REC suggests transferring PFC's ownership of Co. to PGCIL, both stocks down

15 Jul 2022 , 01:42 PM

The government should think about selling Power Finance Corporation’s interest in the company to Power Grid Corp. of India, according to the state-run REC Ltd.

In the last week of June, REC proposed that a non-banking public sector business buy out PFC’s ownership part in the company in a presentation to the power ministry.

The possibility of PGCIL acquiring PFC’s stake in REC was considered at the meeting, which was presided over by RK Singh, minister of power and renewable energy.

A senior administrator informed ET that the power ministry has ordered REC to submit a proposal.

To combine the two lenders for the electricity industry, In March 2019 PFC paid Rs14,500 crore for the government’s 52.6% holding in REC. In PFC, the government owns a 56% stake.

Due to worries that it would limit finance for the electricity sector, the PFC and REC merger has hit a roadblock. According to REC, the merger will not have any effects on lending because PGCIL is not in the loan sector, according to a power ministry official.

Prior to the purchase of the share, PFC and REC each had access to up to 20% of the net worth of a bank. A bank’s total credit exposure limit has been revised to 25% of net worth after PFC purchased a controlling interest in REC.

The merged entity’s capacity to lend will be constrained once it can only borrow up to 20% of its net value from a bank after the merger.
The electricity ministry had opposed PFC’s purchase of the government’s holding in REC in 2018. The ministry had argued that the action would harm the two strong Navratnas in the otherwise failing sector.

Additionally, it had forewarned the Department of Investment and Public Asset Management (Dipam) that after the sale, operational and administrative problems would arise.

However, Dipam had stated that rather than having two central public sector units fighting for the same market share, such problems may be solved by creating a sizable finance firm for the power sector.

PFC and REC continued to operate as distinct organizations after the transaction.

After the acquisition, Deloitte was hired as a consultant and advocated for the merger of the two businesses. DIPAM has also argued in favour of having a single chairman oversee both businesses in order to expedite the merger.