Cabinet okays Power Finance Corp's takeover of Rural Electrification Corp

The Centre's stake in PFC is valued at nearly Rs 160 billion, while its stake in REC is valued at Rs 120 billion

The Cabinet Committee on Economic Affairs (CCEA) on Thursday gave an in-principle approval to the strategic sale of the Centre’s 52.63 per cent holding in Rural Electrification (REC) to the Power Finance Corporation (PFC), along with transfer of management control. The government has a total 58.3 per cent stake in REC, remainder of which is part of Bharat 22 ETF and CPSE ETF. The move will help the Centre meet its disinvestment target of Rs 800 billion for FY19.

The government said the acquisition intends to achieve “integration across the power chain, obtain better synergies, create economies of scale, and have enhanced capability to support energy access and efficiency to finance the power sector. It may allow for cheaper fundraising, with an increase in bargaining power for the combined entity.”

Finance Minister Arun Jaitley said he had announced in the Union Budget FY19 that multiple public sector enterprises working in one space should be merged or acquired. “This is on the same line. During the consultations, the committee of ministers accepted the proposal of the power ministry, which wanted PFC to be the holding company,” he said. Jaitley said the transaction would be over by the end of the financial year. However, he did not comment on the valuation.
 

“The PFC-REC deal will lead to synergies. They are now competing in the same space. This drives up the cost of borrowing for them. We are expecting that to reduce,” said a finance ministry official after the meeting.

Business Standard had reported on Thursday that the power ministry believes PFC's acquisition of government’s stake in REC makes more financial sense for both the companies. Officials in the Department of Investment and Public Asset Management (DIPAM) had backed a proposal by REC to buy the Centre’s 65.6 per cent stake in PFC. The Centre’s stake in PFC is valued at nearly Rs 160 billion, while its 58.3 per cent stake in REC is valued at Rs 120 billion. 

The government will want to get a premium on the deal. PFC’s closing cash and cash equivalents, as of March 2018, stood at Rs 5.37 billion. Senior government sources said the disinvestment target will be met, and will help the Centre control its fiscal deficit at the targeted 3.3 per cent of the gross domestic product GDP.
 

PFC, the power sector's leading financier, is battling threats from non-performing power assets close to 14,000 Mw. REC, on the other hand, has been at the helm of the Centre's key projects. The recent being the ambitious Pradhan Mantri Sahaj Bijli Har Ghar Yojana or 'Saubhagya' project for 100 per cent household electrification.

“After the transaction, these institutions would be very positive for the power sector. There will be one big agency, having exposure to generation, distribution, and the intermediaries in supply as well,” said K K Mittal, capital markets expert. He further added that while one financing agency for the sector bodes well, issues such as coal supply, distribution losses, etc need to be resolved.

Kameswar Rao, leader, energy, utilities & mining, PwC India, said there is a growing demand to fund new areas such as transmission links for distributed renewable projects, electric mobility, hybrid-storage projects etc., which are key to the sector’s growth. 

Apart from the PFC-REC deal, another tranche of the successful Bharat 22 ETF, and a few other deals, including the sale of Air India’s ground handling unit are in the works.

Sources also said the Centre is still considering NTPC taking over the Centre’s 63.7 per cent stake in SJVN. “The HP government, which owns 26.78 per cent, has reservations. We're trying to understand their issues. So, nothing is certain,” said a finance ministry official.

In FY18, DIPAM raked in a record Rs 1 trillion, against a target of Rs 725 billion. A big portion of this was ONGC’s acquisition of Hindustan Petroleum, which garnered Rs 396 billion. In the PFC-REC deal, the Centre hopes for a similar situation, where a single deal helps take them over the line.

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• Nod for implementation of Shahpurkandi dam project on the river Ravi in Punjab. For this, central assistance of Rs 4.85 billion to be provided 
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• Govt contribution to NPS to rise to 14%
• Nod to revised model MoU between FIU of India and other nations 
• Approval for India-Zimbabwe pact on cooperation in geology, mining 
• Gives ex-post facto approval for signing MoC between India, Kanagawa Prefectural Govt of Japan