PFC Not To Make Open Offer Post REC Acquisition

Power Finance Company will not be required to make an open offer to minority shareholders of Rural Electrification Corporation after buying out the government's 52.63 percent stake in the company as it is a related party transaction, an official said.

The Cabinet Committee on Economic Affairs (CCEA) on Dec. 06 gave in-principle approval to the acquisition of the government stake in REC by PFC.

REC will continue to be a separate listed company.

“We understand that an open offer is not required because the management complexion is not changing,” an official said. “It's a related party transaction. We will seek exemption from SEBI.”

As per SEBI’s takeover code, if a company acquires more than 25 percent in another listed company, it has to make an open offer to minority shareholders to buy at least 26 percent more in the target firm.

The government holds 52.63 percent stake in REC and 65.64 percent in PFC.

According to the official, a related party transaction does not trigger takeover code unless the valuations are absurd. “If the premium for the deal is less than 25 percent in a related party transaction, then it does not trigger a takeover code.” Based on the market price of REC on Dec. 6, the government stake in REC would be valued at around Rs 10,500 crore.

The quantum of premium which PFC will pay to the government for its stake in REC would be decided around January, he said. PFC-REC deal is the second acquisition transaction among Central Public Sector Enterprises. In January, Oil & Natural Gas Corporation bought the government's entire 51.11 percent stake in oil refiner Hindustan Petroleum Corporation Ltd. for Rs 36,915 crore. ONGC, too, was exempted from making an open offer to minority shareholders of HPCL.

The official further said both PFC and REC would separately appoint advisors for valuation purposes, which will work in consultation with the government-appointed advisor ICICI Securities Ltd. for the merger and acquisition deal. Pursuant to the deal, REC would become a subsidiary of PFC. "An immediate merger of REC with PFC is unlikely to happen," the official said.

While PFC will seek approval from fair trade regulator Competition Commission of India, REC will seek nod from the Reserve Bank for the deal, he said. The government hopes that the PFC-REC deal will create a larger entity with an enhanced balance sheet and provide higher value loans as well as remove duplication of work.

At the end of the previous financial year, the total resources of REC stood at over Rs 2.46 lakh crore, of which reserves were Rs 33,515.59 crore. The net worth of the company was Rs 35,490 crore and "cash and bank balance" was Rs 1,773 crore at the end of March 2018.

PFC's "reserves and surplus" was Rs 37,221 crore, and "cash and bank balance" stood at Rs 4,600 crore at the end of March 2018. So far in the current fiscal, the government has raised over Rs 32,000 crore from CPSE disinvestment. The budget target has been set at Rs 80,000 crore for current fiscal.