Govt may offload only 5% in PFC, allow it room to raise capital later

NEW DELHI: The government may offload just 5% stake in the state-run Power Finance Corporation’s planned public offer following a request from the company that a large offering could impact its ability to raise capital later.

The finance ministry was earlier keen to disinvest 10% government equity in PFC.

“It is not a hard and fast rule that the government has to divest 10% stake in every company. PFC is already listed and the government can sell a lower percent of its stake,” a finance ministry official said, adding that a final decision yet to be taken. The government holds 89.78% stake in the company, having sold 10% through a public offer in 2007.

PFC is one of the 10-odd state-run firms that form part of the government’s disinvestment programme for 2010-11, budgeted to raise Rs 40,000 crore.

If the plan is reworked, PFC’s follow-on offer would comprise sale of 5% equity held by the government and may also include fresh equity offer of 10% of the paid-up capital of the company. The company’s board of directors had last week cleared a proposal for fresh issue of equity shares. The fresh equity could be raised through a qualified institutional placement or a follow-on public offer, together with an offer of sale by the government. The issue size will not exceed 20% of PFC’s existing paid-up capital.

The dedicated power financier, which has worked out a diversification plan, feels a high divestment by the government will make it difficult for the company to raise the higher amount of capital it needs to fund growth.

Besides, a high stake sale would mean that the government’s stake could fall quickly to below 51% if the company were to raise capital aggressively from external sources. In such a case it will have to pump in more capital to retain its public sector status.

PFC has already communicated its views to the power ministry and said that the government should not sell stake in the company but only allow it to raise fresh equity. PFC has recently been categorised as an infrastructure finance company, which has its benefits but also comes with a higher regulatory capital requirement, or the capital the company needs to maintain in relations to loans disbursed. As a state-owned finance company, PFC had to maintain a CAR of 9%, which now goes up to 15%.

At the end of June 2010, PFC had a capital adequacy ratio of 17.38%, but this cushion could be easily exhausted given that it hopes to disburse Rs 28,000 crore in the current fiscal against Rs 25,800 crore lent last year.