starter schemes to BOD
The Status of Non-starter schemes is required to be produced to Board of

Directors on half yearly basis. Monitoring of non starter schemes would give a
pace to recovery of unutilized amount as well as required action towards revival
of such schemes through liasioning with borrower for implementation of
schemes.
The status of same was put up to BOD detailing 12 nos. of schemes under Non-
starter category.
To counter verify, details of non-starter schemes observed during audit of
Project offices were compared and it was observed that same of the schemes
are not included in the list:
Project Non-starter Non-starter Remarks

Office schemes schemes observed
shown by T&D by IA during audit of
PO
Panchkula 0 44 44 schemes not shown
Hyderabad 0 06 06 schemes not shown
The same was done on a sample basis for the audits performed by IA team,
therefore, existence of more cases may not be ruled out in other PO's.
In view of above, T&D Division may please clarify internal check placed for
identification of non starter schemes and intimation to BOD.
22. Pending actions towards compliance of exposure issue
While conveying exposure norms approved by BOD on grant of IFC status to

REC, the CS Division vide office order SEC-1/224/2009/1018 dated 1.10.10 has
also referred to RBI letter dated 29.6.10 for compliance by the respective
divisions. As may be seen from the said letter exemption from Prudential
Exposure Norms in respect of lending to central and state entities in the power
sector till 31.03.2012 is subject to compliance of certain laid down conditions.
In this connection, it is seen that exposure to various entities including

undisbursed commitments as on 31.10.2010 (details as provided by ZO) and
that available as per the IFC norms is as under:-
1
Entity Present Present Exposur Remarks

exposure Exposure e as per
including in %age norms
undisbursed terms of of IFC
commitment the net
as on worth
31.10.2010
MSETCL 8910.89 crore 80.42% 25% Further sanctions
MSEDCL 7701 cr 69.50% 25% by T&D Division
MSPGCL 10671 cr 96.30% 25% need to be in line
PSEB 10288 cr 94% 25% with the exposure
(680 cr yet to norms/road map
document) as suggested by
APGENCO 5055.63 cr 45.62% 25% RBI/CS Division
Office order dated
1.10.2010. T&D
Division needs to
take necessary
action
accordingly.
In view of the above, following is observed that:-

a) T&D has to adhere to exposure norms as prescribed by CS Division
circular dated 1/10/2010 taking note of the fact that in case of central and
state entities, RBI has granted exemption from compliance with its
Exposure Norms till 31st March, 2012 (in terms of its letter dated
29/6/2010 referred in the circular) which is however subject to
compliance of certain laid down conditions.
b) T&D Division has to review all those cases where its exposure has
already exceeded than the norms prescribed by RBI and report the
same on quarterly basis to RBI along with the milestone for achieving
adherence to RBI norms by 31st March, 2012;
c) Despite raising this issue during last quarter and duly observed by Audit
Committee, no action in regard to review of exposure and formulation of
road map has since been informed to us.
Therefore, T&D Division is advised to take further necessary action in term of

REC CS Division circular including RBI letter dated 29th June 2010 (as indicated
in the circular). Wherever exposure has already exceeded in terms of CS
Division circular on 1st October 2010, necessary action may be taken and
position advised to Internal Audit.
1
23. Non Utilisation of Grant from GOI for a long time
a) During audit, it was learnt that Grant from Government of India (GOI),
was given for energy conservation schemes during 1990s. As per books
of accounts maintained by C&AT Division, it is observed that out of Rs 25
crore, an amount of Rs 19.87 crore have been utilized leaving Rs. 5.93
crores which is still unutilized in the account of REC for a long time.
As per general norms for grant from Govt of India, unutilized portion has
to be utilized in time framed manner or returned to the GOI. Failure to the
same, interest on the balance amount can be called for by the GOI.
Neither T&D division nor Loan Division could have substantiated the
action to be taken on the Grant amount.
Since this grant pertains to T&D project, it is requested that the same
needs to be analysed and further action on the amount needs to be taken
up urgently to avoid any action from GOI.
b) Similarly, in case of Jal dhara Grant from GOI, the grant has been utilized
fully but pending required recommendations / approval, the books of
account have not been settled by C&AT Section since long time. The
formality of closure of such scheme/account needs to be taken up by
T&D Division and information regarding the closure to CA&T Division for
necessary action.
c) Despite repeated oral request, the work allocation of T&D Division was
not made available to IA Team. The same may please be confirmed or
the work allocation be provided to the internal Audit Division.
24. Key areas missing in Appraisal Process
The appraisal of T&D schemes in REC is based on the appraisal guidelines

formulated long back. The guidelines incorporate factors such as cost of diesel,
load factor etc. These factors have changed with the change time and
technology. Following are observed:
a. Interest during construction period (IDC) being a expense and becomes

part of the project cost. However, while calculating the viability of the
project, it is not taken into consideration, more specifically in those cases,
where request for IDC financing has not been received. Whether IDC is
being financed or not, it is always part of cost, therefore need to be
factored in while calculating viability.
b. It is observed that while verifying viability of the project / Discounted Net

Cash Flow, major inflows are considered towards savings to the systems
1
by way of improved system. As per prudent appraisal process for
financing a project, a separate cash flow has to be identified and
generally, financer desires escrow on revenue of that particular cash
flow. In case of T&D Schemes (state) in REC, generally, schemes are
part and partial of overall system and as such that particular scheme did
not have any identified separate cash inflow. To mitigate this issue, it is
always recommendable that financing for a scheme of a district / circle /
revenue stream may be encouraged. This would serve two purposes,
separate identified cash flow and system could be taken over in case of
default.
c. Present, viability working does not capture SEB’s various commercial

losses, theft, etc, which is generally huge. The guidelines may be
suitably modified to capture this aspect also because ultimately net cash
flow has to be worked out to verify viability.
d. At present, schemes have been evaluated based on certain assumption

but validation of those assumption have not been carried out on ground
facts. It is recommended that evaluation study as prescribed in P: SI
guidelines, may be conducted and can be taken into account to analyses
the achievement of objectives of such schemes so that guidelines for
appraisal could be accordingly modified.
e. It is observed that certain borrowers, who have been rated as A or even

higher category, are in losses and a considerable exposure has been
extended to them. Whereas other borrowers like entities of Gujarat, who
are in profit, have not been considered for some priority. Required
analysis of borrower’s financial health need to be done and appropriate
action to be taken considering borrower’s strengths and weakness.
25. Review of Business scenario in various states
With a view to assess the present exposure to different state utilities vis a vis
financial status of those power utilities, details have been worked out below
based on the report on performance of state power utilities by PFC for the FY
2008-09 (readily available), outstanding loan balance of REC as on 31.3.2010
and disbursement of REC during 2009-10.
(In crore)
State Financial Performance of Exposure / REC
State Power Utilities (as per disbursemen outstanding
PFC study) t during as on
PAT/ (Loss) for FY 2008-09 2009-10 31.3.2010
Rajasthan (1215) 1824.75 7962.03
Maharashtra (680) 3815.95 9163.84

1
Tamil Nadu (7132) 3071.79 7143.84
Orissa 125 221.36 468.75
West Bengal 345 1726.78 4294.01
Haryana (1419) 2460.50 4588.46
Himachal 32 179.13 1140.09

Pradesh
Punjab (640) 1054.98 4350.23
Uttar Pradesh (6540) 2623.92 5197.04
Uttarakhand (465) 130.58 2035.95
Andhra 352 1544.20 7999.63

Pradesh
Karnataka (1324) 152.28 1331.01
Chhattisgarh 774 247.54 2315.39
Gujarat 126 305.90 1785.95
Madhya (3124) 373.01 1177.30

Pradesh
From the above table, following can be observed:-
i. Approximately 80% T&D disbursements for the FY 09-10 was made in

five states including Maharashtra, Rajasthan, Haryana, Punjab and
Andhra Pradesh. This trend is continued for last three to four years and
now REC has significant exposures to those states. The T&D Division
may take necessary steps to tap more business from other states also.
ii. Appropriate strategy need to be worked out towards business

development in view of recent guidelines from RBI also which desires
compliances of conditionality and adhering the exposure norms in future
applicable to REC;
iii. It is also worthwhile to state that T&D business of PFC has considerably
grown up as sanction during 2009-10 was about Rs 12000/- crores.
During audit of various project offices, it was observed that they have
also tapped business in Orissa, Gujarat etc etc wherein REC present
1
business is negligible. Appropriate review need to be made so that our
business strategy could be properly adjusted and modified.
iv. Appropriate factoring need to be done in rating / appraisal / extending

exposure differentiating loss making and profit making power utilities.
v. For exposure regulations, REC follows rating given by the PFC to the
discoms. It is to be stated that since PFC has entered in T&D sector in
recent years, therefore their rating for discom may not factoring the
experience of REC relating to higher exposure concentration,
rescheduling experience with certain Discoms, etc. Therefore, REC
needs to work out own rating system for discoms and factors like present
loan outstanding, experience of REC with these discoms etc.
vi. In order to develop business opportunity with other state, more

specifically to performing power utilities like Gujrat, which is an industrial
state and wherein demand of power is rising, required action including
more concession to profit making discoms by creating more categories
with special concession may be considered with approval of competent
authority.
vii. Presently the hypothecation is given of the lines, transformers, etc which
are scattered in a district. In case of default, takeover of those assets is
not practically feasible and may not contribute any revenue to the
company. It is worthwhile to state that some years back, there was a
practice of hypothecation of bulk security ie. hypothecation of the total
assets of particular circle. The benefit of such hypothecation was that the
schemes can be financed to the power utilities upto the amount of assets
already/ to be created within the circle. Further, from the point of the
financer, the total distribution of power of the circle can be controlled in
case of default.
REC has already experienced such non payment from the State utilities
and thereafter, the reschedulement of the loan in many states. With the
hypothecation of bulk security, the loan documentation would be explicit.
Further, in case of default, power distribution/transmission can be taken
over easily.
Above recommendations may be considered by T&D Division and appropriate

action taken with approval of competent authority.

Internal Audit Report-CO: T&D Division 201: Period: July 2010 To December 2010

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Internal Audit Report-CO: T&D Division 201: Period: July 2010 To December 2010

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Internal Audit Report- CO: T&D Division 201

Internal Audit team

Nidhi Garg, Sr. Officer (F&A)

Ashwini Kumar Meena, Officer (Tech.)

Head of the Unit: Sh. S. K. Gupta

T&D Division is looking after financing activities relating to transmission, sub-

2. Organization structure of Project office

The Division is headed by General Manager & supported by following officials:-

3. Scope / Coverage of Audit

4. Records seen during audit

5. Non production of records

6. Performance & Business Development Activities of Project Office

 Incorrect calculation of net inflow

The observations of the internal audit of the ZO as described in the scope of

• Outstanding Observations: This part contains observations,

• Significant Observations: This part contains important

• Other Observations: - Remaining observations are given in three

S. IA Observations Reply furnished Further views

Sr Sche Proje Sanct Cost

As T&D Division has not clarified the final

In reply to the observation T&D Division had

Earlier view of IA: T&D Division needs to

8. Incorrect calculation of net inflow

It is observed that there was inconsistent appraisal process in these two

Description SPA:PE – SPA:PE- Financial effect

Consequent upon improper calculations of capital based (i.e. after deduction of

In addition to above, further issues are as under:-

a. Cost savings taken into account for calculations is based on circular

b. Actual benefits from the project need to be analysed with Projections so

9. DOP not adhered

To monitor adherence of the above Delegations, T&D Division is maintaining the

Following issues have been obwserved:-

a) At present, there is no check in case of improper information / no

b) The loan component of RGGVY schemes have not been captured in

c) It was incidentally observed that the annual ceiling entrusted to CMD

10. Monitoring of T&D schemes not done as per the monitoring

As per the monitoring guidelines issued on 24/8/2006, frequency of the

a) There is no annual monitoring programme made and no monitoring of

b) If required, the requirement of monitoring by CO may be reviewed and

During audit of ZO Hyderabad, it was observed that in scheme code 760195,

S. Scheme No. Loan sanctioned (in Loan disbursed(in Difference(in

Generally, in case of such mistakes, rectification process can be taken up

12. Improper terms / sanction

On random basis, a sanction letter dated 4.6.2009 of a scheme (Scheme Code :

However, sanction letters has since been standardized and PO is responsible

2. Improper sanction of spares without verifying the details: As per REC

During audit it was observed that in scheme code 100990, 3% unidentified

13. Insufficient monitoring of Turnkey award cost

According to operational guidelines for P: SI schemes, “In case of schemes to

Furthermore, it is to be noted that in some schemes REC is financing 90% of

Therefore, T&D Division may consider following actions:-

a) Monitoring of award cost in case of turnkey execution of projects to be

c) Software may be suitable modified to capture award cost for proper

d) All previous cases may be reviewed and necessary action taken.

14. Non-monitoring of Evaluation Studies, to be conducted as per

As per clause 10(b) of REC P:SI GuidelinesL-

In view of above, following may be seen:-

b) T&D Division may further pursue PO/ZO for following up

c) During audit of PO/ZO, sometimes, it has been informed that other

It is requested, that all such cases be reviewed and appropriate action be

In absence of proper guidance to Project Offices, this practice is being

16. Electricity Regulatory Commission’s (ERC) approval for transmission

As per present REC policy, in case of transmission schemes, appraisal of