Is the Government Milking Cash Rich PSUs?

Mon, 27 Mar Pre-Open

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The government's compulsion to bridge its fiscal deficit by using cash lying with listed public sector units (PSU) has taken various shapes such as share sales and special dividends.

In FY17, oil marketing companies like Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL) and Indian Oil Corporation Limited declared second interim dividends totaling Rs 45.7 billion. Meanwhile, Hindustan Zinc Limited was recently in the limelight for giving the highest dividend, given by a corporate in a single financial year, which for FY17 stood at Rs 271.57 billion.

As per the reports, Coal India may part with about 43% of its cash reserves, effectively eroding the company's net worth by 44%, while paying out its interim dividend.

The government's pressure to give maximum dividends without meaningful growth in profitability has left PSUs staring at declining cash reserves. The cash balance of non-bank public enterprises plunged by 20% in the first half of this financial year.

A large dividend outgo means companies are left with less cash to fund their investment plans, inducing them to borrow more. Increased borrowing can affect their credit ratings and make funds costlier.

The seventh pay commission recommendations and shortfall in direct tax collections are the major reasons for the rising fiscal deficit of the government. Therefore, to increase the revenue, government is taking the routes such as disinvestments, cutting subsidies, receiving massive dividends from PSUs and the cash received from the share buybacks by PSUs.

Besides dividend, the government's resource mobilization through the stock market route has been high. So far in this financial year, the Centre had raised Rs 400 billion by way of disinvestment. This was the highest ever. The bulk of the proceeds, however, has come through share buybacks - where the PSUs have bought back shares held by the government by paying cash available on the balance sheet.

Utilizing spare cash is always a good thing. The first preference is always to reinvest in the business to create assets that generate cash over a longer time period. This holds true for cyclical businesses-where most PSUs operate in. While buybacks and dividend payouts are legitimate ways to return cash to shareholders, whether PSUs would have done it, if not for the government's need to fill its treasuries, is a question that should bother minority shareholders.

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