Several options have been examined, with two emerging as the most cost-effective. One proposal involves the merged entity issuing preference shares to the government at ₹10 apiece.
The other involves the government subscribing to non-tradable bonds issued by the merged entity, with the proceeds used to raise its stake to 51% or more. The boards of PFC and REC will meet on Sunday to discuss the merger plans.
Currently, the government holds a 55.9% stake in PFC and 52.6% in REC, with the remainder owned by public shareholders. Post-merger, however, the Centre’s stake is expected to fall below 51%, necessitating an infusion of about ₹25,000 crore for New Delhi to retain majority control in the combined entity. ET had reported in February that the government could consider preference shares as an option to raise its equity stake above 51% post-merger.
PFC did not respond to ET’s request for a comment.
Stock or Bonds
Legal and financial advisors have suggested two options to avoid any strain on the fiscal.
Under one option, the merged entity can allot preference share capital to the government at the face value of ₹10 per share, unlike equity shares, which would require subscription at a premium. PFC shares are currently trading at ₹437.As per ET’s estimates, the government would need to subscribe to around 800 million preference shares, entailing a cash outflow of about ₹800 crore if this route is chosen to retain a majority stake.
Under the alternative route, the government would need to subscribe to equity capital through recapitalisation bonds of nearly ₹24,000 crore. At a coupon rate of 7%, this would imply an annual interest cost of around ₹1,400 crore.
Between the two, recapitalisation bonds would be the costlier option due to the recurring coupon outgo.
Legal and financial advisors have suggested that PFC should opt for the preference share route over recap bonds, as the latter would be more expensive than a one-time cash outflow for preference share allotment, people cited above said.