Cashing in: Centre asks CPSEs to use reserves to pay dividends

Hard-pressed for funds, the Centre has asked the companies owed by it to desist from offering just mandatory ‘minimum dividend’ to it, and dip into even their accumulated reserves to boost the payout this fiscal.

The directive has come at a time when their profits have plunged and the cash balances have shrunk due to the Covid-19 pandemic.

“CPSEs are advised to strive paying higher dividends taking into account relevant factors like profitability, capex requirements with due leveraging, cash/reserves and net worth,” department of investment and public asset management (Dipam) noted in an office memorandum dated November 9. The department also asked profitable companies to pay dividend on quarterly basis, instead paying the interim dividend for full year in February-March.

“Reserves can also be used (by the CPSEs) to pay dividends,” Dipam secretary Tuhin Kanta Pandey told a TV channel on Friday.

The government has also asked 8-9 CPSEs to undertake buyback of their shares as per the new rules that mandated each PSU with a net worth of above Rs 2,000 crore and cash and bank balance of over Rs 1,000 crore to exercise the option.

Dividend receipts of the Centre from CPSEs have been on a declining trend in recent years mainly due to reduction in the Centre’s stake in many profitable companies via disinvestment. While the Budget estimate for the current fiscal is an ambitious Rs 65,747 crore, only Rs 10,000 crore has been received this far.

Dividends from CPSEs are a major part of the Centre’s non-tad receipts, with RBI surplus transfer and telecom spectrum receipts being other major components.

In FY20, CPSE dividends were just Rs 35,000 crore, much lower than the revised estimate RE) of Rs 48,256 crore, going by the Controller General of Accounts data.

Reserves and cash surplus usually consist of capital reserves (to offset capital losses), securities premium reserve (can be used to buyback shares), general reserves (can be used for any useful purposes including dividend or working capital) and surplus cash (can be used for dividend). Unlike surplus, reserves are earmarked for specific purposes and are usually parked in term deposits of various maturities and current accounts, besides mutual funds.

The surplus is cash and cash equivalent instruments like current and savings bank balance and liquid instruments of less than three-months maturity. Cash and bank balance are around a fifth of the total reserves and surplus in aggerate.

The reserves and surplus of CPSEs (about 250 at last count) have increased from Rs 9.2 lakh crore in FY17 to Rs 9.27 lakh crore in FY18 and to Rs 9.93 lakh crore in FY19.

Buybacks and liberal dividends have depleted the surplus cash of the CPSEs from as high as Rs 2,63,502 crore in FY14 to Rs 1,94,802 crore in FY17 and further to Rs 1,71,107 crore in FY18 and Rs 1,68,691 rore in FY19.

According to Dipam guidelines, CPSEs would pay a minimum annual dividend of 30% of profit after tax or 5% of net worth, whichever is higher.

The Dipam letter CPSEs said: “It has further been observed that most CPSEs pay interim dividend in February/March of the year concerned. Such bunching of interim dividend payouts by CPSEs in February-March may compete with their cash availability for year — end payments to suppliers as well as towards advance tax. In view of this, the CPSEs, especially companies that pay relatively higher dividend (100% dividend or Rs 10 per share as the case may be) may consider paying interim dividend every quarter after quarterly results. Other CPSEs may consider paying interim dividend usually on half-yearly basis”.

Only companies which do not have possibility of dividend payout as per the minimum prescribed are advised to pay interim dividend annually during October/November each year based on projected PAT, with the declaration of second quarter (Q2) results, it said. Further, all CPSEs should consider paying at least 90% of projected annual dividend, in one or more instalments, as interim dividend, the department added.

The CPSEs were also asked to pay final dividend of last financial year soon after the AGM is over in September of every year in cases where interim dividend has not been paid out fully during the last FY and there is a balance to be paid out as final dividend.

In some cases, the dividend payouts have exceeded the net profits of these state-run firms in the past: Coal India, for instance, paid Rs 12,353 crore as dividend in FY17, a whopping 133% of its net profit after the government asked the PSUs to pay liberal dividends to bridge the revenue gap from telecom spectrum. NMDC had paid 144% and 51% of its net profit as dividend in FY16 and FY17, respectively.

Besides, higher dividends, the government have also asked 8-9 CPSEs to undertake buyback of shares as per the new rules that mandated each PSU with a net worth of above Rs 2,000 crore and cash and bank balance of over Rs 1,000 crore to exercise the option.