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12. Non renewal of Central Government approval for the Baspa Project under section 10(23G) of the Income Tax Act, 1961 beyond FY2004 may affect our cash flows Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, GOI, has granted JHPL’s Baspa project approval under section 10 (23G) of the Income Tax Act, 1961 vide Notification no. 217/2003 dated September 12, 2003. This approval is valid upto March 31, 2004 only and the Company has made an application for its renewal to CBDT. In the event the Government decides not to renew this benefit under section 10 (23 G), there may be increase in cost of debt and it may have an adverse impact on our cash flows and profitability if not reimbursed by HPSEB in terms of the PPA, in a timely manner or at all. For further details, please refer to the section titled “Tax Benefits” on page 176 of this Draft Red Herring Prospectus.

13. Withdrawal of 10 year Tax Holiday in block of first 15 years under section 80IA of the Income tax Act, 1961 may adversely affect our liquidity The Company is entitled to the benefit of a 10-year tax holiday period during the block of first 15 years under section 80IA of the Income Tax Act, 1961. The Company is availing of this benefit in first 10 years of operations commencing from COD for the year ending March 31, 2004. In the event this tax holiday is withdrawn the Company shall be liable to pay income tax as applicable in those years, which may adversely affect Company’s liquidity until the same is reimbursed by HPSEB.

14. There are number of outstanding litigation against us, some of our Directors, Promoters and our group companies We, along with our Directors, Promoters and group companies are defendants in legal proceedings incidental to our business and operations. Specifically, there are several cases for compensation pending against us on various accounts including damage caused to property or claims for higher rate of compensation for land acquired under the Land Acquisition Act, 1894. These legal proceedings are pending at different levels of adjudication before various courts and tribunals. Should any new developments arise, such as a change in Indian laws or rulings against us, our promoters and group companies, by appellate courts or tribunals, we may need to make provisions in our financial statements, which could increase our expenses and our current liabilities. Furthermore, if significant claims are determined against us and we are required to pay all or a portion of the disputed amounts, it could have a material adverse affect on our business and profitability.

For more information regarding litigation involving our directors or us, our Promoter, and certain other listed companies promoted by our Promoter, please refer to the section titled "Outstanding Litigation and Material Development" on page 120 of this Draft Red Herring Prospectus.

15. Contingent Liabilities as on September 30, 2004

We face contingent liabilities, including:

–  –  –

If any of these contingent liabilities materializes, our profitability could be adversely affected. For more details of our contingent liabilities, please refer to the section titled “Financial Statements” on page 150 of this Draft Red Herring Prospectus.

–  –  –

We have provided an indemnity in favour of the GoHP. Under this indemnity, the Company shall be fully responsible for any damage or loss arising out of the construction, operation or maintenance of the Power Plant to any property or person and has also undertaken to indemnify the GoHP on such account. In the event of such loss or damage, the Company may face claims for loss or damage from GoHP.

17. Lease terms of part of the land on which the Power Plant and associated facilities are located have expired and are pending renewal The lease term in respect of the lands, descriptions of which are given below, have expired as indicated below against each land. Until the renewal applications made by the Company to GoHP is granted, the Company is continuing to occupy these lands without a valid lease agreement in force between itself and GoHP.

The details of the lands for which the lease period has expired is indicated below

–  –  –

In the first three cases above, prior to the respective lease deeds expiring, the Company, vide its letter dated December 26, 2003, has applied for renewal of the lease term by a further period of ten years. In the last case, prior to the respective lease deeds expiring, the Company, vide its letter dated January 19, 2005, has applied for renewal of the lease term by a further period of ten years.

Non-renewal of these lease agreements or the increase in the lease rentals payable by us may affect our operations adversely.

–  –  –

The consent, vide letter No. EPPCB/JP-Baspa-II, HEP, Kinnaur/2003-/9539-44 dated January 9, 2004 issued by HP State Environment State Pollution Control Board, Shimla under the Water (Prevention and Control of Pollution) Act, 1974 and Air (Prevention and Control of Pollution) Act, 1981 to operate the Power Plant was valid up to March 31, 2004. The Company has, vide its letter dated March 13, 2004, applied for renewal of the consent. In the event, the consent is not renewed, the Company may have to face the civil and criminal penalties provided under the said Acts and may also have to suspend operations of the Power Plant.

19. JAL, our promoter, has interests in other companies that are engaged in businesses that are similar to ours and that may compete with us in the future Our promoter, JAL, which will hold approximately 60% of our equity shares after the completion of the Offer, has a 100% subsidiary Jaiprakash Power Ventures Limited, through which it is setting up the 400 MW Vishnuprayag HE project (to be operational by 2006), and a 100% subsidiary Jaypee Karcham Hydro Corporation Limited, through which it is setting up the 1000 MW Jaypee Karcham Wangtoo HE project (to be operational by 2010). As a result, in future, there may be conflicts of interest between these ventures of JAL in addressing business opportunities and strategies.

20. The business is subject to complex government regulations and changes in these regulations or in their implementation could adversely affect our results of operations Our business is subject to complex regulations, both local as well as central government, supervised by multiple regulatory authorities and government bodies such as the CEA, HPSEB, HPERC, etc. To conduct our business, we must obtain licenses, permits and approvals for our plant. We cannot assure that we will be able to obtain and comply with all necessary licenses, permits and approvals for our plant. If we cannot comply with all applicable regulations, our business prospects and results of operations could be adversely affected.

21. The Company is entitled to a fixed return on equity under the PPA for tariff purposes Under the PPA, return on equity is fixed at 16% p.a. for tariff purposes, in addition to incentives for plant availability with a cap of 2% p.a. and incentives for secondary energy with a cap of 10% p.a. return on equity.

Accordingly, variation in our profitability accruing through the PPA would be limited on account of the above.

Also, please refer to the section titled “Risk Factors – Internal Risk Factors – I” on page xi of this Draft Red Herring Prospectus.

–  –  –

The PPA provides for reimbursement of increase in O&M costs at the rate of 6% p.a. for first 10 years from COD and thereafter the same is linked to WPI and CPI. Any increase in our O&M cost over and above the reimbursable amount may adversely impact our profitability.

23. The shareholding of our Promoters in JHPL is pledged to our Lenders Originally, JAL had pledged 356 million shares with the Lenders, out of which 61 million shares have been depledged for the purpose of offering the same in this Offer. Consequently, 295 million shares (60.08% of the paid up share capital of the Company) of the Promoters held in the Company are pledged to the Lenders of the Company as a collateral security. In the event of default of payment to the Lenders by JHPL, the pledge could be invoked by the Lenders. The PPA stipulates that a minimum of 51% of our equity is to be held by JAL. If the shareholding of JAL falls below 51%, the PPA may be terminated. In such an event, our business operations could be adversely impacted.

Further, it is a term of the above mentioned pledge that in case the market value of the pledged shares after this Offer and listing of the shares falls below Rs. 3,560 million (to be reviewed every six months), to bridge the shortfall, either the Company will create a reserve within a period of three months or the promoter will furnish a letter of credit/ bank guarantees. In case the shortfall is not bridged by our Promoter, the cash flow of the Company may be impacted.

24. Any labour unrest at our Power Plant could adversely affect our operations and profitability Our workers are presently not organized under any trade union. In the event of any labour unrest at the Power Plant, our operations and profitability could be adversely affected.

25. Lenders’ rights under the loan agreements may adversely impact our business The Lenders have certain rights under the loan agreements signed with the Company, which, inter alia, include (i) obtaining a non-disposal undertaking from the Promoters regarding maintaining their equity shareholding in the Company to the satisfaction of the Lenders; and (ii) right to appoint one or more nominee/s on the Board of Directors of the Company during the currency of the loan.

The Lenders also have certain powers including (i) restricting the Company from undertaking any new projects or making any investment or taking any asset on lease without obtaining prior approval of the Lenders during the currency of the loan; (ii) restricting the Company from undertaking expansion / diversification / modernisation plans without obtaining prior approval of the Lenders and without proper tie-up of funds; as well as investment in associate / allied / group concerns without prior approval of the Lenders; and (iii) restricting the Company from paying dividend without written approval of the Lenders. In the event the Lenders refuse to grant the requisite approvals, such refusal may adversely impact the business of the Company.

26. The entire cash flows of the Company are retained in a Trust and Retention Account maintained with Lenders, the disbursements / withdrawals out of which require prior consent of the ICICI Bank Limited, the lead lender.

All our cash inflows are deposited in a separate account, being a trust and retention account (TRA), maintained with ICICI Bank, the lead Lender. Such account is required to be maintained during the entire tenure of the long term loans. The funds so available in TRA are utilized in accordance with the provisions of TRAA, which lays down priority for operation and maintenance (O&M) of the power plant, followed by ‘debt service’ in accordance with an ‘Operations budget’ submitted by the Company duly approved by Lenders Engineers and the lead Lender.

Subsequent to the utilization of funds for such budgeted expenses, the TRAA envisages creation of reserves equivalent to the projected expenditure during specified period on various heads. For details, please refer to the section titled “Management Discussions and Analysis of Operations and Financial Conditions” on page 55 of this Draft Red Herring Prospectus.

–  –  –

27. The business of the Company is seasonal and a steady revenue through the year cannot be assured Our Power Plant is dependent on the water flow of river Baspa. The water flow increases during the months of May to September each year due to snow melting and monsoons. As a result, approximately 70% of our generation was during this period in FY2004. This trend is likely to continue in the future. Our business being seasonal in nature, the profitability and revenues will vary quarter to quarter for each financial year.

External Risk Factors

1. The business of the Company is dependant upon the discharge of water from River Baspa The capacity of the Power Plant has been designed based on the hydrological data (water discharge from River Baspa) for the period from 1977-78 to 1992-93. Baspa being a snow fed river, water availability depends entirely on the melting of the snow on the higher altitudes and rainfall in the catchment area. Inadequate availability of water may result in reduced generation of our Power Plant, which may affect the operations of the Power Plant.

2. Risk arising due to geological uncertainties

Extensive geological investigation had been carried out by the State Government before taking up civil works for the Project. While past studies have not indicated any adverse geological features such as major faults, thrusts or highly stressed rock mass and the project has been completed and commissioned, occurrences of such adverse geological conditions in future cannot be ruled out.

3. Natural disasters could disrupt our operations and result in loss of revenues and increased costs.

Our Power Plant requires a constant supply of water from the River Baspa to continue to operate and is vulnerable to man-made and natural disasters such as, explosions, earthquakes, storms and floods as well as to terrorist attacks or other enemy actions. The occurrence of a man-made or natural disaster, terrorist attack, enemy action or other accidents could disrupt the operations of our Power Plant and result in loss of revenues and increased costs. During the construction phase of the Project in July 2000, there was an unprecedented flash flood on the night of July 31, 2000 causing widespread damage to the approach road and bridges to the Power Project facilities thereby adversely affecting the implementation schedule of the Power Project. There can be no assurance that the insurance coverage we maintain for these risks will be adequate to compensate us for all damages and economic losses, which we may suffer as a result of any such events.

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