Unhappy with the financial management and capital allocation policies of State Public Sector Undertakings (PSUs), the Gujarat government has sought to impose mandatory norms for dividend distribution, stock buy-backs, bonus and stock splits to fix the problem.

The new guidelines require all PSUs to pay out dividends either at 30 per cent of profits or 5 per cent of net worth, whichever is higher. Firms with cash balances of ₹1,000 crore and net worth of ₹2,000 crore will need to consider stock buybacks.

 

Mandatory distribution policies fail to deliver shareholder value in PSUs for many reasons. One, companies in mature sectors with predictable profits and free cash flows (such IT and FMCG) are best-placed to deliver high dividends and buy-backs.

But most PSUs in India operate in the commodity or infrastructure sectors which are capital-intensive, with high profit volatility based on business cycles. Global giants in cyclical sectors typically build scale and efficiency by adding to their cash coffers during boom times, and deploying them in buyouts or expansion during down-cycles.

But with frequent dividend and buyback demands draining their cash coffers, PSUs such as NTPC, HPCL and SAIL, to name just three, have been hamstrung in pursuing this strategy.

Two, scale and modernisation hold the key to sector dominance and pricing power in cyclical industries. But periodic payouts pegged to net worth or cash balances actively hinder a Coal India, an ONGC or a BHEL from investing adequately in modernisation.

Therefore, sound capital allocation decisions in PSUs are better enforced through autonomous Boards and visionary top managements, than through one-size-fits-all distribution mandates.

What’s more, equity investors look at India as a growth market and accord high valuations to companies with strong growth runways, not those with generous payouts. PSUs paying high dividends such as ONGC and Coal India trade at sub-5 PE multiples while the low dividend-paying IRCTC trades at over 50 times.

As Gujarat government backed PSUs also operate mainly in the power and infrastructure sectors, the new rules may play out very similarly for them.

If it is keen to extract a better return on investment, the Gujarat government perhaps ought to explore freeing up capital from its ailing enterprises, so that the promising ones can pursue their growth ambitions.

A recent CAG report showed that though the 100 Gujarat State PSUs carried an equity base of nearly ₹1-lakh crore and assets of ₹3-lakh crore, they earned just ₹2,724 crore in total profits in FY22, with the bulk of this coming from just eight firms. Sixteen PSUs were defunct while 55 weren’t filing their financial statements.

Cracking the whip on non-compliant PSUs and initiating capital restructuring in loss-making ones may yield better outcomes for State finances than mandated distribution policies.  

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