The power ministry is concerned about operational and administrative issues that may come up if the PFC-REC merger goes through
The Finance Ministry's proposal to raise Rs 14,000 crore through the merger of Power Finance Corporation (PFC) and Rural Electrification Corporation (REP) has left the Ministry of Power worried about the financial health of the two companies in the an otherwise weak sector.
According to a report by The Economic Times, a senior government official has said that the power ministry is concerned about operational and administrative issues that may come up if the merger goes through, as these are established setups.
Another concern is that the net worth of the acquiring company may fall drastically, the official added.
The ministry is also worried that the fundamentals of both the companies may get damaged if the deal goes through.
On the other hand, the Ministry of Finance is convinced that creating a large financing company for the sector instead of two competitive public sector units in the same space is more important. The body will be able to manage if any issues come up.
The specifics of the deal are yet to be worked out.
"If REC acquires PFC, the government can raise nearly Rs 3,000 crore or more, given the higher shareholding of the government in PFC," a finance ministry official said, according to the report. The government holds a 58 percent stake in REC and 66 percent stake in PFC.
PFC and REC have a capital adequacy ratio of 17.7 percent and 16.7 percent respectively, more than RBI’s norm of 15 percent for non-banking finance companies (NBFC).
"Upon an acquisition deal, there will be a requirement to raise tier-I funds which will dilute government holding in these NBFCs. The power ministry has been indicating that due to higher government holding, PFC is better placed with enough cushion to raise tier-I capital," the official told the newspaper.Vinayak Chatterjee, Chairman of Feedback Infra Group, said while India needs a standalone power finance corporation, REC is an implementing organisation and its merger with a financing company, could be inappropriate.