The extra ordinary general meeting (EGM) of the members of state owned Power Finance Corporation Ltd (PFC) on Tuesday cleared the decks for the power sector lender to buy the Union government’s entire stake and acquire management control in REC Ltd (formerly Rural Electrification Corp.).
The EGM held at Gurgaon 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 Limited together with management control."
The government is likely to net around Rs14,000 crore in its disinvestment kitty with the Cabinet Committee on Economic Affairs (CCEA) in December approving the sale of the government’s stake in REC to PFC, along with management control.
Given that PFC is under the administrative control of the power ministry, it makes the Government of India and PFC related parties, according to the Companies Act. The Act states that no company shall enter into any contract or arrangement with a related party without the board’s approval.
The transaction will now have to be approved by the boards of the two public sector units and minority shareholders. The PFC board meeting is expected later in the day with the decision being termed as ‘procedural.’
“The resolution has been passed by the EGM. It was procedural and a necessary formality before the board meeting. The share price and other details will be decided by the PFC board," said a senior company executive requesting anonymity.
The decision also signals the creation of a major lending institution for the Indian power sector and is expected to reduce competition, while leveraging synergies and achieving economies of scale, as REC and PFC are the biggest lenders in that space. According to Moody’s Investors Service, PFC and REC had total reported assets of ₹2.86 trillion and ₹2.46 trillion respectively.
“The EGM has passed the resolution. There is a board meeting in the second half today. These are the processes that needs to be followed and we are implementing the decision of the government," said Rajeev Sharma, chairman and managing director, PFC.
The strategic sale of the government’s 52.63% of total paid up equity shareholding in REC will take the government closer to its ₹80,000 crore target of disinvestments in this fiscal year and help it meet the fiscal deficit target of 3.3% of gross domestic product (GDP) in 2018-19.
This comes in the backdrop of Moody’s Investors Service placing REC and PFC “on review for downgrade". Moody’s decision followed ICRA Ltd placing the long-term rating of AAA for the various debt programmes of REC and PFC “on watch" in December with developing implications.
While Moody’s in December placed “on review for downgrade the Baa3 issuer ratings" of PFC and REC, it also placed “on review for downgrade the (P) Baa3 foreign currency senior unsecured MTN program ratings and Baa3 foreign currency senior unsecured ratings of PFC and REC," the agency said in a statement. Moody’s also placed on review for downgrade PFC’s and REC’s standalone credit profiles of Ba3. Baa3 is the lowest investment grade.
This transaction also comes at a time when power has emerged as one of the highly stressed sectors, with close to Rs1 trillion of loans having turned bad or been recast.