The Hindu Business Line : A fair demand for bonus shares

The Central Government as the major shareholder in various public sector companies is well within its rights to demand certain compliances from them. And there is no way the boards of these companies can parry these demands given the fact that the concept of independent directorship is a myth, especially in the context of public sector companies where directors are beholden to the government of the day.

Public sector oil companies, commanding as they do on an average a reserve position of 29 times their paid-up capital, are being told to handout bonus shares to the shareholders. On the face of it, the demand appears to be reasonable given the fact that financial pundits concede that such companies are ideal candidates for bonus issues.

Not an unfair demand

That they have built such envious financial sinews is at once a reflection of their near monopoly status as well as their conservatism in the matter of dividend payout. The Government, therefore, is not behaving irresponsibly while making this demand which, if acceded to, would be a reward for the exemplary forbearance shown by it all these years in allowing these companies to plough back their profits for business purposes rather than demanding hefty cash dividend year after year as it could have.

Moreover, the demand for bonus shares also reflects the Government’s sensitivity to the financial woes of the oil majors which is entirely its making — by not allowing them to increase the prices of petroleum products despite the steep increase in international crude prices and instead partially compensating them through issuance of bonds maturing in the distant future.

Issuance of bonus shares thus would not strain their resources which heavy cash dividends would have. Not only would there be no cash outgo on account of dividend when bonus shares are issued but there would be no cash outgo either in the form of taxes because under the income-tax law, no Dividend Distribution Tax (DDT) is payable when the reward to shareholders is not in cash but is in the form of bonus shares.

The rationale

The moot question however is: Why is the Government so insistent on getting the bonus shares? An informed investor knows that bonus shares are no great shakes what with its potential to dilute the net worth of the company besides arguably being an illusory reward as is the general perception in the US.

What does it want to achieve by receiving the bonus shares? For retail investors in India, bonus shares do give a better exit price given the fact that a 1:1 bonus issue does not result in the halving of the market quotation post-bonus.

But then the Government obviously has no intention of unloading its investments in the market. It must be remembered that the oil majors are listed companies and there is public shareholding in these companies. While they would certainly welcome the additional shares falling on their laps, they must at the same time be conditioned to scale down their future cash dividend expectations from these companies unless the Government somehow believes that the same cash dividend is sustainable on the enlarged capital.

May be the Government wants an alignment between the scale of operations of these companies and their paid-up capital. LIC’s small paid-up capital, for example, does not do justice to the scale of operations carried on by it. Such deference to accounting and financial nuances is normally associated with the private sector though.

(The author is a Delhi-based chartered accountant.)

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