The proposed merger of REC with state-owned shadow banking firm Power Finance Corporation has hit a roadblock and is not likely to happen in near future as it would violate Reserve Bank norms on the exposure of non-banking financial companies (NBFCs), according to sources.
As per the Reserve Bank of India's (RBI) norms, debt exposure of an NBFC in a project cannot exceed 25 per cent. The exposure of Power Finance Corporation (PFC) and REC as a merged entity would exceed the limit of 25 per cent in any existing project as the two firms have been financing power sector projects.
After the merger, the new entity will be required to reduce its exposure in a project to 25 per cent which may not be feasible.
"The merger of REC with PFC is unlikely to happen in near future because of RBI norms on exposure of NBFCs. The capacity to finance a project of the merged entity would be halved. As separate entities, they can finance up to 50 per cent in a project which would be reduced to just 25 per cent after the merger," one of the sources said.
In March 2019, PFC had completed acquisition of a majority stake in REC by transferring Rs 14,500 crore to the government with hope of merger of the two firms in 2019-20.
PFC Chairman and Managing Director Rajeev Sharma told PTI, "We have given money to the government. Now, the government would decide about the merger."
At the time of completing the acquisition last year, Sharma had said, "We are hopeful about merger of the two firms (PFC and REC) during 2019-20. We have to get direction from the government in this regard and then we would appoint consultant for the purpose."
According to the sources, PFC has borrowed fund at an interest rate as high as 7.25 per cent for completing this deal while it is rasing money through bonds at a rate as low as 4.25 per cent for funding power sector projects.
The sources said the deal has dented the profitability of PFC as it has to raise funds from the market at higher rates for funding government divestment.
This stake acquisition was in pursuance to the in-principle approval from the Cabinet Committee on Economic Affairs for strategic sale of 52.63 per cent of paid-up equity shareholding of REC held by the government to PFC, along with the transfer of management control.
PFC had acquired 103.94 crore shares constituting 52.63 per cent equity stake held by the government in REC along with the management control at a cash purchase consideration of Rs 14,500 crore. The acquisition price of REC per equity share worked out to Rs 139.50 per piece.
Power Finance Corporation has financed 70 per cent of the deal from the cash inflows from the business and the balance 30 per cent is through debt.The source also said the merger would also reduce a sense of competition among the executives of two entities and customers would be deprived of benefit of finer lending rates.