The Union Cabinet has given its approval to a scheme that will allow power distribution companies (discoms) in select states to convert their debt into state bonds, as well as roll out a host of steps to improve efficiency at power plants.



This will ensure struggling discoms can shake off years of losses and start on a path to profitability.



Power Minister Piyush Goyal said that power discoms in several states had been severely mismanaged, resulting in a debt burden upward of Rs 4 lakh crore. This has taken a toll on the power as well as bank sectors.



The plan, called Ujwal Discom Assurance Yojna (UDAY), will shift 75 percent of discoms debt burden from their to states' balance sheets and this will be result in interest cost savings to the tune of 3-5 percent.



States can sell the balance 25 percent as state-backed bonds. State government's power bonds will carry interest rates of g-sec plus 50 basis points.



The government is in talks with states and ratings agencies and the debt takeover will not affect states' fiscal headroom available under the FRBM Act.



The aim of the restructuring package would ease financial burdens of state discoms, bring down their costs as well as ensure timely tariff revision for them, Goyal said.



The government will sign individual memorandum of understanding (MoU) with each state.



Steps the government will take to improve operational efficiency include swapping of coal linkages, monitoring aggregate technical and commercial losses (AT&C) as well as focus on feeder separation and smart metering in states.



The government will also moot the topic of quarterly revision of tariffs with state electricity regulators.



"All states were on board and were keen on rehabilitation of discoms," coal secretary Anil Swarup, who was privy to the discussions, exclusively told CNBC-TV18, adding that as part of the package, the government would look to streamline coal linkages by increasing supply to more power-efficient plants.



The government has outlined a target of bringing down losses at discoms to zero by 2019. Providing 24/7 power to every home by 2019 was one of its key electoral promise.

More to come.