In order to meet the disinvestment target of 80,000 crore for this financial year, the Cabinet Committee on Economic Affairs has given an in-principal approval for the strategic sale of 52.63% stake in Rural Electrification Corporation (REC) to Power Finance Corporation (PFC) along with transfer of management control. The proposed deal is likely to fetch the government around ₹15,000 crores and after the closure of the deal, REC will become a subsidiary of PFC.

The proposed deal is similar to the one where Oil and Natural Gas Corporation (ONGC) acquired the government’s entire 51.11% stake in oil refiner Hindustan Petroleum Corporation last year for nearly ₹37,000 crores. The upstream state-owned oil behemoth financed the deal with market borrowing of ₹25,000 crores. Also, the proposed deal will be along the lines of government’s idea to create large public sector companies by consolidating companies based of common factors and functions.

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In an otherwise stressed sector, both REC and PFC reported robust profits in FY18 and paid hefty dividends to the government. The deal will require approval from the Competition Commission of India and Reserve Bank of India as both the companies operate in the same sector and are non-banking financial companies. The acquisition will increase the leverage of PFC and impact its return on assets and return on equity. The final modalities of the deal are being worked out by the government officials and the leverage of PFC is likely to be close to ₹15,000 crores.

While the acquisition is aimed at achieving the integration of power financing businesses of REC and PFC, the deal might cause value disruption in the power and renewable energy sectors as both the companies are main lenders to renewable energy sector. As at September-end, the government held 57.99% in REC and 65.64% in PFC. However, the government stake in REC came down to 52.63% after stake-sale through the exchange-traded funds.

Interestingly, PFC will not have to make any open offer to minority shareholders of REC after buying the government’s 52.63% stake in the company because it is a related party transaction. In fact, according to the Securities and Exchange Board of India takeover code, if a company acquires more than 25% in another listed company, then it has to make a mandatory open offer to minority shareholders to buy another 26% stake. But, last year after the ONGC-HPCL deal, the former was exempt from making an open offer to minority shareholders of HPCL.

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