The Indian government is selling a majority stake in Rural Electrification Corp in a deal that will create a power financing giant

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(Image source- Reuters)

  • The Indian Cabinet has approved the sale of a 52.63% stake in infrastructure financier Rural Electrification Corp (REC) to another state-run power lender, Power Finance Corporation (PFC).
  • The deal will also see the transfer of management control to PFC, which is India’s largest lender to the power sector, and create a power financing behemoth.
  • The major impetus behind the deal is to help the Indian government meet its disinvestment target of ₹800 billion for the year and the fiscal deficit target of 3.3% of GDP. It is expected to raise around ₹140 billion from the sale.

In a bid to meet its disinvestment targets for the year, the Cabinet of the Modi government has approved the sale of a 52.63% stake in infrastructure financier Rural Electrification Corp (REC) to another state-run power lender, Power Finance Corporation (PFC). Once the transaction is completed, the government will retain a 6% stake in REC.

The deal will also see the transfer of management control to PFC, which is India’s largest lender to the power sector, creating a power financing behemoth.

Under the proposed terms of the deal, REC will become a subsidiary of PFC and retain its separate identity. The two government-owned financiers operate in the same space at the moment, which is why the idea of a merger came about.

REC largely focuses on providing financial support to companies engaged with power generation and transmission while PFC is primarily a non-banking financial company in the power infrastructure sector.

The decision marks a reversal from an earlier proposal for REC to buy out PFC. That proposal was struck down because it was determined that it would be easier for PFC to raise the funds to finance the deal since it was larger.

While the supposed objective of the sale is to help REC and PFC capitalise on synergies, raise funds with greater ease and provide cheaper financing to the sector, the main aim of the Indian government is to meet its disinvestment target of ₹800 billion for the year and fiscal deficit target of 3.3% of GDP. To date, it’s only raised ₹327 billion following the botched Air India sale.

The government is expected to raise as much as ₹140 billion from the sale of the majority stake in REC, which will be a much-needed boost to its coffers.

However, the deal may come at a greater cost than intended. Power is one of the problem sectors of the Indian economy, as financiers to the sector are weighed down with over ₹1 trillion in bad loans.

Both REC and PFC suffer from shaky balance sheets, so their intended merger could exacerbate the financial strain at the latter. At the end of September 2018, PFC was saddled with ₹283 billion worth of gross non-performing loans while REC had around ₹204 billion of gross bad loans on its books, according to BloombergQuint.

The deal could see PFC’s credit profile deteriorate further as it will have to raise a lot of debt capital to fund the purchase. To prevent this, it will probably have to liquidate some asset holdings.


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