The government has proposed that Power Finance Corp acquire REC in a Rs 14,000- crore deal, a surprising reversal of the previous plan of REC taking over PFC.
The deal would require approval of the Cabinet, which may consider the proposal on Wednesday, sources familiar with the development said. The proposal, which is similar to Oil & Natural Gas Corp’s acquisition of Hindustan Petroleum NSE 0.24 % Corp last fiscal year, is part of the government’s Rs 80,000-crore disinvestment target, of which it has been able to mobilise only Rs 32,247 crore so far in fiscal 2018-19.
Until last week, the government was considering acquisition of PFC by REC followed by a merger, since it would have fetched more money given the government’s larger stake in the former, which also has a higher market value. The change in the proposal is backed by feedback from within government departments, including the administrative power ministry, sources said.
“The power ministry had flagged concerns of the impact of the deal on two sound Navratnas in the otherwise ailing power sector, but said if the finance ministry still wants to carry the exercise, then PFC should acquire REC,” a senior government official said.
The power ministry has at various levels voiced concerns about operational and administrative issues that might crop up post the acquisition of one company by the other while the finance ministry is of the view that the issues could be managed to create a large financing company for the power sector rather than having two staterun firms competing in the same space.
The government owns 58% of REC (formerly Rural Electrification NSE -0.86 % Corp) and 66% of PFC. Experts said the net worth of the acquiring company would come down drastically as it would have to finance the deal. The capital adequacy ratio of PFC is 17.7%, while that of REC is 16.7% against the central bank guidelines of 15% for.
The deal between the NBFCs would require the RBI’s approval. Experts are apprehensive about the deal, saying it might cause value disruption in the power and renewable energy sectors. PFC and REC are currently the prime lenders to renewable energy projects.
Feedback Infra Group chairman Vinayak Chatterjee said with the gradual withdrawing of banks, NBFCs and others from infrastructure financing, the view that the country needs sectoral developmental financial institutions is gaining momentum.
“Under the current circumstances, it would be useful for the country to have a standalone power finance corporation NSE -2.00 % . But REC is an implementing organisation. Merging of a finance company and an implementing company may not be appropriate and in my view, they should be kept separate,” he said.
The PFC-REC deal is being considered on the lines of the acquisition of the government’s entire 51.11% stake in oil refiner HPCL by state-owned ONGC in 2017-18. The government bagged Rs 36,915 crore from the stake sale. The government is also looking at a similar deal between NTPC and Satluj Jal Vidyut Nigam.