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Government to consolidate large subsidiaries into one

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Source: The Economic Times
Saturday, January 27, 2018

 New Delhi has embarked on a consolidation drive by merging the group companies of Power Finance Corporation and Rural Electrification Corp to create a single unit that would harness embedded synergies. 


The move, aimed at pruning the number of subsidiaries or special purpose vehicles under these entities, will result in cost optimization, and bring the cost base at state firms on a par with those at private-sector establish. 

Others such companies, including NTPC, may soon adopt the same approach. While PFC and REC have already started the process, NTPC is likely to issue relevant tenders, two people familiar with the matter told ET. 

"More such government companies, like NMDC, Container Corporation, Shipping Corporation, and Coal India, may soon follow the path of consolidation," said one of the persons cited above. 

Emails sent to PFC, REC and NTPC remained unanswered until the publication of this report. Other companies could not be contacted immediately for comments. 

About three months ago, India earned global recognition for "ease of doing business" as it climbed 30 notches to vault into the top 100 rankings on the World Bank's 'ease of doing business' index. 
 
The government has already proposed mergers of state-owned banks where small to mid-size banks are expected to be merged with their larger peers, bringing in efficient managements. 

Government firms are often blamed for complex structures, with many group companies pursuing almost the same business objectives. 

For instance, Power Finance Corp has about 25 subsidiaries spread across the country. NTPC has five such arms, while Coal India has about a dozen group entities working on the same vertical. Those have been created over a period of time. 

Eastern Coalfields, a subsidiary based out of West Bengal, is only mining coals, nothing different from Mahanadi Coalfields, another subsidiary, based out of Odhisha. 

Earlier last month, Moody's Investors Service said that it has a stable view on the Indian power sector for the next 12-18 months. 

The presence of multiple entities in the PSU space is a throwback to the 1960 s. Economies of scale in such structures are not available now, said an industry source. 

"Now managing so many subsidiaries has become very complicated for the managements. Compliance is also costly and consequences of non-compliance are huge," said an accounting expert. 

Various issues of corporate governance also arise for listed companies. In line with the private sector, PSUs are also considering the elimination of excess entities.
 
The union cabinet seems to have already issued some direction in this regard, source said. 


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