India plans to merge two state-owned electricity lenders

India is studying a proposal to combine two public lenders with utilities, REC Ltd. and Power Finance Corp., according to interlocutors familiar with the discussions. raise funds to fill a budget deficit.

In the first phase of the agreement, REC will get a controlling stake in Power Finance valued at $ 2.5 billion by the year ending in March 2019, said people, asking not to not be appointed, as the talks are not public. Subsequently, it is planned to merge the subsidiary with REC, which is a departure from the original plan to keep their business separate. Power Finance had a market value of 268.8 billion rupees ($ 3.8 billion) on Tuesday.

The government of Prime Minister Narendra Modi is looking for ways to reduce the country's budget deficit to help finance social badistance projects before the elections. The sale of the stake in Power Finance reflects a similar transaction earlier this year, when state explorer Oil & Natural Gas Corp. bought a majority stake in refiner Hindustan Petroleum Corp.

The proposed merger is under review after REC expressed its concern that simply acquiring a majority stake in Power Finance would weaken its credit profile and generate no operational benefit. On the other hand, REC based in New Delhi informed the Ministry of Energy that a combined entity would be complementary as it would eliminate competition between them for fundraising or seeking customers, according to the people involved in the plan.

The sale of the stake in Power Finance, which is expected to yield about $ 2.5 billion on the basis of the lender's last closing price, reflects a similar deal last year when the explorer Oil & Natural Gas Corp. bought a majority stake in refiner Hindustan Petroleum Corp.

Affordable Energy

A lender in the combined energy sector can leverage its size to borrow at lower rates and thus help fund the national goal to ensure affordable electricity supply at all times for all Indians and funding for projects beyond the electricity sector. A larger lender will also help instil better discipline among borrowers, especially distribution companies, said the population.

REC, Power Finance and the Ministry of Energy's press offices did not respond to e-mails seeking comment, while appeals to the Department of Finance spokesperson did not respond.

The government holds a 65.6% stake in Power Finance, which has increased 29% since Bloomberg first announced its intention to sell its stake in REC on September 24th, when it increased by 24%.

REC wants the merged entity to extend its loan portfolio beyond the electricity sector and wants the supervision of its operations to be entrusted to the Ministry of Finance, the people said. The company changed its name and abandoned last month the Rural Electrification Corp., which limited its activities.