Rural Electrification Corporation-Power Finance Corporation merger on the fast-track

The proposal for the merger will be sent to the Law ministry for consultation this week. 
Image for representational purpose only.
Image for representational purpose only.

Racing against time to meet the divestment targets it has set for itself, the Union government plans to initiate formal processes for the merger of power sector firms Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) by December 15, Ministry of Finance sources say. The proposal for the merger will be sent to the Law ministry for consultation this week. 

“The process for the merger of PFC-REC is already on. This week, we will be sending the proposal to the Law Ministry for consultation. Once they clear it, it will go to the Core Group of Secretaries and then to Cabinet for the final nod.  We intend to send the final note to cabinet for approval by December 15,” a senior official from finance ministry said. 

The Department of Investment and Public Asset Management (DIPAM) has two merger proposals for power sector which it intends to complete by the end of this fiscal year. Apart from REC acquiring PFC, the government is also looking at NTPC acquiring Satluj Jal Vidyut Nigam (SJVN).

To speed up the process and cut down on procedural time, it selected ICICI Securities last week to advise and assist the ministry on the two deals. This will help it in the valuation process too. 

Six firms — Ernst & Young LLP, Deloitte Touche Tohmatsu, ICICI Securities, IDBI Capital Market and Securities, SBI Capital Markets and RBSA Capital Advisor LLP — had made presentations before DIPAM on November 26, on the two deals. 

DIPAM has to meet the disinvestment target of Rs 80,000-crore, out of which it has raised over Rs 32,000 crore from minority stake sales in state-run firms, and the follow-on offers of CPSE ETF and Bharat-22 ETF. Now, with the government already breaching the fiscal deficit target for this fiscal, there is more pressure on the ministry to complete its disinvestment target. 

“We already have internal consultations with PFC and REC. They have raised some technical and some legal issues for which we need the counsel of the Law ministry. We expect to formally initiate the process in December and to commence the process by February-end,” the official added.

Currently, PFC has a market valuation of Rs 26,880 crore, in which government has a 65 per cent controlling stake. Last month, REC had expressed concerns to the Power ministry that acquiring a controlling stake in PFC would not be beneficial and would weaken its credit profile. It had then suggested that going for a merger would be a better idea. 

News of a possible merger however, has dented the share prices of both companies. On Friday, both the stocks closed 6 per cent down – REC at Rs 100, and PFC at Rs 86.35. Apart from the merger announcement, investment bankers also highlighted the problem of crowding out of issues. The news on the merger came at a time when the CPSE-ETF third follow on offer was ongoing, which includes all the four stocks proposed for mergers.

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