The proposed PFC–REC merger will fold REC into Power Finance Corporation (PFC), with REC shareholders likely receiving PFC shares (illustratively around 8 PFC shares for every 9 REC shares at current prices), creating a single, much larger power‑sector financier with an ₹11.5 lakh crore loan book.

PFC–REC merger: what’s happening?

• PFC already owns 52.6% of REC, and PFC itself is 56% owned by the Government of India, so REC has been a PFC subsidiary since PFC bought the government’s REC stake for ₹14,500 crore in March 2019.

• In the Union Budget, the Finance Minister announced restructuring of public sector NBFCs as part of the “Viksit Bharat” vision, with PFC and REC identified for merger to achieve scale and efficiency.
• Following this, the PFC Board has given in‑principle approval for a merger under the Companies Act, with REC being merged into PFC and PFC issuing new shares to REC shareholders, while ensuring PFC continues as a “government company” post‑merger.
• UBS notes that at current market prices (LTP), the indicative swap is roughly 8 PFC shares for 9 REC shares, but the final swap ratio will be decided by an independent valuation.

Click here to explore the current share price, market trends, and performance updates of REC and PFC stocks.

Valuation, book value and government stake

• Current prices, the merger could increase PFC’s share count by about 34%, assuming REC is fully merged into PFC.

• On this basis, UBS expects FY27 book value per share (BVPS) of around ₹474 for the merged entity, even without baking in additional merger benefits.
• The combined entity is currently implied at about 0.88× FY27 price‑to‑book (P/B), suggesting some scope for re‑rating if synergies materialise and the “holding company discount” disappears.
• The government’s shareholding in PFC is projected to fall from 56% to roughly 42% post‑merger, as new PFC shares are issued to REC shareholders, though PFC would still remain a government company.

Strategic logic: why merge PFC and REC?

• The combined loan book will be around ₹11.5 trillion (~US$125 billion), putting PFC‑REC in the league of large Indian banks in terms of outstanding credit.

• Both entities have a very similar loan mix and overlapping customer base (state utilities, power generation, transmission and distribution projects), so merging them reduces duplication and internal competition.
• Post‑merger sectoral mix is expected to be roughly 29% conventional power generation, 40% transmission & distribution, and 14% renewables, with the rest in other infra.
• UBS expects the merged entity to gain better pricing power, higher growth potential and improved return on assets (RoA), as the holding company discount (PFC holding REC) is removed and competition between the two stops.
• The merger aligns with the government’s broader push to build scale in PSU NBFCs, support energy transition and infra funding, and streamline capital allocation in the power sector.

Potential benefits of the PFC–REC merger

• Scale and size: Combined loan book of ₹11.5 trillion makes PFC comparable to large banks, improving access to capital markets and investor visibility.

• Elimination of holding company discount: Merging REC into PFC removes complex holding structure and could support a valuation re‑rating from current ~0.88× FY27 P/B.
• Better pricing power: Large overlap in customer base means one unified lender instead of two PSU NBFCs bidding for the same power and infra projects, supporting better margins.
• Higher RoA and growth: Synergies, reduced duplication and greater scale can improve RoA and growth, especially in renewables and infra funding where the government wants faster expansion.
• Government reform signal: Shows continued intent to consolidate public sector NBFCs, which can improve governance, efficiency and capital allocation over time.

Key concerns for shareholders

• Government stake dilution: Government share in PFC may fall to ~42%; markets must stay confident of continued implicit sovereign support for funding costs.

• Single borrower limit: Earlier merger attempts reportedly failed on single borrower exposure limits; this structural issue still needs a robust solution.
• Execution and integration risk: Integrating two large power financiers with overlapping clients, systems and governance processes is complex and can affect asset quality and growth temporarily.
• Swap ratio uncertainty: Final swap ratio will be set by independent valuers; REC shareholders’ outcomes depend heavily on this, and any perceived unfairness can trigger volatility.
• Funding‑cost dependence on government: PFC and REC rely on implicit government backing to keep borrowing costs low; any change in that perception post‑merger could hurt spreads.

What REC and PFC shareholders should watch

• Swap ratio announcement: For REC investors, the share‑exchange ratio is the most important short‑term driver of returns; UBS highlights 8 PFC for 9 REC at current prices, but final terms may differ.

• Regulatory approvals and timeline: The merger will follow the Companies Act process, requiring approvals from boards, shareholders, lenders, regulators and possibly NCLT, which can take time.
• Government stance on support: With government holding reducing, any explicit statements about continued support (e.g., guarantees, policy backing) will be critical for bond investors and ratings.
• Clarity on capital allocation and dividend policy: The merged entity’s approach to growth vs dividends, particularly given large infra needs, will matter for long‑term shareholders.
• Impact on valuations: Watch how PFC/REC P/B and P/E multiples move as details emerge; re‑rating would reflect confidence in synergy realisation and policy continuity.

FAQs

1. What exactly has been announced about the PFC–REC merger?
PFC’s Board has given in‑principle approval to merge REC into PFC following the Budget announcement on PSU NBFC restructuring, with PFC issuing new shares to REC shareholders and remaining a government company post‑merger.

2. What is the proposed PFC–REC swap ratio?
The final swap ratio will be based on independent valuation, but UBS, using current market prices, estimates that for every 9 REC shares, shareholders could get about 8 PFC shares. This is only an indicative calculation, not an official ratio.

3. How big will the merged PFC–REC entity be?
The combined loan book is estimated at around ₹11.5 trillion (US$125 billion), with a sector mix of roughly 29% conventional generation, 40% T&D, 14% renewables, and the rest in other infra.

4. What happens to the government’s stake after the merger?
UBS estimates PFC’s government shareholding could fall from 56% to about 42% after issuing new shares to REC shareholders, but PFC would still qualify as a government company.

5. Why is the PFC–REC merger considered positive by analysts?
Analysts like UBS believe the merger can boost pricing power, improve RoA, eliminate the holding company discount, and support higher growth, especially in renewables and infra, potentially leading to a valuation re‑rating.

6. What are the main risks for investors?
Key risks include uncertainty around the final swap ratio, execution/integration risk, regulatory constraints like single borrower limits, and the critical need for continued government support to keep funding costs low.