It’s official! PFC-REC deal gets a green signal from Cabinet

New Delhi: Putting a full-stop to the speculations, the Cabinet Committee on Economic Affairs (CCEA) gave an in-principle nod on December 6 to the strategic sale of the government's 52.63 percent stake in Rural Electrification (REC) to the Power Finance Corporation (PFC), along with the transfer of management control.

The Centre owns 58.3 percent stake in REC, the remainder of which is part of Bharat 22 ETF and CPSE ETF. The acquisition is part of the government's plan to reach its divestment target of Rs 80,000 crores in the current fiscal.

'PFC-REC deal aimed at obtaining better synergies'

A statement released by the government said that the acquisition intends to achieve "integration across the power chain, obtain better synergies, create economies of scale, and have enhanced capability to support energy access and efficiency to finance the power sector. It may allow for cheaper fundraising, with an increase in bargaining power for the combined entity."

The move is in line with the announcement made by Finance Minister Arun Jaitley in Union Budget FY19 that public sector enterprises working in one space should be merged or acquired. "This is on the same line. During the consultations, the committee of ministers accepted the proposal of the power ministry, which wanted PFC to be the holding company," Jaitley said.

"The PFC-REC deal will lead to synergies. They are now competing in the same space. This drives up the cost of borrowing for them. We are expecting that to reduce," said a finance ministry official after the meeting.

What does the future hold for the merged entity?

Sources said that the process of the merger will be over by the end of the current financial year. But speculations are rife among employees about what the future holds for the merged entity, especially if one looks at the script followed by the previous deal that was sealed last year on these lines between ONGC and HPCL — HPCL, till date, does not accept ONGC as its promoter.

The flip

The rumours of the merger had been doing the rounds for the longest time. However, grapevine had it that REC will buy the government's share in PFC, and not the other way round. Just days before the deal was struck, there was a reversal and it was reported that the government felt that PFC's acquisition of government's stake in REC made more financial sense for both the companies.

The government will want to get a premium on the deal.