New Delhi: State owned Power Finance Corporation (PFC) may announce its acquisition of management control in REC Ltd today.
The buyout of the government’s entire stake in the power sector lender by PFC clears the decks for the creation of a $80 billion lending institution for the Indian power sector and is expected to reduce competition, while leveraging synergies and achieving economies of scale. According to Moody’s Investors Service, PFC and REC had total reported assets of Rs2.86 trillion and Rs2.46 trillion, respectively.
“PFC's strategic importance to the government will further increase upon completion of the acquisition, as the combined entity will become the biggest non-bank finance entity in which the government holds a controlling stake. In addition, it will account for the majority of financing for state power utilities. State power utilities in turn still account for a material portion of power generation capacity in India," Moody’s said in a statement on Wednesday.
The Thursday' announcement comes in the backdrop of Moody’s Investors Service retaining the Baa3 issuer ratings of PFC and REC. Moody’s retained the previous stable outlook for the two power sector lenders after placing them “on review for downgrade" in December. Baa3 is the lowest investment grade.
The announcement will also mark the culmination of the ₹14,500 crore disinvestment proceeds from the stake sale that has helped the National Democratic Alliance (NDA) government exceed its disinvestment target of ₹80,000 crore for the fiscal year 2018-19. The disinvestment receipts touched ₹85,000 crore last week.
The Cabinet Committee on Economic Affairs (CCEA) in December approved the sale of the government’s 52.63% stake in REC to PFC, along with management control.
Last week PFC signed a share purchase agreement to acquire 103.94 crore equity shares of ₹10 each of REC Limited from the President of India. The PFC board on last Tuesday also cleared the power sector lender’s plan to acquire management control in REC Ltd. The board meeting was preceded by an extraordinary general meeting of PFC that passed a resolution for PFC “to enter into a Related Party Transaction (RPT) for acquiring GoI’s 1,03,93,99,343 fully paid up equity shares of REC Ltd together with management control."
This transaction also comes at a time when power has emerged as one of the highly stressed sectors, with close to ₹1 trillion of loans having turned bad or been recast. The state distribution utilities have also been beleaguered by issues such as low collection, increase in power purchase cost, inadequate electricity tariff hike, inadequate subsidy disbursement, and increasing government department dues. In turn, the poor payment records of discoms have not only adversely affected power generation companies, but has contributed in causing stress in the banking sector as well.
As on September 2015, the total debt of all state owned discoms was estimated to be around ₹2.45 trillion, with ₹0.8 lakh crore serviced by the states. Also, the annual discom losses in FY16, FY17 and FY18 were funded through borrowings.
The REC sale has also helped the government towards reaching fiscal deficit target of 3.4% of gross domestic product (GDP) in 2018-19. The budgeted fiscal deficit target was 3.3% of gross domestic product (GDP) at the beginning of 2018-19 and was later revised to 3.4% of gross domestic product, while preparing the interim budget.
“The consideration for the transaction is expected to be paid on 28th March, 2019 and funds for the same have been arranged by PFC already," PFC said in a statement on 20 March.