India is seeking to merge two of its biggest power utility lenders to help unlock investments worth hundreds of billions in the nation's energy sector.
The government plans to integrate Power Finance Corp. Ltd. and its unit REC Ltd. that are currently competing in the debt market, a senior official told reporters on Monday asking to remain anonymous as the information isn't public.
India's ambition to rapidly electrify its economy will require $450 billion over the next seven years to build new power plants, transmission lines, and energy storage systems, according to Power Secretary Pankaj Agarwal. The nation's per-capita electricity consumption, currently at a third of the global average, is expected to triple by 2047, he said, aligning with the government's goal to reach developed nation status by that time.
“Combining the two lenders will give them a size and scale that will help them borrow at lower costs and meet the growing funding needs of the power sector,” said Deven Choksey, managing director at DRChoksey FinServ.
Still, the plan is fraught with challenges and reforms will be needed for the combination to succeed, according to Praveen Kumar Singh, an industry expert and a former director at Power Finance.
Indian banks cannot lend more than a certain percentage of their capital to a single borrower. After the merger the new company would be able to borrow half of what the two entities could have separately accessed, according to Singh.
Additionally, the government, current a majority shareholder of Power Finance, would own less than 51% of the merged company, requiring equity infusion from the state to regain control. Should regulators remove the existing constraints, the merger's benefits would be significant, Singh said.
In 2018, India's cabinet approved a plan for Power Finance to buy the federal government's stake in REC, a reversal of the initial plan which saw REC as the acquirer.
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