REC takeover: PFC to draw Rs 10K crore from own reserves

REC takeover: PFC to draw Rs 10K crore from own reserves

New Delhi, Feb 11: Contrary to an earlier plan to fund its acquisition of the Centre’s 52.63% stake in Rural Electrification Corporation (REC) mainly through borrowings, state-run Power Finance Corporation (PFC) will likely draw Rs 10,000 crore from its ‘reserves and surplus’ to carry out the Rs 14,000-crore purchase. The deal will materialise later this month, making a major contribution to the Centre’s disinvestment kitty for the year. Sources said the acquisition is likely to be debt-funded by only to the tune of Rs 4,000 crore.
Last year, a similar PSU-PSU deal where ONGC acquired the Centre’s 51% stake in HPCL had a large component of debt funding; while the transaction was worth Rs 37,000 crore, the state-run explorer resorted to debt to raise some Rs 25,000 crore.
The sources added that despite spending such a large sum, PFC won’t get the tag of the promoter of REC and the government would continue to hold the status to avoid a possible backlash from its overseas bonds holders, who could demand higher yields on these instruments if the sovereign backing is diluted. Bond issuances by state-run firms overseas have a clause that investors will be compensated if the government of India’s shareholding in these companies go below 50%.
Incidentally, ONGC has also not been named as the promoter of oil marketer HPCL so far. Backed by the law ministry, the petroleum ministry has now asked HPCL to recognise ONGC as its promoter and put the same on record with the stock exchanges.
Use of reserves, however, could constrain PFC’s lending ability to the power sector if additional capital is not infused into the company. Between REC and PFC, they lend a considerable Rs 1,50,000 crore/annum to the power sector. “This is likely to come down to Rs 80,000 crore or thereabouts,” an official familiar with the matter said.
The acquisition will also restrict the leeway of lenders such as LIC or banks or mutual funds to invest in these firms – the lending threshold in a group company (PFC) will be breached much faster than in these as independent companies.
Critics of the deal had flagged three consequences of the deal — a possible rating downgrade, capital erosion and worsening of debt-equity ratios depending on the structure of the deal.
Global rating agency Moody’s will ‘review for downgrade’ of PFC’s standalone credit profile by focusing on the extent of decline in the post-transaction consolidated capital ratios of PFC.