India mulls merging 2 state power lenders


NEW DELHI • India is considering a proposal to combine two state-run lenders to utilities, REC Ltd and Power Finance Corp, according to people familiar with the discussions, as it seeks to raise funds to bridge a budget gap.

The first phase of the deal will see REC acquiring a majority stake valued at about US$2.5 billion (RM10.5 billion) in Power Finance, possibly by the year ending March 2019, the people said, asking not to be named as the talks aren’t public.

Subsequently, the plan is to merge the subsidiary with REC, a departure from the original plan to keep their operations separate. Power Finance had a market value of 268.8 billion rupees (RM15.96 billion) on Tuesday.

Prime Minister Narendra Modi’s government is seeking ways to narrow the country’s budget deficit to help finance public welfare projects ahead of elections. The sale of the stake in Power Finance mirrors a similar deal earlier this year, when state explorer Oil & Natural Gas Corp bought a controlling stake in refiner Hindustan Petroleum Corp.

The merger plan is being considered after REC expressed concern that just acquiring a controlling stake in Power Finance would weaken its credit profile and wouldn’t yield any operational benefit. On the other hand, New Delhi-based REC has informed the Power Ministry that a combined entity will be complementary as it would eliminate competition among them in raising funds or finding customers, according to the people involved in the plan.

A combined power sector lender can leverage its size to borrow at lower rates and help fund the nation’s goal of ensuring round-the-clock supply of affordable electricity for all Indians and also help fund projects beyond the electricity sector. A bigger lender will also help instil better discipline among borrowers, especially distribution companies, the people said.

Press offices at REC, Power Finance and the Power Ministry didn’t respond to emails seeking comment, while calls made to the Finance Ministry’s spokesman were not answered.

REC shares fell as much as 0.9% to 120.85 rupees in early trade in Mumbai yesterday, while Power Finance declined as much as 2.1% to 99.65 rupees. The government has a 65.6% holding in Power Finance, which has gained 27% since Bloomberg first reported the government’s plan to sell its stake to REC on Sept 24, while REC has advanced 24%.

REC is keen on the merged entity to subsequently extend its lending book beyond the power sector and wants oversight of its operations shifted to the Finance Ministry, the people said.

The company changed its name, discarding the earlier Rural Electrification Corp, last month as it limited the scope of doing business.