PFC, REC say merger transition smooth; merged firm to have 20% exposure cap | Company News
Power sector financier Power Finance Corporation (PFC) and its subsidiary REC Ltd said on Thursday that they hoped to manage the transition to a merged entity smoothly, without any material constraints and that after the merger, a single entity exposure limit of 20 per cent would apply to the merged entity.
A single entity exposure limit for a finance company is a regulatory cap capping the total credit and investment exposure of a single borrower, typically set as a percentage of the entity’s own funds, often tier one capital.
Prior to PFC’s acquisition of REC, both entities were subject to an individual exposure limit of 20 percent each, with a combined limit of 40 percent. Following the Centre’s divestment of its stake in REC to PFC in 2019, the combined exposure was capped at the group limit of 25 per cent of the respective banks’ Tier 1 capital, compared to the previous aggregate limit of 40 per cent.
“Given access to diversified sources of funding for both entities, the transition to lower exposure limits was managed smoothly. Additionally, for over five years, both entities have been operating comfortably within the applicable group limits. Post-merger, a single entity exposure limit of 20 percent would apply to the merged entity,” the companies said in a stock filing.
They added that the overall tier one capital of India’s top 10 banks is around Rs 18 lakh crore, which will further increase due to increased profits. “Taking into account this and the current bank borrowings of both entities, we believe that sufficient headroom would be available for additional borrowings,” the companies said.
Currently, the outstanding borrowings of the two entities comprise approximately 18 percent borrowings from domestic banks or financial institutions, 25 percent foreign currency borrowings and 57 percent domestic bond borrowings.
Both entities comply with the Reserve Bank of India’s credit concentration norms applicable to individual and collective borrower exposures linked to Tier 1 capital. Both operate within prescribed exposure limits.
“After the merger, these limits will apply to the consolidated Tier 1 capital of the merged entity. Given the strong net worth of both entities, no violation of the borrower exposure standards is anticipated. The merged entity is expected to maintain comfortable capital levels to support future loan growth,” the companies said.
PFC had acquired a 52.63% stake in REC in 2019, after which REC became a subsidiary of PFC. In her Budget speech this year, Finance Minister Nirmala Sitharaman had announced the proposed restructuring of PFC and REC with an aim to achieve greater scale and improve efficiency of public sector NBFCs.
On February 6, the boards of directors of both companies had given in-principle approval to a restructuring in the form of a merger, while ensuring that the merged entity continues to remain a “state corporation” under the Corporations Act, 2013.
“On a consolidated basis, the combined entity is expected to benefit from improved balance sheet strength, capital efficiency and operational synergies, enabling large-scale financing and enhanced credit flow across the power sector value chain,” the companies said, adding that the combined entity will have stronger technical capabilities and deeper sector expertise to capitalize on emerging opportunities such as green hydrogen and nuclear power.
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The two companies said the merged entity would continue to retain its status as a Crown corporation and that external agencies would be appointed – including consultants, valuation experts and legal advisors – to ensure structured and timely execution of the merger.
