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Power ministry fears merger likely to hurt PFC, REC

The finance ministry proposes to mop up Rs 14,000 crore through an acquisition deal between Power Finance Corporation (PFCNSE 3.13 %) and Rural Electrification Corporation (REC), but the power ministry is concerned that the move will hurt two sound navratnas in the otherwise ailing sector
The power ministry is concerned about operational and administrative issues that might crop up after the proposed deal, said a senior government official.
However, the finance ministry is of the view that any such issues can be managed to create a large financing company for the power sector rather than having two central public sector units competing in the same space, he said.
The ministry has at various levels expressed reservations about PFC and REC merger since these are two large companies with established setups,” said the official on condition of anonymity. However, the finance ministry is upbeat about the acquisition.
The contours of the deal have yet to be decided. But if REC acquires PFC, the government can raise nearly Rs 3,000 crore more, given the higher shareholding of the government in PFC,” said a finance ministry official. The government owns 58% in REC and 66% in PFC.
The power ministry is concerned that the net worth of the acquiring company will come down drastically, according to the official. The capital adequacy ratio of PFC is 17.7%, while that of REC is 16.7% against the RBI norm of 15% for non-banking financial companies (NBFCs).
Upon an acquisition deal there will be requirement to raise tier-I funds, which will dilute government holding in these NBFCs. The power ministry has been indicating that due to higher government holding, PFC is better placed with enough cushion to raise tier-I capital,” the official said.
Feedback Infra Group chairman Vinayak Chatterjee said with the gradual withdrawing of the banks, NBFCs and others from infrastructure financing, India needs sectoral developmental financial institutions. “Under the current circumstances, it would be useful for the country to have a standalone power finance corporation. But REC is an implementing organisation. Merging of a finance company and an implementing company may not be appropriate and in my view they should be kept separate,” he said.
The government official said that the power ministry was concerned that if not implemented properly, the proposal would damage the fundamentals of both companies. The finance ministry official, however, said REC and PFC are in the same business. “The books of the project implementing division in REC are separate from the main firm and a mega finance firm with expected loan book of Rs 6 lakh crore will help in raising finance at lesser rates,” he said.