Centre’s PSE dividend policy is too pushy
In recent years, there has been a marked shift in the strategy adopted by the Centre to generate revenue from Central Public Sector Enterprises (CPSEs). With the number of CPSEs where partial stakes can be divested to the public dwindling in number and strategic sales facing roadblocks, the Centre has turned its attention towards dividend receipts to bolster non-tax revenue.
Since 2020-21, dividends received from CPSEs have been higher than divestment proceeds. The revised guidelines for capital restructuring of CPSEs released this month are aimed at ensuring a steady revenue stream from this source. The Centre, however, needs to ensure that its dividend policy does not impinge on the operational freedom of the CPSEs or harm their long term prospects. The new guideline stipulates that CPSEs should pay a minimum annual dividend of 30 per cent of profit after tax or 4 per cent of networth, whichever is higher. While the latter threshold has been lowered slightly, from 5 per cent of networth in the guidelines issued in 2016, the new guidelines are also applicable to government-owned non-banking finance companies. Going by the profit earned by some of the public sector NBFCs such as PFC, REC, IRFC and HUDCO last fiscal, the Centre could earn additional dividend of above ₹8,000 crore in FY25. This gain will certainly help, when indirect tax revenue is growing at a sluggish pace and the pressure to spend on capex continues.
The dividend distribution policy should be less onerous. For instance, the guidelines have made it almost mandatory for the entities to declare a minimum level of dividend. Failure to do so needs to be explained based on capex and business expansion needs, or capacity of the enterprise to borrow, and must be ratified by the Centre. Though the government is the majority owner-shareholder, in the interests of PSU autonomy, it is best that decisions on dividend distribution are taken by company boards. The government is also trying to ensure cashflow from the PSEs through the year by laying down that they should try to pay interim dividend every quarter. Making NBFCs adhere to these policies could impair their cash flows, affecting their ability to lend. They may have to borrow from the market for raising funds, raising their cost of capital. NBFCs could have been kept out of these rules, just as banks and insurance companies have been exempted.
The guidelines also mandate that CPSEs with a market price below the book value for six months can announce buyback of shares. Similarly, CPSEs have been told to issue bonus shares when reserves and surplus are far above the share capital, or split the stock when market price is many times the face value of its stock. While these measures can boost the stock price to facilitate future fund raises, such decisions need to be deliberated by the company managements and boards. They involve subjective factors such as market conditions, investor sentiment and extent of liquidity. They cannot be determined on the basis of company financials alone.
