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HomePolicyWhat does the government’s recommendation to pay the highest possible dividends mean for the PSUs?

What does the government’s recommendation to pay the highest possible dividends mean for the PSUs?

PSU
By Priya Kumari

The government has recommended the Public Sector Undertaking (PSU) entities to pay the highest possible dividends this year so as to help it in meeting the challenging deficit target. However, some of them are seeking exemption from paying hefty dividends to the government.

Is it a case of financial extortion of the PSUs? Or, is it a way to fuel economic growth by investing the idle cash in alternative avenues?

The number game

According to the guidelines issued last year, the state-run firms need to pay a minimum dividend of 30% of their net profit or 5% of their net worth – whichever is a higher subject to the maximum dividend permitted under the law. It is one of the several indirect measures aimed at helping the government achieve the disinvestment target for FY ’17.

Disinvestment is essentially a process of divesting from assets with an aim to invest the proceeds in more lucrative (alternative) avenues.

Disinvestment is essentially a process of divesting from assets with an aim to invest the proceeds in more lucrative (alternative) avenues. The Union government aims to raise Rs. 56,500 crore by selling stakes in state-owned enterprises in 2016-17, with Rs. 36,000 crore coming from minority stake sales and Rs. 20,500 crore from strategic stake sales.

This is significantly lower than the Rs. 69,500 crore targeted in the last budget*. Owing to unfavourable macroeconomic conditions, like the increase in interest rate by the Federal Reserve and unsettled uprisings in the Chinese economy, the government is struggling to meet its disinvestment target.

In particular, the PSUs have broadly underperformed in recent times. This is evident from the fact that the Nifty PSE index, a metric of Public Sector Enterprises on the NSE, has fallen 17% in the last two years compared to 7.5% rise in the benchmark Nifty. Demonetisation is another nail in the coffin which has resulted in dampened prospects of consumption and is stressing the balance sheet of the companies.

demonetization aginst disinvestment for PSUs

The recent demonetization move will prove a hindrance in achieving the disinvestment targets for PSUs | Photo Coutesy : The Hindu

The inherent impact

The range of impacts that this move may have varies from medium to long term. It will prove beneficial in drawing investors, particularly those focused on dividend yields, towards the PSU stocks. It is an indirect method of encouraging the PSUs to improvise upon the capital mix and push the boundaries of financial innovation to raise funds from alternative sources.

From the government’s perspective, it is yet another mode of fetching non-tax revenue.

The move will provide a way to syphon the funds lying idly in the vaults of these enterprises into alternative investments for public welfare.

Firms argue against higher dividends

The state-run firms have argued that higher dividends will stress their balance sheet, thus not leaving enough money for planned capital investments. This will force them to borrow more which will affect their credit ratings and make borrowing even costlier.

Looking at the numbers in the past, the government received about Rs. 34,000 crore out of the total dividend of about Rs. 58,000 crore declared by 112 state firms in 2014-15. The dividend comprised nearly 44% of the net profit of state firms. A majority of the overall dividend came from oil sector companies that were also among the most profitable.

A majority of the overall dividend came from oil sector companies that were also among the most profitable.

In such cases of cash surplus, it is justified for the government to ask for higher dividends to prevent the funds from lying idle by investing those elsewhere. However, in other cases, it will make more sense to allow the firms the flexibility to invest money in expansion and modernisation. This, one hopes, will have a positive impact on the profitability, innovation and self-sufficiency of the public sector companies in the long term.


Featured Image Courtesy: IB Times
Bibliography:
http://www.livemint.com/Politics/RcaKz3NQ6P4YqWaY7IorpL/PSUs-to-monetize-idle-assets-disinvestment-department-renam.html
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