Power sector financier Power Finance Corporation (PFC) and its subsidiary REC Ltd on Thursday said they expect to manage the transition into a merged entity smoothly without any material constraints and that, post-merger, a single-entity exposure limit of 20 per cent will apply to the merged entity.
A single-entity exposure limit for a financing company is a regulatory ceiling capping the total credit and investment exposure to a single borrower, typically set as a percentage of the entity’s capital funds, often Tier I capital.
Prior to the acquisition of REC by PFC, both entities were subject to a single-entity exposure limit of 20 per cent each, with a combined limit of 40 per cent. 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 respective banks’ Tier I capital, compared to the earlier aggregate limit of 40 per cent.
“Considering access to diversified funding avenues for both entities, the transition to the lower exposure limits was managed smoothly. Further, for over five years, both entities have been operating comfortably within the applicable group limits. Post-merger, a single-entity exposure limit of 20 per cent would apply to the merged entity,” the companies said in a stock exchange filing.
They added that the aggregate Tier I capital of the top 10 Indian banks is around Rs 18 lakh crore, which will further increase on account of profit accretion. “In view of this and the current bank borrowings of both entities, we believe that adequate headroom would be available for additional borrowings,” the companies said.
Currently, the outstanding borrowing mix of both entities comprises around 18 per cent domestic bank or financial institutions’ borrowings, 25 per cent foreign currency borrowings, and 57 per cent domestic bond borrowings.
Both entities comply with the Reserve Bank of India’s credit concentration norms applicable to single and group borrower exposures linked to Tier I capital. Both operate within the prescribed exposure limits.
“Post-merger, these limits will apply to the consolidated Tier I capital of the merged entity. Given the strong net worth of both entities, any breach with respect to borrower exposure norms is not foreseen. The merged entity is expected to maintain comfortable capital levels to support future lending growth,” the companies said.
PFC had acquired a 52.63 per cent equity 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 proposal to restructure PFC and REC with the objective of achieving scale and improving efficiency among public sector NBFCs.
The boards of the two companies had on 6 February accorded in-principle approval for restructuring in the form of a merger, while ensuring that the merged entity continues to remain a “Government Company” under the Companies Act, 2013.
“On a consolidated basis, the merged entity is expected to benefit from improved balance sheet strength, capital efficiencies, and operational synergies, enabling large-scale funding and improved 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 capitalise on emerging opportunities such as green hydrogen and nuclear energy.
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The two firms said the merged entity will continue to maintain its status as a government company, and external agencies will be appointed — including consultants, valuation experts, and legal advisers — to ensure structured and timely execution of the merger.
