In a significant development for India’s power financing architecture, Power Finance Corporation (PFC) on February 6 announced that its board has accorded in-principle approval for a merger with REC Limited, following the Cabinet Committee on Economic Affairs (CCEA) nod for restructuring the two state-owned lenders.

The announcement formalises what had been indicated earlier in the Union Budget 2026, where Finance Minister Nirmala Sitharaman outlined a vision to restructure public sector NBFCs to improve scale, efficiency, and credit delivery. As part of this process, PFC had earlier acquired 52.63 percent of the government’s stake in REC, effectively making REC its subsidiary. With this, the two entities are already operating in a holding-subsidiary structure.

According to PFC’s stock exchange filing, the board has now taken cognisance of the Budget announcement and approved the restructuring in the form of a merger, subject to detailed scheme formulation and regulatory approvals. Importantly, PFC has clarified that post-merger, it will continue to remain a “Government Company” under the Companies Act, 2013 and other applicable laws.

This development is not merely a corporate restructuring. It is closely linked to India’s long-term power sector strategy and the funding challenges associated with it. Over the past decade, both PFC and REC have emerged as the primary lenders to the power ecosystem, financing generation projects, transmission lines, distribution upgrades, renewable energy assets, and increasingly, new technologies such as electric vehicles, battery storage, and green hydrogen.

REC, in particular, has expanded its mandate beyond traditional power financing into non-power infrastructure segments including roads, metro rail, airports, ports, and communication infrastructure. PFC, under the Ministry of Power, has remained one of the country’s largest NBFCs with a dominant role in funding state utilities and central power projects.

The government’s rationale, as reflected in the Budget statement, is to achieve scale and improve efficiency in public sector NBFCs. Market participants have long argued that the fragmentation of lending capacity across multiple state-backed entities limits their ability to raise capital at competitive costs and deploy it efficiently in large infrastructure projects.

The strategic context is critical. India’s ambition to electrify its economy at scale will require an estimated $450 billion investment over the next seven years to build new generation capacity, expand transmission networks, and develop energy storage systems. Power Secretary Pankaj Agarwal has indicated that India’s per capita electricity consumption, currently about one-third of the global average, is expected to triple by 2047 in line with the country’s developed nation aspirations.

Against this backdrop, consolidating PFC and REC could create a single, larger balance sheet capable of borrowing at lower costs, deepening market access, and supporting larger project financing requirements. Deven Choksey, Managing Director at DRChoksey FinServ, told Bloomberg that combining the two lenders would give them size and scale advantages to meet the growing funding needs of the power sector.

Markets have responded positively to the restructuring signal. Since the Budget announcement, shares of PFC have risen 5.8 percent, while REC has gained 2.3 percent, indicating investor expectations of operational and financial synergies.

From a policy perspective, the move signals continuity in the Centre’s reform-linked approach to the power sector. Over the years, structural issues in distribution companies, delays in project execution, and financing constraints have hampered private investment in the power value chain. By strengthening the balance sheets and lending capacity of the two largest public sector power financiers, the government appears to be preparing the financial backbone required for the next phase of energy transition and infrastructure expansion.

For lenders, the merger could translate into improved asset-liability management, lower cost of funds, better risk diversification across power and non-power infrastructure segments, and stronger bargaining power in capital markets. For borrowers, especially state utilities and renewable energy developers, this could mean more predictable and larger financing support.

For Indian markets, this is a structural development rather than a short-term trigger. The power financing ecosystem underpins capital expenditure across generation, transmission, renewables, and emerging clean technologies. A stronger, consolidated lender can accelerate project execution cycles.

The development is particularly relevant for the power, renewable energy, transmission, and infrastructure EPC sectors that depend heavily on long-term project financing from PFC and REC.