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 on Thursday said they expect to manage the transition to a merged entity smoothly without any material restrictions and post-merger, a single asset 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 that limits the total credit and investment exposure of a single borrower and is generally set as a percentage of the entity’s capital funds, usually Tier I capital.
Prior to REC’s acquisition by PFC, both entities were subject to a single entity risk limit of 20 percent each and an aggregate limit of 40 percent. After the Center transferred its stake in REC to PFC in 2019, the combined exposure was limited to the group limit of 25 per cent of the Tier 1 capital of the relevant banks, compared to the earlier aggregate limit of 40 per cent.
“The transition to lower risk limits has been managed smoothly, given access to diversified financing avenues for both entities. Additionally, for over five years, both entities have been operating comfortably within applicable group limits. Post-merger, a single asset risk limit of 20 percent will apply to the combined entity,” the companies said in their filing to the stock exchange. he said.
They added that the total Tier I capital of the top 10 Indian banks is around Rs 18 lakh crore and this will increase further due to profit growth. “Given this and the existing bank debts of both parties, we believe that sufficient space will be available for additional borrowings,” the companies said. he said.
Currently, the outstanding debt mix of both entities consists of approximately 18 percent of debt from domestic banks or financial institutions, 25 percent of foreign currency debt and 57 percent of domestic bond debt.
Both entities comply with the Reserve Bank of India’s credit concentration norms applicable to Tier I capital-linked single and group borrower exposures. Both work within 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, no violations of borrower risk norms are anticipated. The merged entity is expected to maintain comfortable capital levels to support future credit growth,” the companies said. he said.
PFC had acquired a 52.63 percent equity stake in REC in 2019, following which REC became a subsidiary of PFC. In this year’s Budget speech, Finance Minister Nirmala Sitharaman had announced the proposal to restructure PFC and REC to increase scale and efficiency among public sector NBFCs.
The boards of directors of the two companies received in-principle approval for restructuring in the form of a merger on February 6, ensuring that the merged entity remains a “Government Company” under the Companies Act, 2013.
“On a consolidated basis, the combined entity is expected to benefit from enhanced balance sheet strength, capital efficiency and operational synergies enabling large-scale funding and improved credit flow across the energy sector value chain,” the companies said. the companies said, adding that the combined entity will have stronger technical capabilities and deeper industry expertise to capitalize 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 state-owned company and that external agencies, including consultants, valuers and legal advisors, will be appointed to ensure the structured and timely execution of the merger.
