Cabinet approves proposal to sell REC to PFC

The union cabinet has approved the sale of government’s entire 52.63 per cent stake in power sector financier REC Ltd to Power Finance Corporation Ltd, as part of government’s efforts to raise funds through divestment.

“The Cabinet Committee on Economic Affairs (CCEA), chaired by Prime Minister Narendra Modi on Thursday gave ‘in principle’ approval for the strategic sale of the Government of India’s existing 52.63 per cent of total paid up equity shareholding in Rural Electrification Corporation (REC) to Power Finance Corporation (PFC) along with transfer of management control,” according to a cabinet note.
“The transfer of assets is intended to achieve integration across the power chain, obtain better synergies, create economies of scale and enhance capability to support energy access and energy efficiency by improved capability to finance power sector,” the release added.  
Both are listed entities and a combination of the two may also allow for cheaper fund raising with increase in bargaining power for the combined entity, it added.
Both REC and PFC are central public sector enterprises under the ministry of power. At current market price, the government’s stake in REC is worth around Rs11,000 crore.
Finance minister Arun Jaitley had, in his 2017-18 budget, announced plans to merge PSUs with similar operation to achieve scale and efficiency.
The finance ministry is reported to have agreed to a power ministry proposal to make PFC the holding company and REC its subsidiary. This may not make much difference as the shareholding of REC will be with PFC even while the former remaining a separate entity.
Jaitley said he expected the deal to be completed by the end of the financial year. The modalities will be worked out by a committee comprising him, secretaries of the departments involved and Infrastructure Minister Nitin Gadkari, Jaitley added.
Last year, the government had sold its 51.11 per cent stake in oil marketing PSU Hindustan Petroleum Corporation Ltd to Oil and Natural Gas Corporation Ltd for Rs 36,915 crore. That. The government has raised Rs32,737 crore of the Rs80,000-crore divestment target so far this year.
REC’s Chairman and Managing Director PV Ramesh had earlier told BloombergQuint that a merger with PFC would be beneficial for the shareholders of the company. The government, however, announced a share sale.
The transaction, however, is likely to hurt PFC’s finances as it may have to raise debt to fund the deal, in which in turn may affect its profitability.