PFC board clears next step for REC merger, seeks govt approval

Power Finance Corporation has moved a step closer to its proposed merger with REC Limited after its board approved seeking formal approval from the President of India for the transaction. In an exchange filing, PFC said its board has approved reserving the proposal for the merger of REC into PFC for the approval of the President of India.

The board also authorised PFC Chairman and Managing Director Parminder Chopra to apply for and seek the President’s approval for the proposed merger. The merger will be carried out based on a share exchange ratio to be determined by valuers appointed for the transaction.

PFC also clarified that the merged entity would continue to retain its “government company” status, including through possible issuance of securities or capital infusion by the central government if required.

The proposed merger remains subject to final board approval and multiple regulatory clearances and permissions. Upon completion of the merger, all assets and liabilities of REC would be transferred to PFC and REC would stand dissolved under the provisions of the Companies Act.

The development comes amid growing market discussion around the structure of the merger and the government’s ability to maintain majority ownership in the combined entity. At present, the government holds a 55.9% stake in PFC and a 52.6% stake in REC, while the remaining shares are held by public investors.

Analysts have estimated that, based on prevailing market prices, the Centre’s stake in the merged entity could potentially fall below the critical 51% threshold unless additional capital is infused.

The issue has gained significance because bonds issued by both Power Finance Corporation and REC Limited carry covenants linked to government ownership. A fall in the government’s holding below 51% could be interpreted as a change in control and may trigger covenant-related concerns.According to analyst estimates, the government may need to infuse nearly Rs 25,000 crore to maintain majority ownership in the merged entity. This has raised questions over whether the Centre, amid fiscal constraints, would be willing to commit fresh capital to an already well-capitalised state-run finance company.

Earlier this week, Chopra indicated during a post-results interaction with analysts that the merger is targeted to become effective from April 1, 2027, subject to regulatory and government approvals.

She also reiterated that the merged entity would retain its government-company status, though the final structure is still being worked out.

The proposed merger was originally announced in the Union Budget on February 1 as part of the government’s broader strategy to consolidate state-run financial institutions in the power and infrastructure financing sector.

Both PFC and REC had subsequently granted in-principle approval to the merger proposal on February 6. If completed, the merger would create one of India’s largest infrastructure financing institutions focused on power generation, transmission, renewable energy and infrastructure lending.