Even a year after Power Finance Corporation acquired REC for Rs 14,500 crore, the government has no road map on the merger of the two state-run firms that operate in the same space, top officials familiar with the matter said. The two infrastructure finance companies dedicated to power sector are likely to continue operations as separate entities at least in the near term, mainly due to apprehensions that their consolidation may lead to financing issues in an already troubled power sector, they said.
PFCNSE -3.31 % had completed the acquisition of REC in March last year. But the parent firm does not have management control of REC even though its director – commercial PK Singh is on the board of the subsidiary firm. This defies the logic of the divestment programme kick-started to merge PSUs where synergies existed, some investors said. Asked about the proposed merger, power and renewable energy minister R K Singh told ET on Monday, “The issue is under examination.” He did not divulge any further details.
Sources said the government is now considering merits of concerns raised by a section of investors that merging the two companies may reduce financing in the power sector that contributes most to the over Rs 9 lakh crore stressed assets in the banking system. They said the power ministry had flagged possibility of such issues before the deal. The share purchase agreement of the PFC-REC acquisition is silent on merger but talks about giving complete management control of REC to PFC, sources said.
This has yet to happen. The Public Enterprises Selection Board (PESB) recently advertised vacancy for REC chairman and managing director post even though technically it is no longer a government company. “There was logic in finding synergies in PSUs and merging them, but all the pros and cons must have been evaluated before the acquisition took place, particularly in case of sectoral financiers like PFC and REC which have big roles in their sector,” a former bureaucrat said on condition of anonymity.
Before the divestment, PFC and REC could each borrow up to 20% of a bank’s net worth from that bank. Post divestment, their combined credit exposure limit has been revised to 25% of a bank. Once they merge, the combined entity will be able to borrow only up to 20% of net worth from one bank, sources said. Deloitte, which was appointed as consultants post acquisition, had suggested merger of the two companies. Also, the Department of Investment and Public Asset Management had advocated for a common chairman for both the companies to facilitate the merger, sources said.
Similar to the case of ONGC’s Rs 36,915 crore buyout of HPCL, PFC-REC deal helped the government meet its disinvestment target of Rs 80,000 crore last year. While ONGC and HPCL, too, continue to operate as companies with different boards, they are not competitors.
