As things stand, the Centre’s stake could slip well below 51% after a merger, affecting the resultant entity’s status as a government company.
The Centre may need additional equity worth Rs 16,000-17,000 crore in the merged entity so its stake remains above the threshold for classification as a government company, said the people. “Currently, a merger scheme is being prepared in which one option being weighed is that if the government needs to infuse equity, how much that would be,” said a government official. The government owns 55.99% of PFC but doesn’t directly own stake in REC.
Scale & Flexibility
PFC, though, owns 52.6% in REC, formerly Rural Electrification Corp. REC’s public shareholders will be issued new shares in the combined entity, leading to stake dilution for the Centre.
The government had said in the February 1 budget that it seeks “to achieve scale and improve efficiency in public sector NBFCs (non-banking finance companies). As a first step, it is proposed to restructure Power Finance Corp and REC.”
The boards of both companies subsequently approved a merger plan, stating that the new entity will remain a government company, clearing the air over ownership. The move appears to have enthused investors in PFC, but not so much those of REC. PFC shares have surged 8% since the budget announcement, while REC’s have fallen about 2.75%.A merger could potentially create a larger, more efficient lending institution with greater scale and financial flexibility, although details of the structure and operational aspects of the integration remain to be spelled out. The combined net worth of the two stands at more than Rs 1.7 lakh crore.
The two will look to engage advisers in two weeks to work out the merger contours. Fund infusion requirements will become clearer when the valuations of PFC and REC are determined by external experts. Some brokerages have pegged this to be as high as Rs 30,000 crore.
REC didn’t respond to queries. PFC did not offer any comment on the matter. According to the Companies Act 2013, a government company means any company in which not less than 51% of the paid-up share capital is held by the Centre.