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The increasing demand of electrical power and continuous depreciation of conventional energy resources like oil, gas and coal, have facilitated the researchers to think over distributed electricity generation and consumption from the renewable sources like mini/micro hydro, biogas, wind etc., Three-phase self excited induction generator (SEIG) seems to be a prospective player for generation of low cost, environmental friendly and efficient source of electricity. Advantages of induction generator over alternator is its low cost, easy construction, ruggedness, maintenance free structure, lesser complex control, self protection against faults and good dynamic response. SEIG produce power amidst varying demand of reactive power and poor voltage and frequency regulation under varying speed and load respectively. The paper proposes a VSC based controller for SEIG coupled with uncontrolled prime mover for maintaining the real power at SEIG terminal constant to maintain fixed frequency and reliving the burden of supplying of reactive power to load. The VSC meets the demand of dynamically varying reactive power demanded by load and dissipates excess power at bleeder across its d.c. bus to maintain the real power at SEIG terminals. The regulated voltage and frequency at the terminals of SEIG feeding 3-phase, 4-wire load with neutral current compensation has been demonstrated through simulation results. The proposed scheme suits well for low capacity isolated power system fed through hydel power distributed generation with an uncontrolled turbine driving the SEIG, The proposed scheme is simple and easy to realize through digital processors and cost effective. Performance of the system is simulated in Matlab/Simulink.