Centre's disinvestment plan to get a boost if REC-PFC merger happens

Senior power ministry officials, Dipam officials, and representatives from REC and PFC met Finance Minister Arun Jaitley last week, to discuss the merger proposals

The next big takeover of a government company by another is likely to get a bigger boost for the Centre’s disinvestment proceeds if Power Finance Corporation (PFC) is taken over by Rural Electrification Corporation (REC).

The power ministry, however, believes that PFC acquiring the government’s 58 per cent stake in REC makes more financial sense for both the companies. 

The Department of Investment and Public Asset Management (Dipam) is in favour of REC buying 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 stake in REC is valued at Rs 120 billion. Besides, the government is looking to get a premium over these valuations. In the case of REC acquiring PFC, the government would want a deal size upwards of Rs 200 billion, sources said.

Senior power ministry officials, Dipam officials, and representatives from REC and PFC met Finance Minister Arun Jaitley last week, to discuss both the proposals.

“The power ministry, after considering which deal would make sense for both companies, favours PFC acquiring the Centre’s entire stake in REC. Dipam has its own views, but will accede to the administrative ministry’s views,” said a senior official. The person, however, added there was no final decision as yet.

“Nothing has been finalised for now. The Cabinet note on this matter will take some time,” the official said. A final decision will be taken soon, and the proposal is expected to be ready for the Cabinet approval in a few weeks.

PFC is the power sector’s leading financier, which is currently battling bad loan threat from close to 14,000 megawatt worth of power assets. REC, on the other hand, has been at helm of the government’s key energy access projects, the recent being the ambitious Saubhagya project for 100 per cent household electrification.

“These institutions were set up for a specific mission, but over time, their activities have converged. Further, much of their traditional mandate, such as rural electrification, has been achieved with states driving it. Having multiple Institutions without a distinct mandate means higher transaction costs,” said Kameswara Rao, leader, energy, utilities & mining, PwC India.

“On the other hand, 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 power sector’s growth. In effect, it is time for a new institution with a mandate focusing on these emerging segments. A larger sector financial institution with a renewed capability is clearly a positive for the sector,” Rao said.

A look at the financial data of both the companies shows that as of end-fiscal year 2017-18 (FY18), while PFC had a larger market cap, REC was stronger in terms of cash position.

The Centre’s 2018-19 disinvestment target is Rs 800 billion. To date, Dipam has mopped up Rs 322 billion, including the latest tranche of central public sector enterprise exchange traded fund, which raked in Rs 170 billion. Any deal between PFC and REC would certainly increase the chances of reaching or even exceeding the target, just like the previous fiscal year.

In FY18, against a budgeted target of Rs 725 billion, Dipam amassed a record Rs 1 trillion. A big portion of that was Oil and Natural Gas Corporation’s blockbuster acquisition of Hindustan Petroleum, which garnered Rs 396 billion on its own for the government, and took Dipam to a record disinvestment realisation.

In REC-PFC, the Centre is hoping for a similar situation, where a single deal helps take them over the line.