Dec 7, 2016

The big squeeze on cash-rich companies

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By Pavan Kumar Vijay

It is not just a higher annual dividend that the government is seeking, it wants to dig into the enterprises’ accumulated profits. So, those with free reserves have to pay a special dividend

The number of state-owned companies announcing bonus shares has touched the highest level this calendar year. According to data available, nine state-run companies have rewarded their shareholders with bonus shares in 2016. Bonus issue, also known as a scrip issue or a capitalisation issue, is an offer of free additional shares to existing shareholders.

Companies that are low on cash may issue bonus shares instead of cash dividends as a means of providing income to shareholders. Bonus shares increases the issued share capital of the company, giving a perception of it being bigger than it really is, thus, making it more attractive to investors. Also, increasing the number of shares decreases the stock price, making the stock more affordable to retail investors.

In January this year, the finance ministry asked central public sector enterprises (CPSEs) to give 30 per cent dividend to the government. Those with large cash reserves and sustainable profit were asked to issue bonus shares. This fiat was issued in the backdrop of the government looking to adhere to the fiscal deficit target amidst a massive shortfall in the targeted disinvestment receipts.

According to the new policy, a CPSE will pay a special dividend to the government as a return for its equity investments and CPSEs with large cash reserves may issue bonus shares. The rules have also prescribed issue of bonus shares if reserves are five times or more than the paid-up equity share capital. If reserves and surplus cross 10 times the equity capital, the PSU has no option but to issue bonus shares to shareholders. These sound good hypothetically, for it means wider dispersal of shareholding and cash at one level. However, the most top profitable ones have very closed shareholding, with government being the dominant shareholder.

Until now, only central public enterprises in sectors such as petroleum & gas, chemicals and other infrastructure sectors were required to pay a dividend at the rate of 30 per cent of profit after tax or 30 per cent of government equity. The threshold for all other central public sector enterprises was 20 per cent of profit after tax or 20 per cent of government equity.

It is not just a higher rate annual dividend that the government is seeking, it wants to dig into these enterprises’ accumulated profits. So, enterprises that have free reserves and cash are also required to pay special dividend, which they have been told should be considered as return for government’s equity investment. Additionally, the government wants profit-making enterprises to capitalise some of their accumulated profits, that is, it wants the companies to issue bonus shares to the existing shareholders.

In 2012, the UPA government had urged the public enterprises to use their large investible surplus of over Rs 2.5 lakh crore to be returned to shareholders as special dividend, if they did not plan to invest it for their growth and development in a time-bound manner. So what should the public sector enterprises do if they need funds for expansion or to set up new facilities? The finance ministry has now said that as recommended by the Fourteenth Finance Commission last year, public sector enterprises should consider market borrowings to partly or fully finance some of their expansion plans instead of relying entirely on their investible surpluses.

The capital investment requirements of CPSEs may be kept in view but it needs to be specifically assessed whether those investment requirements can be fully or partly met out of market borrowing, to leverage the favourable debt-equity ratios in the state-owned firms, said a statement by economic affairs department, further stating that the reliance on market borrowing would enforce more professionalism in the CPSEs.

The government needs to show more alacrity on strategic sales instead of putting the big squeeze on the cash-rich state-run companies. It is creditable that the government seems to have bitten the bullet on IDBI Bank privatisation, but the same intensity needs to be shown across the CPSE spectrum. We keep hearing of the government plans. The government should now look into individual cases along with their respective administrative ministries.

The enterprises that will have reasonable valuations should be put on the block first. The government has budgeted a very aggressive Rs 56,500 crore revenue from disinvestments in this fiscal, of which Rs 36,000 crore is to come from minority stake sale in PSUs while Rs 20,500 crore is targeted from strategic sales.

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