Holding

The PPAs are statutory only regarding tariff provisions; escrow obligations are not statutory, and MPEB’s prioritisation of projects based on the least tariff criterion is lawful and non‑arbitrary, though the priority given to the Pench project is set aside.

Summary

The Supreme Court examined disputes arising from Power Purchase Agreements (PPAs) and Memoranda of Understanding (MOUs) between independent power producers (IPPs) and the Madhya Pradesh Electricity Board (MPEB) concerning escrow protection and tariff determination. The IPPs claimed the PPAs were statutory contracts that bound MPEB to provide escrow coverage, and that MPEB could not alter the terms or invite fresh bids based on a new "least tariff" criterion introduced under a Section 43A(2) tariff notification. The Court held that the PPAs are statutory only to the extent they prescribe tariff determination; escrow obligations are not statutory, so MPEB was free to renegotiate and prioritize projects based on the least tariff, a rational and non‑arbitrary criterion. The Court affirmed MPEB’s decision to prioritize certain projects, quashed the priority given to the Pench project, and directed a fresh decision on escrow allocation. The appeals of most IPPs were dismissed, with a partial allowance for STI.

Issues considered

Whether the PPAs/MOUs constitute statutory contracts imposing an enforceable escrow obligation on MPEB
Whether MPEB could alter the terms of the PPAs and invite fresh bids based on the least tariff criterion under Section 43A(2)
Whether the least tariff criterion is arbitrary, a hoax, or unreasonable
Whether the Expert Committee's assumptions for tariff calculation are arbitrary
Whether the decision to prioritize specific projects, including Pench, is valid

Legislation cited

Electricity (Supply) Act, 1948s. 43, s. 43A(2)

Subjects

Electricity (Supply) ActPower Purchase AgreementEscrow accountStatutory contractTariff determinationLeast tariff criterionArbitrarinessAdministrative lawLiberalisation of power sector

Judgment

INDIA'I/ THERMAL POWER LTD. ETC. ETC. A
v.
STATE OF M.P. AND ORS.

FEBRUARY 16, 2000

[G.T. ~A"IAVATI AND S.N. PHUKAN, JJ.j B

Electricity (Supply) Act, 1948:

Section 43A(2)-Tariff notification-Dwing negotiation of tenns of
various agreements relating to power projects with private investors pursuant C
to Policy Decision of the Government to privatise the power sector--Effect of,
on the ongoing negotiations-After the issue of tariff notification, Central
Government suggested to give priority to those projects offering least tariff so
as to ensure benefit of capacity addition from such projects in the 9th Five
Year Plan-Electricity Board decided to prioritise the projects for providing D
escrow protection mainly On the basis of least tariff criterion-Held, decision
of Board not ariJitrary or unreasonable-Board was also entitled to alter the
tenns of escrow agreement as there was no statutory obligation under Section
43 or 43-A of the Act to maintain escrow account-Although Power Purchase
Agreements were concluded contract, but there was no obligation under PPA E
to execute escrow agreement at a date prior to the first unit commercial
operation date-Tariff criteria based on and consistent with the notification
issued under Section 43-A (2) cannot be described as a hoax, unrealistic or
arbitr~onstitution of India, Articles 298, 299-Policy decision Ad-
ministrative Law-Arbitrariness.
F
Electricity-Board deciding to give priority to those power projects
offering least tariff f1Xed in accordance with the mandate of such notifica-
tion-Held, court would not interfere and substitute a different criterion-<:on-
stitution of India-Articles 226 and 136-lnterference with.
G
Constitution of India-Articles 226 and 136-Decision of Expert Com-
mittee-Certain assumption made by it for determining the project
costs-Held, if such assumptions based on valid basis and not fanciful or
arbitrary--<:ourt would not invalidate such assumptiom~Practice and Proce-
dure. H
925
926 St:PREME COURT Rr.PORTS (2000] 1 S.C.R.
A Words and f'hrases-'Statutory contract'~Meaning of-Within the
meaning of Contract Ac~ 1872.

Pursuant to liberalisation of the electricity sector by the Government
of India, MO Us and Power Purchase Agreements (PPAs) were entered into
B by the State Government and Madhya Pradesh Electricity Board (MPEB),
with independent power producers (IPPs) for establishing the power
projects and for sale of entire electricity generated by these projects to
MPEB. Under the PPA, MPEB W'ds supposed to open the letters of credit
in respect of amounts payable by it. According to the escrow agreement,
MPEB was also to maintain escrow account with its ban!t following the
C first commercial operation date o~ the P°'"er projects. Execution of escrow
agreement and opening of escrow account subject to conditions of the
parties agreeing to the terms and conditions of the proposes escrowable
thereof.

D The IPPs were insisting upon escrow coverage/protection and is·
suance of Letter of Comfort in their favour so as to enable the Financial
Institutions ("Fis') to lend them enough money. MPEB had agreed to
cooperate with and assist lPPs in obtaining financial assistance from the
Fis by making a provision for different types of securities for payment of
its dues to the lPPs. There was no reluctance or refusal on the part of
E MPEB to provide escrow coverage to all or as many as possible, but it was
not possible for it to issue Letters of Comfort and provide escrow coverage
and enter into escrow agreements with all of them as the appellants desired
and the Fis required better escrow coverage than the one which the MPEB
was willing to provide. The IPPs including the appellants could obtain tile
F financial closure because of their inability to persuade the l<'ls to lend them
enough money.

During the course of negotiations between M.P. Government, MPEB
and IPPs, Central Government in exercise of its power under Section
43·A(2) of Electricity (Supply) Act is~ued a notification amending its
G earlier tariff notification. Under the amended tariff notification and sug·
gestion made by the Government of India to give priority to those projects
which offered the least tariff so as to get the benefit of capacity addition
from those projects during the 9th Five Year Plan, :\-JPEB decided to
prioritise the projects for providing escrow protection mainly on the basb
H of least tariff criterion and after considering an optimum mix of liquid
J.

INDIA n-!rJ{MAL POWER LTD. v. STATE 927

fuel, hydel and coal based projects. The IPPs were also called upon to A
furnish security deposit of an amount equal to 2% of the approved project
cost.

Writ petition Wds filed by the appellants before the High Court
praying for a writ of mandamus directing the respondents to grant escrow
facility to it. Similar petitions were filed by other IPPs. A single Judge of B
the High Court directed the Government and MPEB to take fresh decision.
Letter Patent Appeals were filed by the State Government, IPPs and
MPEB, and the Division Bench allowed the appeals and dismissed the writ
petitions filed by the IPPs. Hence this appeal.

It was contended by the appellants/IPPs that they had entered into
c
PPAs under Sections 43 and 43A of the Electricity Supply Act and as such
they were statutory contracts and therefore, MPEB had no power and
authority to alter their terms and conditions; that the MOUs and PPAs
were concluded contract and therefore, it was not open to MPEH to
unilaterally change the conditions of those contracts and to invite fresh D
bids on the basis of the new least tariff criterion; that MPEB having
decided to provide escrow coverage to 4 or 6 IPPs, no need had arisen for
it to change that decision, even though it was justified in entering into
negotiations for reduction of tariffs.

Disposing of the aplleals, this Court
E

HELD : 1.1. Provisions of Sections 43 and 43·A of the Electricity Act
indicate that the agreement can be on such terms as may be agreed by the
parties except that the tariff is to be determined In accordance with the
provision contained in Section 43-A(2) and notifications issued there· F
under. Merely because a contract is entered into in exercise of an enabling
power conferred by a statute that by itself cannot render a contract a
statutory contract. If entering into a contracts containing the prescribed
terms and conditions is a must under the statute then that contract
becomes a statutory contract. If a contract incorporates certain terms and
conditions in it which are statutory then the said contract to that extent is G
statutory. A contract may contain certain other terms and conditions
which may not be of a statutory character and which have been incur·
porated therein as a result of mutual agreement between the parties.
Therefore, PPAs can be regarded as statutory only to the extent that they
contain provisions regarding determination of tariff and other statutory H
928 SUPREME COURT REPORTS (2(){,'0] 1 S.C.R.
A requirements of Section 43-A(2). Opening and maintaining of an escrow -<-::--
account or an escrow agre~ment are not the statutory requirements and,
therefore, merely because PPAs contemplate maintaining escrow accounts
that obligation cannot be regarded as statutory. [936-A-D]

1.2. Though MOUs and PPAs were concluded contracts it cannot be
B said that under those contracts the appellants and other IPPs acquired a
legal right and MPEB incurred an enforceable obligation in respect of
providing escrow coverage. The provisions of MOUs and PPAs disclose
that the obligation to open and maintain and escrow account is to be
discharged by MPEB to execute an escrow agreement at an earlier date.
C Execution of the escrow agreement and opening of an escrow account are
contingent upon an agreement between the parties regarding the terms and
conditions of those agreements and accounts. The terms and conditions of
the escrow agreement could not be finalised in view of the disagreement of
the financial institutions with the terms and conditions suggested by
D MPEB and some of the appellants and their insistence upon certain other
conditions. It was not because of any lack of effort on the part of MPEB.
In any case it cannot be said that any legal right in favour of IPPs to have
an escrow agreement at that stage had come into existence. Therefore, the
question of MPEB going back upon the terms and conditi11ns of the
concluded contract does not arise at all. [938-F; H 939-A-C]
E
1.3. The Minister of Power, Government of India had drawn the
attention of the State Government to the delay in finalising the projects
and the need to take a final decision in the matter as early as possible and
to the recent amendments to the notifications issued under Section 43-A
F of the Electricity (Supply) Act. Though the said amendment is prospective
it cannot be said that it was totally irrelevant and could not have been
taken into consideration by MPEB to seek revision of PPAs by revising
better terms from those IPPs who had agreed to undertake the projects.
But the situation in which all were placed was such that it was not possible
G for the MPEB, IPPs and Fis to enter any further agreements regarding
escrowable coverage and financial closures. Therefore, the decision of
MPEB to invite offers for better terms in its favour by different parameters
so as to enable it to prioritise the projects for providing escrow protection
based on the least tariff criterion and to decide about the optimum mix of
liquid fuel, hydel and coal based projects cannot be said to be un-
H reasonable and arbitrary. [940-B-D)
1

LN!JlA THERMALPOWhR LTD. v. STATE ')21)

1.4. The least tariff criterion cannot be said to be a hoax when it is A
based upon and consistent with the notification issued under Section
43-A(2). To give priority to that project which will supply electricity to
MPEB at a cheaper rate far from being regarded as a hoax or as an excuse
must be regarded as a rational criterion because it will be more beneficial
to the MPEB and the general public who are the ultimate consumers of
electricity. The situation in which MPEB was placed at a relevant time
B
justified adopting that criterion and the Court cannot in such matters
substitute its opinion and say that it would have been better if a different
criterion had been adopted. After the event it may be visualise that it would
, have been better if a different course was adopted or decision was taken.
But that cannot render the decision already taken arbitrary or invalid so C
long as it is taken bona fide and is based upon consideration of relevant
aspects. Prioritisation could have been done on the basis of the dates on
which Techno-Economic Clearance was sanctioned or it could have been
on the basis of the date of sanction given by the financial institutions. If,
however, considering all the relevant aspects MPEP thought to prioritise D
the projects on the basis of the least tariff criterion it cannot be said.
thereby it acted in an arbitrary or unreasonable manner. It is also not
possible to accept the contention that the said criterion was adopted with
a view to favour some and rule out others as no material is available on
record to justify such an inference. (941-H; 942-A-C]
E
2. Though it was argued that the Expert Committee, which was
constituted for tariff evaluation for the improved offers submitted by IPPs,
had made certain wrnog anc! unrealistic assumptions on the basil; of which
the project cost was to be estimated and the lca~l tariff to be determined,
but it would not be proper for this Court to examine in detail the various F
assumption as they are technical matters and moreover, the techno-
economic clearance was given by Central Electricity Authority on the basis
of such assumptions. Certain assumpti\ms had to be made while determin-
ing the project cost and inviting offers on the basis thereof. Once it is found
that there was some valid basis for maldng these assumptions and that it
is found that there was some valid basis for making these assumptions G
and that they are not fanciful or arbitrary it would not be proper to
invalidate the decision taken on the basis of such ussumptions. They were
made applicable equally in all. The rate of foreign exchange variation was
adopted on the basis of the advice of the Ministry of Finance. Having
considered all the relevant facts and circumstances it is not possible to H
930 SCPREMF COURT REPORTS [2000J l S.C.R.
A agree with the contention that the least tariff criterion was not a good
criterion as it was unrealistic and arbitrary. [942-lJ; 943-A-C] <::::,,_

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1140-43
of 2000 Etc. Etc ..

,B From the Judgment and Order dated 25.6.99 of the \1adhya Pradesh
High Court in LP.A Nos. 106, I: L, 71 and 99 of 1999.

C.S. Vaidydnathan, K.N. Rawal, Additional Solicitor General, K.K
Venugopal, Kapil Sibal, K. Parasaran, ML Jaiswal, Anoop G. Choudhary,
C T.R. Andhyarujina, K.S. Coop.:r, Dushyant Dave, Shanti Bhushan, 8.
Dutta, H.N. Salvt:. Dr. Abhishek Singhvi, F.S. Nariman, V.A Mohta, Raju
Ramachanclran, Gopal Sut>ramanium, S1Jbramonium Prasad, Gaurav Ag-
garwal, Aditi Singh Samccr Vyas, Ms. Bina Gopta, J.S. Goswami, Ms.
Seema Sapra, Ms. Vanita Bhargava, ~h. Neena Gupta, P.S. Shroff, Ms.
D Suparna Srivastava, Ms. Gouri Rasgotra, Ms. Purnima Singh, Suman J.
Khaitan Jayant Bhushan, Ashok Kumar Gupta, Bharat Sangal, Ms. Asha
Pathak, Anand Pandey, Prasanto Sen, S. Ganesh, S. Vajifdar., P.N .
Kapadia, UA. Rana, Ms. Rashmi, Raj..:sh Nair, Ms. Shally Maggon, Zubin
Behramkamdin, Ms. Alka Bharucha, RN. Karanjawala, ~1s. Nandini Gort:,
Vishwanathan, Manik Karanjawala, M. G. Ramachandran, Piyush Sharma,
E Pramod Dayal, Anand Padmanabhan, Salish K. Agnihotn, Raji:ndra
Singhvi, R. Sasiprabhu, Manish Garg, Sumant Batra, Ms. Asha Barmola,
Ms. Manjula Gupta, S.K. Gambhir, Awanish Sinha, Anil Sharma, Kri~h
nanand Pandt:ya, Dilip Tandon, B. Krishna Prasad, Rajiv Shakdhar, Vipin
Nair, P.B. Suresh, Parag Tripatlu, Ms. Swdthi Singh, I\!;,. Rakhi Ray, tvh.
F Monica Sharma, Ravindra Snvastavd, Pdrag Tupathi. ;-... P . .'vlidha, S.B.
t.: padhyay, Kcvic Sctalvad, Prasanto St:n, A Sapn:, Ms. Shobhna Bajaj,
Manish Garg and Nikivesh R. Amit Srivastava for tJ.u: appearin3 parties.

The Judgment. of tht: ( '.ourt WdS ddivcrccl by

G G.T. NANAVATI, J. Leave granted in all the S.L.Ps.

These appeals arise out of the common judgment of thi: Division
Bench of the Madhya Pradt:sh High Court in a batch of Letters Patent
Appeals (Nos. 70 to 72, 93 to 99, Wb, 108 and 117 of 1999 and Writ Petition
H No. 1685 of 1998) filed against the common judgment and order of a single
1

lN")lA THERMAL POWHRLTD. v. STATE [U.I. NANAVAll,J.J 931

Judge of that Court in Wnt Petitions filed by India Thermal Power Ltd. A
(W.P. 3534/1988), Bhandcr Power Ltd, (W.P. 4253/98), G.V.K. Power Ltd.
(W.P. 4631;98), S.I.P. Power India Ltd. (W.P. 4694/98), ,\;1/s Shahpoorii
Pallan.ii Powtr Co. Ltd. (W.P. 4742/<J8), Bhilai Power Supply Co. Ltd.
(W.P. 238/98) and Jindal Power Ltd. (W.P. 6175/98).
B
In the year 1991-92, the Government of India declared a policy of
liberalisation in tht: ckctricity sector and thereby widened the scope for
) privak participation in generation, distribution and supply of electricity.
Pursuant to that policy the State of Madhya Pradesh decided to invite
private companies for setting up power plants at different places within the
State so as to increase it power generating capacity by about 7000 ,\;IW. c
On 272. 1992 Madhya Pradesh Electricity Board (MPEB) invited offers
from pokntial private investors for pn; qualification in establishment of
four powcr proj<:clh. One of them wa' Thermal Power Project at Korba
(West) in th;;; distnct of Bila;pur. Indian Thermal Power Ltd. (hereinafter
reft:rred to as 'ITPL') made an applicat~on for establishment of that power D
plant. After con,idering its application the Uovcmmi::nt of Madhya
Pradesh madt: an offer by issuing a ktttr of intent to ITPL to establish,
operate and maintain a power plant at Korba (W t:st) as a generating
company. Simiiar advertisi::ments wt:n: issm;d for other projects also and
ktters of intent were issued to those;: who were found qualifit:d. In all 21 E
MOU's which wen; entt:rt:d into between them and the Stak Government
and MPEB. 13 Independent Power Producer; (IPPs) en!tred into Power
pun:haM: Agrccmrnrs (PPA~) \\ffh :vtP!2B

l;ndtr tlK MOlJ dll<l !'PA t:1.: generating company has to undertake
the projc:ct and otkr for >a!e all nd dcctrical out-put from the project to F
,\;!PEB and the MPEB is under an obligation to purchas;;; the samt:. Wt:
arc not concerned with the other terms and condi!lons contained in the
agreements and the mutual rights and obligations flowing from them exa.:pt
those n:fating to method and amount of paymt:nt. Article 8 of the PPA
provides for the same. In order to secure payment to the lPP the MPEB G
will have to opi::n one or mori:: Letters of Credit in respect of amounts
payable by it. Tlu: aggn:gate of each Letter of Credit ,ha]! be an amount
m:cessary to mt:et two months projc::cted tariff paymcnts. By way of further
security Clause ( c) of Article 8.3 of ITPL's PPA provides for maintaining
an Escrow Account with MPEB's bank at all times following the First Cnit H
932 SUPRFME COURT REPORTS (2GCOJ 1 S.C.R.
A Commercial Operation Date, in such for and substance, as may be mutually
agreed by the parties. It further provides that such Escrow Account shall
I
be (i) established and maintained by MPEB in accordance with Escrow

B
Agreement and (ii) in form and substance acceptable to the parties. In the
PPAs with other IPPs the provision regarding Escrow Account is different-
ly worded. According to these agreements the Company and the MPEB
l
have to cooperate and a~sist each other in establishing a practicable and
appropriate Escrow Account mutually acceptable to the parties as a satis-
factory security mechanism for the payment obligations of MPEB. The
Escrow Account must take :nto account reasonable n:quirements of the
C lenders of the projects. The amount of th;; Escrow Account shall have to
be the 'Escrow Account Amount' which means the amount equal to one
and a half (1.5) times of the .!Stimated average amount payable by MPEB
in a Billing period. They do not provide for any Escrow Agreement before
opening an Escrow Account. In addition to the Letter of Credit and the
D Escrow Account, the Articfo further provided for a guarantee by the
Government of Madhya Pradesh.

In discharge of its obJ'igations under the MOV's and PPA's the
Madhya Pradesh Government in December 1997 decided to recommend
(1) Daewoo, (2) Pench, (3) Bina, (4) GBL, (5) ST! and (6) Maheshwar to
E the Financial Institutions (Fis) for providing Escrow Protection to them
and accordingly letkrs of comforts wen: sent to those six IPPs. Meanwhile
negotiations were going on between Madhya Pradesh Government, MPEB
and the IPPs regarding the terms and conditions of the Escrow Agreement
The Government had proposed to give facrow Protection equal to one
month's invoice. A meeting bLtween Government Officer~. MPEB and the
F Financial Institutions was abo held on 5.9 J 997 for discussing the bsue of
escrowable capacity available with MPEB and whether it was possible to
reduce Escrow Covt:r to one month's invoice amount. In that meeting the
Government suggested that in order to accommodate mon: number of IPPs
the Escrow Cover may be reduced from 1.5 times to at least 1.2 times. The
G banks and Financial Institutions accepted the escrowable capacity of
MPEB at about 22CO M.W. only and stated that Escrow Cover equal to
1.25 times could be accepted as reasonable. Even for this relaxation it
insisted that MPEB shall have to take certain steps to improve its finances.
The Financial Institutions also directed that MPEB should indicate to IPPs
H its ability/inability to provide Escrow Account facility to them so that there
INDIA THERMAL POWER LTD. v. STATE(G.T.NANAVATI,J.] Y33

may not remain any misunderstanding in that behalf. After considering A
various aspects the Financial Institutions decided to consider financial
assistance to those four projects which had already received techno-
economic clearance by them. IPPs thus approved were Shree Maheshwar
Hydel Power Corporation Ltd., Daewoo Power India Ltd., Bina Power
Supply Co. Ltd. and GBL Power Ltd. MPEB was requested to issue letters
to all those IPPs to take steps to negotiate and achieve financial closure
B
within next two or three months. Therefore, MPEB on 21.12.1997, wrote
letters to the four approved IPPs about its decision to recommend them
for grant of Escrow Protection and called upon them to finalise the
negotiations within one month from the date of the letter and obtain
financial closure and start commencement of the project work within three c
months of the execution of Escrow Agreement. They were told that in case
of failure to perform any of the stipulations the Escrow Agreemt:nt will
stand cancelled.

ITPL received techno-economic clearance from the Ct:ntral D
Electricity Authority on 12/15.9.1997. Pursuant to the decision taken in the
meeting with the Financial Institutions. MPEB wrote to ITPL on 21.4.1998
that it was considering granting Escrow Protection to them equal to one
months' invoice amount and inquired whether ITPL was agreeable to that
condition and also to the condition of executing the Escrow Agreement
within one month and achieve financial closure within next three months. E
ITPL expressed its willingness. But IDBI, which was the main financial
institution, did not agree to any reduction below 1.25 times the monthly
billing and u1siskd that the Escrow A!,'fcemt:nt should be executed before
financial closure and COD. It also informed MPEB that as a part of the
security package, Fis/banks would require lPPs to have first charge of its F
receivables. It further told MPEB that in absence of compliance with the
above ~onditions it will be difficult for them to grant any financial closure
to any of the IPPs. Thus the terms of the Escrow Agreement and the
decision to whom Escrow Protection should be extended and to what
extent could not be finalised because of lower assessment of the i::scrowable G
capacity of MPEB and unwillingness of the Fis to relax their stipulations.

While the negotiations and discussion in that behalf were going on
the Central Government, in exercise of its power under Section 43A(2) of
the Electricity Supply Act, 1984, issued a notification on 8.6.1998 amt:nding H
I
~

934 SUPREME CUL RT RHORTS 1wao11 s.c.K
A its earlier tariff notification datt:d 30.3.1992. That wa~ followcd by a lettt:r
dated 12,'15.6.1998 of the Ministt:r of Power, Cfovcrnment of India to the:
Chid Minister of Madhya Pradesh Gowrnment pointing out the ncccssity
to finalisc the projects quickly and drawing attcntion tu the amendment
madc in the tariff notification datcd 8.6.l 998. He requcsted the Uuvi.:rn-
B ment to take an early dcci,sio11 by giving pnority tu those projects which
offer thc kast tariff so as to ensl!rc that in t'.1e 9th Fiw Ycar P!an they get
the bcnefit uf the capa<-ity addition from those projects. Tht: Minister of
Power again wrote to the Gove~nmt:nt on 5. 7. 1998 and l l 7.1998 tu quickly
finalisc the projccts. The Madhya Pradesh Guv..:rnrnt:nt t:i.;r~fon.:, dc:cided
to call all the IPPs on 14.7.1998 for discussion for altering tcrms and PPAs
C in view uf the amendment in the tariff notification and the >uggcstiun made
by the Mini~ter of Power. After the meeting MPEB took the decision to
prioritise tht: prnjcct> for providing Escrow Prott:ctiun mainly on tht: basis
of least tariff criteria md after considering an optimum mix of liquid fuel,
hydd and coal projects. By its lttter datd 24.7.1998 it brought that
D decision to the notice of all the lPPs and calh:d upon them to submit their
offers containing better terms on the basi.~ of t"1e changcd parameters
mentioned in Part B of the proforma sent alnng with that :etter. The lPPs
were also called upon to furnish security deposit uf an amount equal to of
2% of the approved project cost.

E ITPL protested and maintaincd that the terms of its PP A remained
unchanged that the tariff offor by it wa' th1: cheapest, that ir cannot be
asked to givt: security of 2% and that it should be givcn six months' time
from the' dat..: of approval uf the F,now by the f'inannal lnstitutil•ns I'. 1r
obtainfr;.g tinan1 i:: i ch· ,ur ~ o.nd t.Jn;.pktw>t t'• hi:< fonu ....Lr '' '· ll tht '.l ftler!
F a writ petition in the MadhyJ Pradc'h High Court chaH:.:n!,ring tht: rnm·-
munication dated 24.71998 and prayed for a Writ of Mandamus directing
the respondents to giant Escrow facility to it Similar petitions wert: then
fik:d by six other IPPs. AH the seven writ pt:titions were heard by a :earned
single Judge. He was of the view that thc Ou\ernment and MPEB had not
proper:y applied their mind before taking the impugned decision. Ht:
G directed them to take a fresh decision objectively and dispassionately.

As some of the IPPs the State and MPEB were not satisfied with the
said order they filed Letters Patents Appeals before the Divi~ion Bench of
that court. The' eontcntions raised bdore the Division Bt:nch wen: that the
H PPAs are statutory contracts and the condition regarding facrow Cuvt:r is
INDIA TifER\1AL POWER !.1ll. v. STATE [G.T. NA."IAVA1 !, J.J 935

a statutory condition and, therefore, it 1s not open to the State Government A
to go back upon ;t. It was also contended that the principles of promissory
estoppel and legitimate expectation would apply to the facts of these cases
and, therefore, it was not open to MPEB to invite fn;sh bids and determine
giving of priority for Escrow Protection on the basis of the new least tariff
criteria. Contentions regarding priority of adopting least tariff criteria and B
who can be >aid to be lowest according to that criteria were also raised.

The Division Bench held that the PPAs are statutory contracts as
they have be.:n entered into under Sections 43 and 43A It, however, upheld
the contt:ntion raised by the State and MPEB that the decision to invit.:
fresh bids on the basis of least tariff was taken in larger public interest and c
the least tariff criteria is a good criteria. It also held that once the IPPs
participated in the negotiations and gave their fresh bids they can be said
to have abandoned their right to stek enforcement of the PPAs and to
challenge the letter dakd 24.U998. It also held that as the ITPL had not
challenged the earlier decision of issuing Letters of Comfort to six lPPs it D
was not now entitled to any relief. Taking this view the Division Bench
allowed tht: appeals and dismissed the writ petitions filed by the IPPs.

It was contended by Mr. Cooper, learn.:d senior counsel appearing
for appellant GBL and also by some counsel appearing for other appellants E
that the appdlant1PPs had entered into PPAs under Sections 43 and 43A
uf the Electricity Supply act and as such they are ~tatutory contracts and,
' therefore, MPEB had no power or authority tu alter their terms and
conditions. Thi.s wntentinn has been uphdd by thi: Hifh ( 'ourt. fn our
opinion the said cuntenuon 1s not currect and High Court was wrung in
accepting the same. Section 43 empowers Electricity Board to ~nter into F
}
arrangement for purchase of electricity on such terms as may be •:greed.
Section 43 A(l) provides that a gt:nerating company may enkr into a
contract for the sale of electricity generated by it with Electricity Board.
As regards the determination of tariff for the sale of electricity by a
generating company to the Board, Section 43(1)(2) provides that the tariff G
shall be determined in accordance with the norms regarding operation and
plant load factor as may be laid down by the authority and in accordance
with the rates of depreciation and reasonable return and such other factors
as may be determin'-'d from time to time by the Central Government by a
notification 1!1 th~ official gazette. These provisions clearly indicate that the H
I,
~

936 SUPREME COURT RhPORTS [20(,'0j 1 S.C.R.
A agreement can be on such terms as may be agreed by the parties except
that the tariff is to be determined in accordance with the provision con-
tained in section 43A(2) and notifications issued thereunder. Merely be-
cause a contract is entered into in exercise of an enabling power conferred
by a statute that by itself cannot render the contract a statutory contract.
B ff entering into a contract containing prescribed terms and conditions is a
must under the statute then that contract becomes a statutory contract. If
a contact incurporates certain terms and conditions in it which are
statutory then the said contract to that extent is statutory. A contact may
contain certain other terms and conditions which may not be of a statutory
C character and which have been incorporated therein as a result of mutual
agreement between the parties. Therefore, the PPAs can be regarded as
statutory only to the extent that they contain provisions regarding deter-
mination of tariff and other statutory requirements of Section 43A(2).
Opening and maintaining of an Escrow Account or an Escrow Agreement
arc not the statutory requirements and, therefore, merely because PPAs
D contemplate maintaining Escrow Accounts that obligation cannot be
regarded as statutory.

It was contended by Mr. Harish N. Salve, learned senior counsel
appearing for ITPL, Mr. Cooper, appearing for GEL, Mr. Dave, appearing
E for STI and other counsel appearing for the appellants that the MO Us and
PPAs are concluded contracts and, therefor.:, it was not open to MPEB to
unilaterally change the conditions of those contracts and to invite fresh bids
on the basis of the IllW least tariff criteria. There is no disputt; on the potnt
that MOUs and PPAs an; cuncludt:d contracts but tu say that MOL's alld
F PPAs are concluded contract is one thing and to say that under those
contracts the appellants and other IPPs acquired a legal right and the
MPEB incurred an enforceable obligation in respect of providing an
Escrow coverage is a different thing. The MOUs and IPPs while providing
for payment of dues by MPEB has also at the same time made provisions
for securing these payments. Apart from an undertaking by MPEB under
G those agreements an obligation is imposed upon MPEB to open a revolving
letter of credit or letters of credit for payment of the dues. By way of
further security it is provided in those contrncts that Escrow Account shall
be opened and maintained by MPEB to securt: payment of the amount
equal to 1.5 times the monthly bill. Those contracts also provid~ for a
H guarantee agreement with the State Government for paym.:nt of du.:s ot
INDIA 11-lr.RMALPOWERLTD. v. STATE[G.T.NANAVATI,J.] 937

MPEB. Thus the purpose of opening and maintaining an Escrow Account A
is to secure payment for the electricity to be supplied by the generating
companies to MPEB. The Escrow Account is, therefore, really required to
be opened at that stage and, therefore, it is provided in most of these
contracts that the Escrow Account shall be opened at the time of the First
Unit Commercial Operations Date. B
The MOUs with ITPL and SPPL do not specifically provide for an
Escrow Agreement or an Escrow Account. The MOUs with other appel-
lants is in the following terms :

"The Board shall open a revolving letter of credit as well as create C
an escrow account in favour of ....... , which ,. .... shall have recourse
to in case of default."

The PPAs with ITPL and Jindal contain the following clause with respect
to Escrow Agreement and Escrow Account ;
D
"To the extent such is agreed in accordance with the following,
MPEB shall at all times following the First Unit Commercial
Operations Date maintain an Escrow Account with MPEB's. Bank,
in such from and substance as is mutually agreed by Parties and
on terms no less favourable then those applicable to any other
E
independent power generating company and into which MPEB
shall, for each month, place funds therein and from which overdue
payments under this Agreement may be made to the Company in
the event of MPEB failing to maintain, replenish, renew, restore
or replace one or more Letters of Credit in the amounts provided
for above. Such Escrow Account shall be, (i) established and F
maintained by MPEB in accordance with Escrow Agreement; (ii)
in form and substance acceptable to the Parties."

The clause relating to Escrow Account in PPAs with GBL, STI, SPP and
Madhya Bharat is differently worded and is as under :
G
"Escorw Account.

The Company and MPEB shall in good faith and expeditiously
cooperate with the assist each other in establishing a practicable
and appropriate Escrow Account mutually acceptable to the Par- H
I
I
I·--.

938 SUPREME COURT Rr PORTS 12(){,'()) 1 s. C.R.

A ties as a satJSfactory security mechanism for the payment obliga-
tions of MPEB, taking into account the following parameters :

(i) the Escrow Account 'hall take into account tht! rt!asonabk
requin:ments of the Lenders of the Project; and

B (ii) the amount of the Escrow Account shall be the Escrow
Account Amount.''

The Escrow Account clause in the PPA with Bhilai is different from others
and is in the following terms :
c ''Escrow Account. MPEB shall at all times following the First unit
Commercial operations Date or tht date of deemed Commission-
ing for the first Generating Unit, maintain an Escrow Account with
a Scheduled Bank pursuant to an Escrow Agreement in form and
substance as is mutually 2,greed by tht: Parties and into which
D MPEB shall, for each Month, place funds therein and from which
overdue payments under this Agr;;ement may be made to the
Company in tht: event of MPEB failing tu maintain, replenish,
renew, n:ston: or replace one or more Letters of Credit in the
amounts provided for above. Such Escrow Account shall be estab-
E lished and maintained by MPEB in accordance with an Escrow
Agreement which shall be i11 form and substance acceptable to the
Parties.''

These provisions in the MOt:se and PPAs clearly disclose that tht:
obligation to open and maintain an Escrow Account is to be discharged by
F MPEB after the First Unit Commt!rcial Operations Date. They do not
impose an obligation on MPEB to executt an Escrow Agreement at an
earlier date. The Escrow Agreement is to be in such form and substance
as is Acceptable to the parties. The Escrow Account is also to be established
and maintained in the manner and to the extent agreed by the parties. The
G only obligation of MPEB which had came into existence on execution of
the MOUs and PPAs was to cooperate with and assist the appellants in
the matter of execution of an Escrow Agreement and opening of an Escrow
Account. Execution of the Escrow Agreement and opening of an Escrow
Account are thus contigent upon an agreemtnt between the parties regard-
ing the terms and conditions of those agret:ments and accounts. The terms
H and conditions of the Escrow Agreement could not bt: finalised in view of
INDIA THhR\-IAL POWER ITU. v. STATE :nr NANAVATIJJ 939

the disagn:ement of the Fis with the terms and conditions suggested by the A
MPEB and some of the appdlants and their insistence upon certain other
conditions. Even though MPEB and most of the appdlants were willing for
an Escrow Coverage to the extent of one billing month's amount, the Fis
insisted that !t should be for one: and a half month's billing amount. Even
though :V1PEB was willing to provide Escrow Coverage to as many IPPs
as poss[blt: on the basis of its assessment that its Escrowable capacity is B
more the Fh did not agn.:e with that assessment and showed their willing-
ness to assist the IPPs on the basis of MPEB's Escrowabk capacity at 2200
l\IIW only. Thus it was because of the FI's reluctance to agree with MPEB
and the IPPs that the terms and conditions of the Escrow Account, could
not be finalised and Escrow Agreements could not be ext:cuted. It was not C
because of any lack of effort on the part of MPEB. In any cast: it cannot
be said that any h:gal right in favour of IPPs to have an Escrow Agreement
at that stage had come into existence. Therefore, the question of MPEB
going back upon the terms and conditions of the concluded contract does
not arise at an. :VIr. Nariman, learned senior counst:! appearing for SPPL
also submitted that till 24.7.1998 no kgally enforceable right to have an D
Escrow Agreement had come into existence Mr. Shanti Bhushan, learned
senior counsd appearing for Jindal has also not disputed this position.

The IPPs were insisting upon facrow Coverage/protection and is-
suance of Letters of Comfort in their favour so as to enable them to
persuade the Fis to lend them enough money and obtain financial closure. E
For executing the projects it is their duty to being enough finance. No
doubt when such large projects are undertaken it is expected that the party
undt:rtaking the project will require monetary help from Fis. They are
financed partly by equity and partly by debt. Consistently with this position
MPEB had agreed to cooperate with and assist IPPs in obtaining financial F
assistance from the Fis by making a provision for different types of
securities for payment of its dues to the IPs. Though the Escrow Account
will have to be opem~d at a later stage the appellants were insisting for
letters of Comfort and Escrow Agretments even before even obtaining
financial closure. There was no reluctance or refusal on the part of MPEB
to provide Escrow Cowrage to all or as many as possible. But it was not G
possible for it to issue Letters of Comfort and provi.de Escrow Coverage
and enter into Escrow Agreements with all of thi::m as the appellants
desired and the Fis required better Escrow Coverage than the one which
the MPEB was willing to provide. The situation which had arisen was
beyond the control uf MPEB. The lPPs including the appdlants also could
not obtain financial closure because of their inability to persuade the Fis H
940 SUPREME COURT RHORTS [2COOJ l S.C.R.
A to lend them enough money. This was the position in the month of July
1998.

The Minister of Power, Government of India had drawn the attention
of the State Government to tht:: delay in finalising the projects and the need
to take a final decision in the matter as early as possible and to the recent
B amendments to the notifications issm:d under section 43A of the Electricity
Supply Act. Though the said amendment ii. prospective it cannot be said
that it was totally irrdevant and could not have been taken into considera-
tion by MPEB to seei revision of PPAS by inviting better terms from those
IPPs who had agreed to undertake the projtcts. But the situation in which
all were placed was such that it was not possible for the MPEB, the IPPs
C and the Fis to enter into further agreements regarding Escrowable
Coverage and financial closure. We are, therefore, of tht opinion that the
decision of the MPEB to invite offers for better terms in its favour on
different parameters so as to enable it to priorities the projects for provid-
ing Escrow Protection based on least tariff criteria and to decide about the
D optimum mix of liquid fuel, hydel and coal based projects cannot be said
to be unreasonable or arbitrary.

The ITPL was of the view that the least tariff criteria was a 'hoax'
and, therefore, it did not give its fresh bid on the basis of that criteria. It
has, therefore, no right to make any grievance with respect to what has
E happened after 24.7.1998. Jindal did make a fresh bid on the basis of least
tariff criteria but protested against the condition of 2% security deposit
and expressed its inability to give the security deposit as it believed that it
was impossible to achieve financial closure within two months of providing
a bankable Escrow Agreement Form. It was submitted by the learned
counsel Mr. Shanti Bhushan that the condition to complete the formality
F regarding financial closure within two months should be held dis-
criminatory and invalid and Jindal should be considered on that basis. He
submitted that the tariff offered by Jindal was the lowest earlier and even
after the revised offers. He submitted that those who were given Letkrs of
Comfort earlier have a larger timt.: to persuadi: the Fls and obtain financial
G closure. He submitted that considering tht: timt: usually taken by the Fis it
was impossible to get financial closure within two months and, therefore,
Jindal was entitled to be granted longer time for obtaining financial closure.
He submitted that the Court should not deny it the relief which otherwise
it is entitled to for non-compliance with the condition which was really
impossible of compliance. He submitted that the conditions to give security
H deposit of 2% and to obtain financial dosun: within two month~ was
INDIA TIIERMALPUWERLTD. v. STATE[G.T. NANAVATI,J.] 941

imposed with a view to favour some and exclude others whom they did not A
like. He also submitted that no such condition was included earlier in
December when MPEB had issued Letters of Comfort. What is Important
to be noted is that Jindal did not furnish the security deposit nor had shown
its willingness to give 2% security depo~it if any longer time was given to
it for obtaining financial closure. It is, therefore, obvious that it did not
comply with one of the conditions of ~e-invitation of offer and, therefore, B
cannot complain if it's offer has not been considered for prioritisation and
grant of Escrow Coverage on that basis.

It was submitted by Mr. Dave, learned senior counsel appearing for
STI that MPEB having decided to provide Escrow Coverage to 4 or 6 IPPs, C
really no need had arisen for it to change that decision, even though it was
justified in entering into negotiations for reduction of tariffs. The Minister
of Power, Government of India had pointed out in his letter dated
12/25.6.1998 that it would be better to give priority to those projects which
offers the State the least tanffs for the power to be supplied to MPEB. He
had also suggested that it was necessary to establish a mechanism to quickly D
finalise those steps and select projects with least tariffs for being given an
Escrow facility urgently so as to ensure that in the 9th Plan they get the
benefit of the capacity addition from those projects. It was under these
circumstances that a fresh policy decision was taken and, therefore, no
purpose would have been served by retaining the selection earlier made
for recommending Escrow protection and going for negotiations for reduc- E
tion of tariffs. No other IPP except those who had been given Letters of
Comfort would have possibly participatt:d in such negotiations. Therefore,
it is not possible to agree with the contention that the priority fixed earlier
should have been maintained by MPEB.

F
Some of the learned counsel challenged the least tariff criteria as
'hoax' because it is not rational, as an 'excuse' because it was adopted to
favour some and rule out others and as 'unrealistic' as it is based upon
certain assumptions which are not valid. It is difficult to appreciate how
the least tariff criteria can be said to be hoax when it is based upon and
consistent with the notification issued under section 43A(2). To give G
priority to that project which will supply electricity to MPEB at a cheaper
rate far from being regarded as an hoax or as an excuse must be regarded
as a rational criteria because it will be more beneficial to MPEB and the
gem:ral public who are the ultimate consumers of the electricity. The
situation in which MPEB was placed at the relevant time justified adopting H
942 SCPREME COURT REPORTS [2000] 1 S.C.R.
A that l\:*eria and the Court cannot in such matters substitute its opinion
and say th't it would have been better if a different criteria had been
adopted. After the event it may be possible to visualise that it would have
been better if a difft:rent course was adopted or decision taken. But that
cannot render the decision already taken arbitrary or invalid so long as it
is taken bonafide and is based upon consideration of relevant aspects.
B Prioritisation could b.avc been done on the basis of the dates on which TEC
was sanctioned or it could have been on the basis of the date of sanction
given by the Financial Institutions. If, however, considering all the relevant
aspects MPEB thought it proper to priorities the projects on the basis of
least tariff criteria it cannot be said that thereby it acted in an arbitrary or
C unreasonable mann;:;r. It is also not possible to accept the contention that
the said criteria was adopted with a view to favour some and rule out others
as no material is available on record to justify such an inference. It was
submitted that least tariff criteria adopted by MPEB for deciding
prioritisation is unrealistic. Our attention was drawn to certain assump-
D tions on the basis of which the project cost was to be estimated and least
tariff was to be dett;rminated. Our attention was also invited to the report
of the Expert Committee which was constituted for tariff evaluation for the
improved offers submitted by IPPs. The said Committee had opined as
under:

E "CONCLUSION : - Based on the factors and assumptions as
brought out in para 3/N above, it can be stated that the project
cost as complied on Commercial Operation Date (COD) is not
realistic or accurate. Any subsequent tariff caleqlations based on
the unrealistic project cost are also un-reliable and unrealistic.
Given the set of assumptions, the resulting tariff for various IPPs
F
falls in narrow range and a change in any of the assumptions can
lead to a different tariff for the lPPs. Therefore such resulting
tariffs, should not be depended upon to arrive at any conclusions
or any subsequent decisions."

G The Cabinet Sub Committee in spite of the objections raised by Bhilai and
Bina had evaluated the offers on the basis of said wrong assumptions. It
was submitted that the decision taken by the Cabinet Sub Committee based
on unrealistic assumptions should be regarded as bad. We do not think
that it would be proper for this Court to examine in details the various
H assumptions as they are technical matters and moreover, the techno-
!NlJ!A TiiERMALPOWERLTO. v. STATEjG.T. NANAVATl,J.] 943

economic clearance was given by the CEA on the basis of such assump- A
lions. Catain assumptions had to be made while determining the project
Cost and inviting offers on the basis tht:reof. Once we find that there was
some valid basis for making these assumptions and that they are not
fanciful or arbitrary it would not be proper to invalidate the decision taken
on the basis of such assumptions. They were made applicable equally to
all. It was, however, submitted by Mr. Singhvi that the Foreign Exchange
B
Varia tion percentage fixed at 2.553 was very low and that has benefited
some of the IPPs with large foreign exchange equity participation. As
indicated in the minutes of the Cabinet Sub Committee meeting the rate
of foreign exchange variation was adopted on the basis of the advise of the
Ministry of Finance. Having considen:d all the relevant facts and cir- c
cumstances it is not possible for us to agree with the contention that the
least tariff criteria was not a good criteria as it was unrealistic and arbitrary.

As regards the application of the least tariff criteria for evaluating
the various revised bids for deciding prioritisation also there were some D
objections raised on behalf the appellants. Having gone through the
minutes of the met:ling of the Cabinet Sub Committee antl the relevant
facts and circumstances and on taking an overall view we find that the
decision to rncommend Maheshwar, Daewoo and Bina in respect of
Maheshwar Hyde! Project (82MW), Korba (East) Thermal Power Project
(1070 MW) and Bina Thermal Power Project (578 MW) cannot be faulted. E
The decision in favour of these projects appears to have been taken bona
fide and in overall public interest. That decision, therefore, did not call for
any interference by the Court and the High Court was right in upholding
that decision.

F
However, as regards Pench Thermal Power Project we find that it is
not a pit-head project and it did not have any appropriate coal linkage.
The coal linkage which was sugested by the State Government was neither
approved by the coal companies nor by the Railways. lts project cost was
also not properly evaluated and the cost of supplying water from the dam G
was not taken into consideration on the ground that the whole cost of the
dam is to be borne by MPEB. We need not go into the further details
regarding the merits and demerits of the Pench Project, as in view of the
remaining available Escrowable capacity we are diiecting MPEB to recon-
sidc::r its decision as to which remaining coal based project should be given
priority in recommc::nding it for Escrow Coverage. H
944 SUPREME COURT REPORTS (2000] 1 S.C.R.

A It was next contended by Mr. Nariman appearing for SPPL that right
from the beginning the Government of India and even the State Govern-
ment of Madhya Pradesh had accepted the policy of an optimum mix ~f
liquid fuel project, h:ydel project and coal based project. He submitkd that
while deciding prioritisation on the basis of lt:ast tariff criteria the Govern-
ment and the MPEB ought to have compared tht: tariffs within tht: fuel
B category and not between different fuels used. The MPEB also in its letters
dakd 24.7.1998 had declared that it would d..:cide prioritisation of projects
after considering an optimum mix of liquid fud projects, hydel projects and
coal bast:d projt:cts. He, therefore, submitted that the MPEB ought not to
haw exhausted all its Escrowable capacity by recommending one hydel
C project and three coal based projects for Escrow Coverage dlld financial
assistance. As disclosed by the decision of the Cabinet Sub Committee and
also by the order of the High Court produced before this Court no decision
to recommend any liquid fuel project on priority basis for Escrow Coverage
could be taken because of a stay order issued by the Madhya Pradesh High
Court. No doubt it was an interim order and after the same was vacated
D the State Government could have soon thereafter taken a decision. How-
ever, not taking a decision then cannot be regarded as sufficient to vitiate
the decision taken with respect to the hydt:l and thermal power projects.
To us it appears that the compulsions of the situation have prevented the
MPEB for not extending priority for Escrow coverage to any liquid fuel
project. The decision to give priority to the two coal based and one hydel
E power projects was not taken with a view to favour them. Nor does it imply
giving up an optimum mix policy.

In the result, the appeals filed by ITPL [out of SLP (C) Nos.
8654-8657/99), Jindal (out of SLP (C) Nos. 9796-9797/99), Bhilai (out of
F SLP (C) Nos. 10799-10802/99). SPPL (out of SLP (C) No. 14853/99),
Madhya Bharat (out of SLP (C) No. 14792/99) and GBL (out of SLP (C)
No. 9678/99) are dismissed and the appeals filed by STI (out of SLP (C)
Nos. 9770-9772/99) are partly allowed. The decision to give priority to
Pench is quashed and the MPEB is directed to take a fresh decision for
giving priority for Escrow Covt.rage after considering its Escrowable
G capacity and other relevant factors. Tht: MPEB shall do so within two
months from the date of this order.

R.K.S. Appeals dismissed
Partly allowed.