New Delhi: State owned Power Finance Corporation (PFC) on Thursday became the promoter of REC Ltd as it acquired the management control of the power sector lender, PFC chairman and managing director Rajeev Sharma said.
The ₹14,500 crore payment to the government for its 52.63% equity stake and subsequent transfer of REC shares to PFC on Thursday cleared the decks for the creation of a $80-billion lending institution for the Indian power sector. The REC’ shares were acquired at a per equity share price of ₹139.50. While 70% of the deal was financed through cash inflows, the balance was met through debt.
Sharma said the deal would accord PFC a higher strategic importance, making it the second largest government-owned financial firm in India after State Bank of India, based on market capitalisation.
The consolidation will help in faster resolution of stressed assets, given that PFC and REC have a higher representation in the lenders consortium, he added. Also, it will reduce competition, while leveraging synergies and achieving economies of scale.
This comes in the backdrop of around 66 gigawatts (GW) capacity facing various degrees of financial stress.
The consolidation will also help raise resources at competitive costs, improve asset quality and assist state utilities in improving their performance.
Going forward, PFC plans to complete the merger in the next fiscal year.
According to Moody’s Investors Service, PFC and REC had total reported assets of ₹2.86 trillion and ₹2.46 trillion, respectively.
Disinvestment proceeds from the stake sale have helped the National Democratic Alliance (NDA) government exceed its disinvestment target of ₹80,000 crore for 2018-19. Disinvestment receipts touched ₹85,000 crore last week.
“PFC’s strategic importance to the government will further increase upon completion of the acquisition, as the combined entity will become the biggest non-bank finance entity in which the government holds a controlling stake. In addition, it will account for the majority of financing for state power utilities. State power utilities in turn still account for a material portion of power generation capacity in India,” Moody’s said in a statement on Wednesday.
Thursday’ announcement comes in the backdrop of Moody’s Investors Service retaining the Baa3 issuer ratings of PFC and REC. Moody’s retained the previous stable outlook for the two lenders after placing them “on review for downgrade” in December. Baa3 is the lowest investment grade.
The Cabinet Committee on Economic Affairs (CCEA) in December approved the sale of the government’s 52.63% stake in REC to PFC, along with management control.
The transaction comes at a time when power has emerged as one of the highly stressed sectors, with close to ₹1 trillion of loans having turned bad or been recast. State distribution utilities have also been hit by issues such as low collection, increase in power purchase cost, inadequate hike in electricity tariffs, inadequate subsidy disbursement and increasing dues. Besides, poor payment records of discoms have affected power generation companies and led to rising stress in the banking sector.