PSUs - PERSONAL FIEFDOM'S OF GOVT?

By Ruma Dubey

The Govt has failed miserably in controlling the spiraling fiscal deficit, thanks to its mindless spending, with no eye on earning revenue. Doling out social benefit schemes, with an eye only on the vote and not on the balance sheet, the picture that we have today is dismal.

But some good thinking from the Finance Minister might help the Govt salvage at least some of its lost face. The spectrum auction is going great guns and there, it is likely to achieve the Rs.40,000 crore mop-up target. Now, the tricky part was PSU divestment. Given the comatose primary market, this did not take off, though the Govt has shown the courage with the Engineers India FPO. That too, irrespective of the response, it has the good old rich daddy to bank on – LIC. And then it has asked PSUs, cash-rich ones, to declare interim dividends – with the Govt being majority shareholder, it will gain enough to meet some its divestment target.

What is bothersome is that the Govt has arm twisted cash-PSUs to declare interim dividends, irrespective if whether they can afford it or no. There were a lot of voices of discontent, stating that diverting precious cash to pay off dividend would mean lesser money for future capex. Like Coal India, which declared a hefty Rs.29/share interim dividend. For this PSU, the total out-go from the company was Rs.18,317.46 crore out of which Govt, which holds 90% stake, stands to gain Rs.16,485.71 crore plus the dividend distribution tax of Rs 3,113.05 crore. But doesn’t this seriously dent that company’s cash balance, which stood at Rs.43,776 crore? Instead of the earlier plan to raking in money through a 10% divestment, it had to actually disburse money; it paid a price for the Govt’s fallacies. As such Coal India is facing severe coal linkage issues and has not been to scale up production at all. And if the Govt dips into the company lie this, what is the future of this company?

Or then take the case of BHEL. It yesterday declared a dividend of Rs.1.31/Rs.2 face value share. Given the consistently poor performance, payments not coming in from clients, fears of rising negative cash flows; was it prudent to strip BHEL of its precious cash? (For more deatails read - https://www.sptulsian.com/article/78432)

Rating agency Crisil has put out a report, urging the Govt to either force buybacks or pay hefty dividends to reduce the fiscal deficit. It has stated that 20 PSUs are well placed to distribute 40% of the corpus of Rs.64,0000 as dividend without impacting growth plans. It expects the top 20 PSUs, by cash holding, will have an estimated pre-dividend corpus of around Rs 160,000 crore by March 31, 2014. In proportion to the shareholding, the excess payout to the government could, thus, be Rs 20,000 crore and this would approximate 20 bps of fiscal deficit, which can help the government reach closer to its stated fiscal deficit target of 4.8%. It’s a very solid argument which makes logical sense but the question is – why this fiefdom on PSUs? Most of these are Maharatnas, so are they really autonomous as they are made out to be?

Today, you talk to any brokerage house or analyst and most prefer the private sector stocks to public sector. And that brings us to a very pertinent question – is it prudent to buy any stock which is owned by the Govt? Usually, when we want slow and staid but secure returns, PSU stocks were always stated to be best. They were safe as far as promoters went as the Govt of India could neither debunk with the money nor hoodwink the shareholders. But in the current scenario, when we are questioning the very credibility of this Govt, its paralysis on policy action, how can companies under its gambit not get affected? 
 

In 1990’s the Govt, when caught in a similar bind has directed PSU oil companies to pick up equity stakes in one another,  which meant their surpluses got locked in a labyrinth of cross holdings. There was also a time when the Govt had directed PSU companies to pay out minimum dividends of 20 or 30% per annum, irrespective of the balance sheet. But more importantly, one question which increasingly comes to mind is whether it is prudent to buy PSU stocks when Govt runs it like its fiefdom? If a private sector promoter had done this, we would have surely howled till we got hoarse.

The Govt is justifying these hefty payouts saying that this ‘unutilised’ cash reserves could thus be used for better leverage. At this juncture, even the private sector is sitting tight on money as the environment is not conducive to new investments. Does that mean it will pander away the money earned? Surely in a year or two, when investment climate improves, these companies will use the cash to expand their asset base and expand. And it is in such growth that the future success of a company lies. Will the Govt take away that opportunity too? And frankly, if PSUs are run like personal empires, why should people like me and you invest at all in PSUs? If earlier the assurance was that it was a Govt owned company, today the very same reason has become a risk factor!