Power cables and telephone lines hang from a utility pole. (Photographer: Amanda Mustard/Bloomberg)  

Cabinet Approves Sale Of Government’s Stake In REC To PFC

The cabinet approved the sale of government’s entire 52.63 percent in power sector financier REC Ltd. to state-run peer Power Finance Corporation Ltd. as it looks to mop up funds through such a deal for the second straight year to meet its divestment target.

The Cabinet Committee of Economic Affairs has given its in-principle approval for the strategic sale of 52.63 percent REC to PFC—both public listed entities—along with transfer of management control, Finance Minister Arun Jaitley said in a media briefing. “This was announced in the 2017-18 budget that if in one space there are multiple PSUs then their consolidation, acquisition or merger will happen. In this case the cabinet has approved the acquisition model.”

In the finance ministry, we agreed to the proposal given by the power ministry. They wanted PFC to become the holding company and REC a subsidiary. It doesn’t make a difference because they will be part of the same managerial setup. The two will remain separate companies. The shareholding of one will be controlled by the other so that there’s a synergy in their lending policy.
Arun Jaitley, Finance Minister

Jaitley said he expected the deal to be completed by the end of the financial year. The modalities will be worked out by a committee comprising him, secretaries of the departments involved and Infrastructure Minister Nitin Gadkari, Jaitley added.

At the current market price, the government’s stake in REC is worth around Rs 11,000 crore.

The deal mirrors the government’s sale of its 51.11 percent stake in fuel retailer Hindustan Petroleum Corporation Ltd. to Oil and Natural Gas Corporation Ltd. for Rs 36,915 crore in the last financial year. That helped the Narendra Modi government exceed the divestment target in 2017-18, but also forced India’s largest oil explorer to raise debt for the first time. So far this year, the government has raised Rs 32,737 crore of the Rs 80,000-crore divestment target.

REC’s Chairman and Managing Director PV Ramesh had earlier told BloombergQuint that a merger with PFC would be beneficial for the shareholders of the company. The government, however, announced a share sale.

Both PFC and REC are publicly-listed ‘Navratna’ companies under the Ministry of Power. While REC provides financial assistance for power generation, transmission and distribution, PFC is one of India’s largest non-banking financial firms with a focus on power infrastructure.

The transaction may also hurt PFC’s finances as it may have to raise debt to fund the deal, in which case higher interest costs may eat into the state-run lender’s profit.

Also read: PFC’s Buyout Of REC Will Hurt Its Capital Buffers

PFC’s cash on books stood at Rs 1,800 crore as of September, according to its exchange filing. Also, its investments on books were worth Rs 2,800 crore—the key ones being bonds of Andhra Bank Ltd. worth Rs 853 crore, and Rs 372 crore and Rs 589 crore investments in Coal India and NHPC, respectively. It’s not clear whether PFC will liquidate such investments to fund the deal.

In terms of operational performance, however, REC fares better than PFC. The cost of funds of REC stood at 7.28 percent compared with 8.09 percent for PFC as of September. The lower the cost of funds, the better is the ability to improve net interest margin. The net interest margin for REC is about 60 basis points higher than PFC’s.

The gross non-performing loans of PFC stood at 9.67 percent as of September. That compares with a gross NPA of 7.92 percent for REC.