Why you should hold on to your investment in PSUs

Tina Edwin
Tina EdwinJan 11, 2016 | 20:59

Why you should hold on to your investment in PSUs

Central public sector enterprises or Union government-owned companies are not exactly known for running a tight ship, and therefore, rarely rank among the most efficient businesses.

But, many operate in sectors that are of strategic importance such as oil and gas, coal, minerals and mining and have access to natural resources that are not available to private businesses or are made available with stringent conditions.


Some of these government-owned companies such as Coal India have the advantage of being a monopoly.

A number of these public sector enterprises make large profits despite operating at sub-optimal level, and a lot of these profits, remain unutilised as the companies are slow to make fresh investments or acquire assets.

So, every time the Union government faces a fiscal crunch, it falls back on the public sector enterprises to bridge the shortfall. It does this by seeking higher annual dividend as well as special dividend from these enterprises.

In doing so, government-owned companies have to dip into their cash and free reserves.

While such dividends benefit the government as the largest shareholder in the public sector enterprises, other shareholders, including small investors, also stand to benefit. This is because these enterprises, like any company registered in India, cannot pay dividends to one set of equity shareholders and deny it to another set.

The retail investors in these public enterprises can expect generous dividend pay-outs in the next few months.

Last week, the finance ministry wrote to the public sector enterprises where the Union government is the majority shareholder asking them to part with a larger share of profit as dividend. It has said that the government is facing a fiscal crunch.


This time the fiscal crisis has been brought on by the underachievement of the disinvestment target.

The government had hoped to earn about Rs 69,500 crore this fiscal year from selling shares of these enterprises, and of this about Rs 28,500 crore were to be raised through strategic sales. But, the government has so far managed to collect only Rs 12,700 crore through sale of minority stakes till end of December 2015. There have been no strategic sales.

So, the Centre wants all public sector enterprises to pay annual dividend of 30 per cent of their profit after taxes or 30 per cent of the government equity, whichever is higher.

Until now, only central public enterprises in sectors such as petroleum and gas, chemicals and other infrastructure sectors were required to pay dividend at the rate of 30 per cent of profit after tax or 30 per cent of government equity. The threshold for all other central public sector enterprises was 20 per cent of profit after tax or 20 per cent of government equity.

And, it is not just higher rate annual dividend that the government is seeking. It want to dig into these enterprises’ accumulated profits.


So, enterprises that have free reserves and cash are also required to pay special dividend, and that they have been told should be considered as return for government’s equity investment.

Additionally, it wants profit-making enterprises to capitalise some of their accumulated profits - that is, it wants the companies to issue bonus shares to the existing shareholders.

In 2012, the UPA government had urged the public enterprises to use their large investible surplus of over Rs 2.5 lakh crore to be returned to shareholders as special dividend, if they did not plan to invest it for their growth and development in a time-bound manner.

So what should the public sector enterprises do if they need funds for expansion or to set up new facilities? The finance ministry has now said that as recommended by the Fourteenth Finance Commission last year, public sector enterprises should consider market borrowings to partly or fully finance some of their expansion plans instead of relying entirely on their investible surpluses.

Such reliance on borrowings, the government felt will enforce more professionalism in the public sector enterprises.

While it is true that oversight by lenders would help improve governance in public sector enterprises, greater improvement in corporate governance and autonomous functioning can be achieved if the government reduced its ownership to minority.

That alone will ensure that public sector enterprises are not treated as cash cows and minority shareholders’ interest is best served. 

Last updated: January 11, 2016 | 20:59
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