company begins to follow the RBI's prudential norms for NPA provisioning. REC will also need to considerably strengthen its internal control systems and loan pricing mechanisms to support the significant increase in business planned by the company.
REC's business operations are susceptible to the effects of frequent top management changes as is the case with many other government run entities. REC's shareholders remain vulnerable to the possibility of REC's business operations being used by the government more as a tool for public policy than an engine for profit maximization.
About the company and the issue
REC is a public sector non-banking finance company (NBFC). REC operates under the administrative control of the Ministry of Power (MoP) and is wholly-owned by the Government of India (GoI). Established in 1969 with the sole objective of financing rural electrification schemes in the country, it services its clients -through a network of 17 project offices spread across India.
The company's schemes are primarily aimed at extending and improving the supply of electricity by providing adequate funds for transmission and distribution projects, especially in rural areas. However, over a period of time REC's mandate evolved, permitting it to finance all segments of the power sector in the country. In line with its overall objective of assisting the government's rural electrification strategy, REC also acts as the nodal agency for disbursing grants provided under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). The company enters into a Memorandum of Understanding with MoP, which outlines its yearly performance targets and the commitments from the government.
For 2006-07, the company's fund-based income and net profits were Rs 28.3 billion and Rs 7.7 billion, respectively. The operating income of the company has grown at a CAGR of 11.4 per cent over the past 5 years, while PAT has grown at a CAGR of 14.5 per cent in the same period.
REC aims to raise Rs 14 billion to Rs 16 billion by this proposed public issue of 156,120,000 equity shares.
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