PFC Becomes The Promoter Of REC

Power Finance Corporation Ltd. became the promoter of power financier REC Ltd. as it acquired the government’s 52.63 percent stake in the state-run peer along with its management control.

PFC is now working on appointing a nominee director on REC’s board, Rajeev Sharma, chairman and managing director at PFC, told reporters during a media conference in New Delhi today.

“We have become the promoter (of REC) and according to shareholders’ agreement, we will have a director on their board,” he said. “I will review continuously, and sit with their management to resolve stressed assets, common lending policies, common borrowing strategies from international market and other instruments so that we don’t compete with each other.” The decision to have a nominee director from PFC, according to Sharma, will be taken by the government. “It will be done soon.” he said.

PFC acquired the government’s 104 crore shares in REC at Rs 139.5 apiece, amounting to Rs 14,500 crore. While 70 percent of the deal was financed through cash inflows, the balance was met though debt, Sharma said, adding the merger process is expected to begin in the financial year starting April. The government has to give a road map and has to consult us about the merger, he said.

While Sharma said the acquisition will lead to a twofold jump in PFC’s consolidated asset book, income and profit, analysts are concerned about its capital adequacy ratio.

PFC’s tier-I capital adequacy ratio—equity capital to total risk-weighted assets—will fall below the required 10 percent after the deal, two banking analysts told BloombergQuint requesting anonymity. The minimum tier-I capital requirement for a non-bank lender is 10 percent, according to Reserve Bank of India’s norms.

The acquisition will also weaken PFC’s capital levels as it is buying the government’s stake in REC without raising any equity, according to Moody’s investor service.

Yet, Sharma remained optimistic. “Our capital adequacy ratio was 19 percent at the end of third quarter, tier-I capital was 16 percent and tier-II was 3 percent. I am sure we will be able to maintain the regulatory requirement of the RBI in the coming years also,” he said. “By maintaining our growth in business, our disbursements this year will be more than the last year,” he said in response to BloombergQuint’s query.

PFC has already raised Rs 5,500 crore as subordinate debt that will substantially increase the company’s tier-II capital, he said. “We are taking other measures to improve our capital adequacy ratio such as expediting state government guarantee loans so that the risk weight comes down to 20 percent. We are trying to expedite the commissioning of ongoing projects so that the risk weight comes down to 50 percent,” Sharma said, adding the company will also explore possibilities to increase its tier-I capital.