PFC Board Approves REC Merger Following Budget 2026 Mandate

Introduction: A Major Consolidation in Power Financing

In a significant development for India's financial sector, the Board of Directors of Power Finance Corporation (PFC) on February 6, 2026, granted 'in-principle' approval for a merger with its subsidiary, REC Limited. This move formalizes the path toward creating a single, mammoth non-banking financial company (NBFC) dedicated to funding the nation's power and infrastructure sectors. The decision follows a clear directive laid out by the Union Finance Minister during the Budget 2026-27 speech, aiming to enhance scale and operational efficiency within public sector undertakings.

The Budget 2026 Directive

The foundation for this merger was laid in the Union Budget 2026-27. Finance Minister Nirmala Sitharaman announced the government's intention to restructure the two entities as a first step in strengthening public sector NBFCs. The stated goal is to align with the 'Viksit Bharat' vision, which calls for scaled-up credit disbursement and greater technology adoption. The Finance Minister's speech explicitly noted, "In order to achieve scale and improve efficiency in the Public Sector NBFCs, as a first step, it is proposed to restructure the Power Finance Corporation and Rural Electrification Corporation."

Details of the Board's Approval

Acting on the budget announcement, the PFC board met and approved the consolidation. This follows PFC's earlier acquisition of the government's 52.63% stake in REC, a transaction that made REC a subsidiary of PFC. The board has been clear that despite the merger, the resulting entity will retain its status as a 'Government Company' under the Companies Act, 2013. This ensures that the consolidated firm will continue to operate under a public sector mandate, addressing concerns about its governance and ownership structure. The detailed merger scheme is yet to be finalized and will be shared after securing all necessary regulatory and statutory approvals.

Strategic Rationale for the Merger

The consolidation of PFC and REC is expected to create a financial powerhouse with a significantly larger balance sheet. The primary objective is to streamline operations, reduce functional overlaps, and lower the cost of borrowing. A larger, unified entity can access capital markets more competitively, which is crucial for funding India's ambitious infrastructure goals. According to Power Secretary Pankaj Agarwal, India requires approximately $150 billion over the next seven years for new power plants, transmission lines, and energy storage systems. A merged PFC-REC is seen as essential to meeting this massive funding requirement, particularly for green energy projects.

A Look Back: The Path to Consolidation

The journey toward this merger began in March 2019 when PFC acquired the government's 52.63% majority stake in REC for ₹14,500 crore. This transaction, approved by the Cabinet Committee on Economic Affairs (CCEA), established a holding-subsidiary structure. While a merger was anticipated sooner, the two entities continued to operate separately. The recent budget announcement provided the necessary policy impetus to move forward with the full integration of their operations.

Market Reaction and Stock Performance

The market has been closely watching the developments. Since the budget announcement, investor sentiment has been largely positive. Shares of Power Finance Corp have risen by 5.8%, while REC's shares have climbed 2.3%. On the day of the board's approval, February 6, 2026, PFC's stock closed 1.01% higher at ₹419.20 on the BSE. In contrast, REC's shares ended the day 2.51% lower at ₹372.50.

Regulatory Hurdles and the Road Ahead

Despite the in-principle approval, the merger faces significant regulatory challenges. The most prominent is the Reserve Bank of India's (RBI) exposure norms for NBFCs, which cap lending to a single project at 25% of an entity's capital base. As separate companies, PFC and REC could jointly finance up to 50% of a project. A merged entity would likely breach this limit on numerous existing loans, potentially forcing costly divestments or deleveraging. Navigating these regulatory constraints will be a critical part of finalizing the merger scheme. The forward view for investors will depend on the details of this scheme, the projected synergies, and the timeline for completion.

Conclusion

The PFC board's approval marks a pivotal moment in the reform of India's public sector financial institutions. By moving to merge with REC, PFC is set to create a dominant lender for the power sector, aligned with the government's long-term economic vision. While regulatory approvals and integration challenges remain, the strategic intent is clear: to build a more robust, efficient, and powerful financial engine to drive India's energy transition and infrastructure growth.