What Happened
- The government is planning a preferential share allotment mechanism in the proposed merger of Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) to ensure the Centre retains majority stake and the merged entity maintains "Government Company" status under the Companies Act, 2013.
- PFC's Board of Directors gave in-principle approval for the merger on February 6, 2026, following the Cabinet Committee on Economic Affairs (CCEA) approval announced during Union Budget 2026-27.
- Under a simple share-swap at current market prices, the government's stake in the merged entity would fall to approximately 42% (from 56% in PFC), as PFC's share count is estimated to increase by about 34% post-merger.
- To retain majority ownership above 51%, the government is considering preferential allotment of shares to itself in the merged entity.
- The combined entity would have a loan book of approximately Rs 11.5 lakh crore (US $125 billion), making it the largest NBFC in India and a potential major Development Financial Institution (DFI).
Static Topic Bridges
Development Financial Institutions (DFIs) in India
Development Financial Institutions are specialised entities set up to provide long-term finance for sectors where risks exceed the acceptable limits of commercial banks. India had a robust DFI ecosystem from the 1950s through the 1990s — IDBI (1964), IFCI (1948), ICICI (1955), and NABARD (1982) — but most were converted to universal banks or wound down in the early 2000s. Recognising the infrastructure financing gap, the government established the National Bank for Financing Infrastructure and Development (NaBFID) under the NaBFID Act, 2021 as the principal DFI for infrastructure.
- NaBFID established in April 2021 under a dedicated Act of Parliament
- Authorised share capital: Rs 1 lakh crore
- Regulated by the RBI as an All India Financial Institution (AIFI) under Sections 45L and 45N of the RBI Act
- Functions: long-term infrastructure loans, refinancing, attracting private and foreign investment, dispute facilitation
- Shareholders can include: Central Government, multilateral institutions, sovereign wealth funds, pension funds, insurers, banks
- Historical DFIs: IFCI (1948, India's first DFI), IDBI (1964, converted to bank in 2004), ICICI (1955, merged with ICICI Bank in 2002)
Connection to this news: The PFC-REC merger would create a de facto DFI for the power sector with a combined loan book of Rs 11.5 lakh crore, operating alongside NaBFID. While NaBFID focuses on broad infrastructure, the merged entity would specialise in power sector financing — covering conventional generation, transmission and distribution, and renewables.
Government Company Under the Companies Act, 2013 (Section 2(45))
Section 2(45) of the Companies Act, 2013 defines a "Government Company" as one in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government(s), or partly by the Central and partly by one or more State Governments. Subsidiaries of Government Companies are also deemed Government Companies. This classification carries significant implications for governance, audit, and regulatory treatment.
- Section 2(45): 51% paid-up share capital threshold for Government Company status
- Section 139(5) and (7): CAG appoints the statutory auditor and conducts supplementary audit
- Government Companies enjoy certain exemptions and benefits — sovereign guarantee backing, favourable borrowing terms, eligibility for government mandates
- Loss of Government Company status triggers reclassification under SEBI and RBI regulations
- PFC currently holds 56% government stake; post-merger share-swap would dilute this to approximately 42%
Connection to this news: Without preferential allotment, a standard share-swap merger would dilute the government's stake below 51%, causing the merged entity to lose its Government Company status. This would affect its credit rating, borrowing costs, regulatory treatment, and eligibility for sovereign-backed mandates — hence the need for a preferential allotment mechanism.
Non-Banking Financial Companies (NBFCs) — RBI Regulatory Framework
NBFCs are financial institutions registered under the Companies Act that provide banking services (loans, advances, acquisition of shares, bonds) without holding a banking licence. The RBI regulates NBFCs under Chapter IIIB of the RBI Act, 1934. In October 2021, the RBI introduced a scale-based regulatory framework classifying NBFCs into four layers: Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), and Top Layer (NBFC-TL).
- RBI Act, Chapter IIIB (Sections 45-I to 45-QA): registration, regulation, and supervision of NBFCs
- Scale-based regulation (October 2021): four-tier structure based on size, activity, and systemic risk
- Upper Layer: NBFCs specifically identified by RBI based on scoring methodology; Top Layer: currently kept empty, reserved for NBFCs posing extreme systemic risk
- PFC and REC are both classified as Infrastructure Finance Companies (NBFC-IFC) under RBI norms
- NBFC-IFC criteria: minimum 75% of total assets deployed in infrastructure loans, minimum net owned fund of Rs 300 crore
- Key difference from banks: NBFCs cannot accept demand deposits, are not part of the payment and settlement system, and do not have deposit insurance
Connection to this news: The merged PFC-REC entity would become India's largest NBFC by asset size. Its classification as an Infrastructure Finance Company allows it to take concentrated exposure in the power sector, unlike banks which face sector-specific exposure limits. The combined entity's scale could also push it into the RBI's Top Layer regulatory bracket.
Preferential Allotment Under SEBI Regulations
Preferential allotment is the issuance of shares by a listed company to a select group of investors (not through a public issue). It is governed by Chapter V of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. For listed companies, SEBI prescribes pricing norms, lock-in periods, and disclosure requirements. The pricing must be at least the higher of the average of weekly high and low of closing prices during the 26 trading weeks or 2 trading weeks preceding the relevant date.
- SEBI ICDR Regulations, 2018 — Chapter V governs preferential issues
- Pricing: higher of 26-week or 2-week volume-weighted average price (VWAP) preceding the relevant date
- Lock-in period: 18 months for promoter allottees (reduced from 3 years in 2023 amendment); 6 months for non-promoters
- Special resolution required: 75% shareholder approval in general meeting
- Government entities may get exemptions from certain SEBI pricing norms under specific circumstances
- Companies Act, 2013, Section 62(1)(c): allotment to any person (including preferential) requires special resolution
Connection to this news: The government may use preferential allotment to subscribe to additional shares in the merged entity at a determined price, thereby increasing its holding above 51%. This route allows the government to retain control without a public offer, though it must comply with SEBI's pricing and disclosure norms, and secure shareholder approval through a special resolution.
Key Facts & Data
- PFC established: 1986; under Ministry of Power
- REC established: July 1969; became PFC subsidiary in 2019 (PFC acquired 52.63% government stake in REC)
- Current government stake in PFC: approximately 56%
- Estimated post-merger government stake (without preferential allotment): approximately 42%
- Government Company threshold: 51% (Section 2(45), Companies Act 2013)
- Combined loan book: approximately Rs 11.5 lakh crore (US $125 billion)
- Sector mix of combined entity: approximately 29% conventional generation, 40% T&D, 14% renewables
- Estimated share-swap ratio (UBS): 8 PFC shares for every 9 REC shares
- PFC share count expected to increase by approximately 34% post-merger
- Budget 2026-27 announcement: "restructure PFC and REC" to achieve scale and improve efficiency in public-sector NBFCs
- CCEA in-principle approval followed by PFC Board approval on February 6, 2026