Power Finance Corporation (PFC) and REC Limited (REC) provided an update on their proposed merger, first announced in the Union Budget of February 1, 2026. The restructuring aims to create a single, scaled institution to better serve the power sector’s evolving financing needs. Key aspects discussed include maintaining Government Company status, utilizing combined capital strength, and ensuring smooth transition regarding existing lending and borrowing exposures.
Background of the Proposed Restructuring
The Hon’ble Finance Minister announced the proposal to restructure Power Finance Corporation Limited (PFC) and REC Limited (REC) during the Union Budget presentation on February 1, 2026. The objective is to achieve greater scale and efficiency among Public Sector NBFCs. Following this, the Boards of both entities accorded in-principle approval for the merger on February 6, 2026, ensuring the resulting entity remains a “Government Company” under applicable laws.
This consolidation reflects a continuity in the Government of India’s strategic intent, following PFC’s acquisition of a 52.63% equity stake in REC in 2019, which made REC a subsidiary.
Synergies and Market Positioning
The combined entity is anticipated to benefit significantly from improved balance sheet strength, enhanced capital efficiencies, and operational synergies, allowing for large-scale funding across the power sector value chain. The merged entity will be positioned as the largest power sector financer in India.
The consolidation will specifically help capitalize on emerging technology opportunities in the sector, such as Green Hydrogen, CCUS, and small modular nuclear reactors, leveraging deeper sector expertise.
Key Aspects of the Merger Implementation
Government Entity Status
The merged entity will continue to maintain its Government company status. The Government of India will retain control, including the right for the appointment/removal of its board members.
Implementation Structure
The final merger structure is currently under deliberation. External agencies, including consultants, valuation experts, and legal advisors, will be appointed to ensure structured and compliant execution, pending regulatory approvals.
Lending Business Exposure
Both entities currently comply with RBI norms for single and group borrower exposures linked to Tier I capital. Post-merger, these limits will apply to the consolidated Tier I capital. Given the strong net worth of both companies, the expectation is that no breach of borrower exposure norms is foreseen, allowing comfortable capital levels for future lending growth.
Borrowing Exposure Management
Currently, the outstanding borrowing mix comprises approximately 18% domestic bank/FI borrowings, 25% foreign currency borrowings, and 57% domestic bond borrowings. Following the 2019 stake divestment, the group exposure under RBI’s Large Exposure Framework (LEF) was capped at 25% of respective banks’ Tier I capital.
Post-merger, a single-entity exposure limit of 20% will apply to the merged entity. Considering the aggregate Tier I capital of the top ten Indian banks (approximately ₹18 lakh crore as of March 31, 2025) and current borrowings, management expects adequate headroom for additional borrowings and smooth transition management without material constraints.
Source: BSE
