PFC-REC merger explained: What it means for investors & key scenarios ahead

The PFC-REC merger is a structural consolidation, not a business overhaul. Here's what it means for investors, government stake rules and possible execution scenarios

PFC-REC merger news update

  On February 6, Power Finance Corporation (PFC) informed the stock exchanges that it has acquired 52.63 per cent of the Government’s holding in REC Limited (REC) as part of the two companies’' restructuring process.

 

The proposed merger of Power Finance Corporation (PFC) and REC Ltd, announced under the Union Budget 2026, was approved pursuant to 'in-principle' approval of Cabinet Committee on Economic Affairs.

 

"The Board of Directors of PFC took note of the budget announcement and accorded its in-principle approval for restructuring in the form of a merger of PFC and REC, while ensuring that, the merged entity continues to remain as a 'Government Company' under the Companies Act, 2013 and other applicable law," PFC said.

 

The merger, however, is shaping up to be more of a structural reorganisation than a transformational shift in business fundamentals, according to analysts at Emkay Global Financial Services.

 

Below is an explainer on what the PFC-REC merger means for investors, and how it could be executed.

Business fundamentals to remain unchanged

According to Emkay Global Financial Services the merger, by itself, does not materially alter the underlying business prospects of either PFC or REC. Both companies remain heavily exposed to India’s power sector, particularly state utilities and conventional thermal power projects.

 

"There is likely little scope in terms of efficiency gain, as these entities entail employee and establishment expenses of ~8-10bps of AuM," Emkay said.

 

Analysts further noted that any meaningful re-rating of the merged entity will depend less on corporate restructuring and more on a revival in state utility-led capital expenditure in thermal power, which remains the primary growth driver for both lenders.

 

Until such a capex cycle gains traction, the merger is likely to be operationally "business as usual", it said.  ALSO READ | Systematix sees life insurance sector to gain post-GST cut; check top picks

The government stake challenge

At current market prices, Emkay Global said a merger through a share-swap mechanism would leave the government with an estimated stake of around 42 per cent in the combined entity.

 

However, under the Companies Act, 2013, a government company is required to have more than 51 per cent government ownership.

 

Analysts at the brokerage outline three possible scenarios through which the merger could be implemented.

Scenario 1: Large buyback by PFC and REC

One option is a sizable buyback of shares by both PFC and REC, with the government choosing not to participate. This would effectively raise the government’s percentage holding without requiring fresh capital infusion.

 

While this route is balance-sheet neutral for the government, analysts cautioned that the scale of buybacks required could be large, potentially limiting capital available for future lending growth.

Scenario 2: Government capital infusion

The second scenario involves a substantial capital infusion by the government, likely into PFC, through a preferential share issuance. At current prices, this could involve an investment of roughly ₹35,000 crore, estimates Emkay Global, to restore government ownership above the 51 per cent threshold post-merger.

Scenario 3: Change in legal definition of government company

The third, and arguably most structural, option is a legislative amendment, the brokerage said.

 

The Economic Survey has already flagged the possibility of redefining a "government company" by lowering the minimum government stake requirement to 26 per cent.

 

If such a change is enacted, it would remove the need for buybacks or capital infusion altogether, making the merger mechanically simpler. However, this route depends on legislative action and may take longer to materialise, the brokerage said.  ALSO READ | Markets pricing in trade deal positives; buy the dips and hold: Analysts

Bank exposures to PFC, REC

As per Emkay Global, the government would manage regulatory forbearances to address concerns regarding lenders to the merged entity hitting the 'Single Party' exposure limit (20 per cent of net owned funds of the bank in case of infra exposure).

What investors should watch

For shareholders, the merger should be viewed as a structural consolidation rather than an immediate value-unlocking event, Emkay said.

 

In the near-term, stock performance of REC and PFC is likely to be driven by clarity on the merger mechanism, government ownership structure, and capital strategy.

 

Over the medium term, however, the real catalyst remains a pickup in power-sector investments, particularly in conventional thermal projects, which would directly support loan growth, asset quality, and earnings visibility for the merged entity.

 

For now, share prices of both companies are trading below the FY28E BV at ~16-17 per cent RoE (in a slightly-stressed scenario of yield compression and credit cost normalization) and ~5 per cent dividend yield. This is attractive, even ex-growth, as the asset quality situation is far superior, it said.

 

"As for preference between the two, the scheme of merger-led eventual share swap ratio will provide any arbitrage opportunity; until then, the investment case for both remains similar, except that from Q4FY26, REC has a much favorable AuM base of last year for delivering growth," Emkay Global highlighted.