India is said to consider merging two state-owned power lenders


By: Rajesh Kumar Singh and Siddhartha Singh

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 shareholder in Power Finance worth $ 2.5 billion possibly by the year ending March 2019, the people said, asking not to be named as the talks are not 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 ($ 3.8 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 shares 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 was considered after REC expressed concern that just acquiring a controlling stake in Power Finance would weaken its credit profile and would not 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.

The sale of shares in Power Finance, expected to take about $ 2.5 billion based on the last closing price of the lender, mirrors a similar deal last year, when state explorer Oil & Natural Gas Corp. bought a controlling stake in refiner Hindustan Petroleum Corp.

Affordable Power

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

Press offices at REC, Power Finance and the Power Ministry did not respond to emails seeking comment, while calls made to the spokesman's finance ministry were not answered.

The government has a 65.6 percent holding power in Power Finance, which has earned 29 percent since Bloomberg first reported the government's plan to sell its stock to REC on Sept. 24, while REC has advanced 24 percent.

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.

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