The boards of Power Finance Corporation (PFC) and REC on Sunday approved the much-awaited merger scheme between the two companies, with the share-swap ratio set at 88 PFC shares for every 100 REC shares held.
The mega merger of the two power-sector financiers is set to create India's largest power-sector financing institution, with a combined loan book of more than Rs 11 lakh crore. PFC owns a 52.63% stake in REC. The Centre owns 55.99% in PFC but does not directly own a stake in REC.
"The share exchange ratio for the proposed merger of REC into PFC shall be 88 equity shares of PFC of Rs 10 each fully paid up for every 100 equity shares of REC of Rs 10 each," the companies said in an exchange filing.
What does this mean for shareholders?
An REC shareholder who owns 100 shares of REC as of the record date will receive 88 shares of PFC after the merger takes place. Her total holding of 100 shares in REC, meanwhile, will be cancelled.
The record date to determine the eligibility of shareholders for the merger scheme is yet to be ascertained. The scheme is now subject to approvals from shareholders, stock exchanges, the Securities and Exchange Board of India (SEBI), the National Company Law Tribunal (NCLT) and other statutory authorities before becoming effective.
Also read: PFC, REC boards approve merger scheme, share exchange ratio at 88 PFC shares for every 100 REC shares
All about PFC-REC merger
Earlier in February this year, Union Finance Minister Nirmala Sitharaman, after presenting the Union Budget, said that the government will restructure Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) in order to streamline operations. The shares of the two companies had sharply jumped following the announcement.
The Cabinet Committee on Economic Affairs earlier cleared a proposal under which PFC acquired 52.63% of the government's holding in REC. With this acquisition, PFC and REC are currently operating in a holding subsidiary structure. The proposed merger would consolidate the two entities into a single balance sheet, subject to statutory approvals and detailed structuring.
What should investors do?
Fresh exposure to PFC and REC would be better taken in a staggered manner rather than chasing the merger headline, said Harshal Dasani, Business Head at INVasset PMS. He highlighted that the boards of the two companies have cleared the merger proposal, while completion may still depend on regulatory and structural approvals. “That means the trade is no longer only about power financing fundamentals. It is also about swap ratio, timing and execution clarity,” the analyst said.
Between the two, PFC offers cleaner visibility because it is the parent entity and is better placed as the consolidation anchor, Dasani said, adding that REC’s underperformance may create a catch-up trade if the swap ratio is favourable, but that is not the same as fundamental comfort. “The core business remains structurally supported by power capex, transmission, renewable financing and improving state utility discipline, but valuations have already priced in a fair amount of that cycle,” he said.
Also read: PFC, REC seek to help centre retain majority at low cost
“For fresh money, the prudent approach is to wait for the swap ratio or accumulate only in tranches. PFC looks better suited for conservative exposure. REC is more of a merger-arbitrage call and carries higher event risk. The one thing to avoid is treating the merger as guaranteed upside. In PSU financials, structure can matter as much as earnings,” the analyst further said.
