REC Ltd. and Power Finance Corp. are due to be merged to create a single large government financing arm for the the renewable energy sector. The board of REC gave its in‑principle approval for the merger last week, following an announcement in the Union Budget 2026-27 by Finance Minister Nirmala Sitharaman.
The government said the goal of a REC-PFC combine is to create a larger, more efficient renewable energy financing entity. PFC owns 52.63% stake in REC, currently valued at over Rs 49,000 crore. The central government's 55.99% shareholding in PFC is valued at Rs 77,000 crore.
The board will formulate a detailed merger proposal in accordance with applicable laws and regulations, ensuring that the merged entity continues to remain as a "Government Company" under the Companies Act, 2013 and other applicable laws. The detailed merger scheme once finalised will be shared after requisite approvals, as per a stock exchange filing.
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Likely Benefits
The REC-PFC merger is expected to deliver multiple benefits. This includes formation of a single large government financing arm for the the renewable energy sector, lower borrowing costs and stronger balance sheet for the two companies, better capital deployment for projects, and increased infrastructure financing, including new sectors like data centres, logistics, maritime. The combined entity is estimated to have a loan book of around Rs 12 lakh crore and net worth around Rs 1.8 lakh crore.
According to analysts, REC will be merged into PFC, wherein the promoter would issue new shares to REC holders. The share swap ratio will be announced by the companies once the board finalises it.
"We believe post-merger the entity could see better pricing power given the large overlap in customer base, likely higher growth, and the elimination of the holding company discount that exists in the current structure," a UBS note said.
Merger Mechanics
Post the merger, analysts estimate that the government share would fall to 42% from 56% in PFC due to equity dilution resulting from the merger. This leads to three possible scenarios, according to Emkay Global. A large-scale ‘buyback' by PFC and REC, with the promoters not participating or a large-scale capital infusion by the government in PFC via preferential issuance or amending The Companies Act, 2013, as envisaged in the Economic Survey 2025-26, to allow government stake to increase to 26% in a ‘Government Company'.
Moreover, since both PSUs depend on implicit government support for the cost of funds, continued government support will be critical. On the single borrower limit, a solution may be required, given that an earlier merger was called off because of the issue. "We see the merger being positive for growth and RoA and await more clarity on the process," UBS said.
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