PFC-REC Merger Updates: Preferential Share Issue Likely to Maintain Majority Government Control Above 51%

The proposed merger between Power Finance Corporation (PFC) and REC Ltd is likely to include a preferential share issue to the Centre, as policymakers weigh options to ensure that the combined entity retains its status as a government company.

According to news reports, people familiar with the discussions, without additional equity support, the Centre's stake in the merged lender could fall below the mandatory 51% threshold required under the Companies Act, 2013.

PFC-REC Merger Updates: Centre Likely to Infuse Capital to Preserve Government Company Status

As per the Companies Act, a government company is defined as one in which at least 51% of the paid-up share capital is held by the Central government. Currently, the Centre directly holds 55.99% in PFC. PFC, in turn, owns 52.6% in REC, formerly known as Rural Electrification Corporation.

However, since REC also has public shareholders, a merger would involve issuing shares of the combined entity to those investors, potentially diluting the Centre's indirect ownership and bringing its total stake below the critical 51% mark.

Officials estimate that the government may need to infuse approximately Rs 16,000-17,000 crore in equity to maintain majority ownership in the merged institution. A government official indicated that discussions are still ongoing regarding the structure of the merger scheme and the Centre's financial participation.

"Currently, a merger scheme is being prepared in which one option being weighed is that if the government needs to infuse equity, how much that would be," the official said, suggesting that the funding structure is yet to be finalised.

The merger proposal aligns with the broader policy direction outlined in the Union Budget on February 1. In her budget speech, the Finance Minister stated that the Centre aims "to achieve scale and improve efficiency in public sector NBFCs (non-banking finance companies).

As a first step, it is proposed to restructure Power Finance Corp and REC." The boards of both PFC and REC have since approved the merger proposal, confirming that the unified institution will continue to function as a government company.

Advisors are expected to be appointed within the next two weeks to design the transaction framework, conduct valuations, determine the merger ratio, and recommend the structure of any capital infusion required from the government. The final equity requirement will depend significantly on the valuation outcomes and the share exchange ratio between PFC and REC.

Key financial metrics are central to the ongoing deliberations. While the Centre directly holds 55.99% in PFC, it does not hold shares directly in REC but exercises indirect control through PFC's 52.6% stake.

PFC-REC Merger May Need Rs 16,000-17,000 Crore Govt Equity to Retain 51% Stake

Analysts estimate that maintaining a post-merger government holding above 51% may require equity infusion in the range of Rs 16,000-17,000 crore, though some brokerage estimates suggest that total capital requirements could go as high as Rs 30,000 crore. The combined net worth of PFC and REC already exceeds Rs 1.7 lakh crore, positioning the merged entity as a major financial powerhouse in the power sector.

Neither REC nor PFC has officially commented on the ongoing discussions regarding capital infusion or merger structuring.

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