One major obstacle is that the direct stake of the Centre will fall below 51 per cent after the merger. The Centre is, therefore, reaching out to other public sector companies such as Life Insurance Corporation (LIC) and state-owned power companies like NTPC to pick up a stake in the merged company, said a senior government official.
The official said the direct stake of the Centre could fall to 38-45 per cent after the two firms merged.
A senior executive involved in the acquisition process said: “The idea of asking state-owned companies like LIC, NTPC, Power Grid, and NHPC to pick up a stake in the merged company has been floated, so as to increase the stake of the Centre, indirectly.”
A government source said: “Most of the institutional investors have lent to both PFC and REC not only because they are central government firms but also because the government has a majority stake in them. If the stake falls below 51 per cent, many of them can cite it as breach of contract and ask for a payback.”
He said several global lenders had conveyed to the authorities they might increase the rate of lending and reduce their exposure to the merged company. External borrowings of PFC and REC stand at $10 billion (above Rs 70,000 crore). The Centre would need to put back Rs 7,000-10,000 crore to increase its stake to 51 per cent in the merged firm.
Several sector executives pointed out the cost of borrowing could go up for PFC and REC and rating agencies might review their evaluations. “Even if there is no rating downgrade, many lenders will review their risk exposure to a company, in which Centre does not have a majority stake,” said a senior sector executive.
Sharma, in an investors’ concall last week, said borrowing limits were not restricting the merger. “The only deal breaker for PFC is the dilution of government stake below 51 per cent on merger. The government intends to hold management control in PFC and as well as in the merged entity. Considering various options available, a final decision will be taken,” he said.
Several officials also pointed out PFC was pushing for the merger because its capital adequacy would improve. Sharma in the concall, however, said PFC was able to improve its capital adequacy ratio to 19.32 per cent, higher than what it was before acquisition at 18.95 per cent.