Power Finance Corporation and Rural Electrification Corporation Move Toward Historic Merger
The boards of Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) have taken a significant step forward by granting in-principle approval for the merger of these two major public sector entities. This decision, made on Friday, aligns with the government's broader strategy to restructure and strengthen non-banking financial companies (NBFCs) in India.
Government Directive and Strategic Vision
The board's approval comes just days after Finance Minister Nirmala Sitharaman announced the restructuring of PFC and REC during her Budget speech on Sunday. In her address, Sitharaman outlined a clear vision for NBFCs in Viksit Bharat, emphasizing targets for credit disbursement and technology adoption. She stated that restructuring these entities is a crucial first step to achieve scale and improve efficiency within the public sector NBFC framework.
REC confirmed this development in an official exchange filing, noting: "In line with the above and based on the information presented as well as detailed deliberations in this regard, the board of REC has accorded its in-principle approval to proceed with restructuring in the form of a merger of REC and PFC and to formulate a detailed merger proposal in accordance with applicable laws and regulations."
Rationale Behind the Merger
Government officials have highlighted that the merger is driven by the evolving needs of India's power sector. With most villages now electrified, REC's original mandate has become less relevant in contemporary times. The merger aims to refocus efforts on addressing the substantial funding requirements across the power sector, including generation, transmission, distribution, and renewable energy projects.
Currently, REC finances the entire power sector and has diversified into other infrastructure areas such as roads, metro systems, and IT infrastructure. The combined entity will retain its status as a "government company" and is expected to feature a significantly larger balance sheet, enhancing its capacity to support large-scale infrastructure financing.
Historical Context and Financial Implications
This move builds on previous government actions. In March 2019, the government permitted PFC to acquire a 52.6% stake in REC for Rs 14,500 crore, effectively making REC a subsidiary of PFC. This transaction allowed the Centre to classify the funds as "disinvestment receipts," aiding in meeting its annual receipts target.
Both PFC and REC are public sector enterprises operating as non-banking infrastructure finance companies. Their merger is seen as a strategic consolidation to bolster the NBFC structure in India, ensuring more robust financial support for critical infrastructure projects.
Market Reaction and Future Outlook
Following the announcement, market reactions were mixed. REC's share price declined by 3%, closing at Rs 373 on the Bombay Stock Exchange (BSE), while PFC's share price saw a modest increase of 1%, ending at Rs 419. These fluctuations reflect investor sentiment as the market digests the implications of the proposed merger.
The merger proposal will now move into a detailed formulation phase, adhering to all applicable laws and regulations. This process is expected to outline the operational and financial integration of the two entities, paving the way for a more efficient and powerful financial institution dedicated to fueling India's power and infrastructure growth.
