PFC-REC merger may not be a priority amid war squeeze

Mumbai: The boards of Power Finance Corporation (PFC) and REC are set to meet on Saturday (May 16) amid uncertainty over the proposed merger of the two government-owned financiers in the electricity generation sector.

Post-merger, the Centre's stake is expected to fall below 51%, necessitating an infusion of about ₹25,000 crore for New Delhi to retain majority control in the combined entity.

Against the backdrop of fiscal constraints, analysts are questioning whether the government may be reconsidering the merger plan. Neither PFC nor REC has specified an agenda for the meetings, stating only that they are being held for "general" purposes.


Currently, the government holds a 55.9% stake in PFC and 52.6% in REC, with the remainder held by public shareholders. Bonds issued by both entities carry covenants requiring majority government ownership; any dilution below 51% could be construed as a change in control and trigger a breach in the bond terms.

Although the swap ratio has not been announced, analysts estimate-based on current market prices-that the government's stake in the merged entity would fall below the majority threshold.

"The biggest challenge is how they will remain a government entity, as post-merger with REC, the government stake drops to around 43% at the current swap ratio," said Suresh Ganapathy, head of financial services research at Macquarie Capital. "To raise it to 50% at a swap ratio of 0.8x based on CMP, the government would need to infuse about ₹25,000 crore. Given the current circumstances, it is unclear whether such capital infusion is feasible in an entity whose tier-1 capital stands at 22% and growth remains muted," he said in a results review note on PFC. Economists say that the rupee's fall to record lows of around 96 per dollar-driven by elevated global oil prices and foreign capital outflows-alongside high inflation, is exerting pressure on India's fiscal and current account balances.

In this environment, the government is unlikely to prioritise capital infusion into a well-capitalised finance company.

However, PFC chairman and managing director Parminder Chopra indicated earlier this week during a post-results interaction with analysts that the merger is targeted to take effect from April 1, 2027, subject to regulatory and government approvals. She reiterated that the combined entity would retain its government-company status, although the final structure is still under discussion. The government had announced the merger in the Union budget on February 1, with both boards granting in-principle approval on February 6.