Dividend dilemma

These are certainly confusing times for Central public sector undertakings. Early this year, state-owned enterprises were under pressure from the Centre to draw up aggressive capital expenditure plans so that they could give a leg-up to the flagging investment cycle. In a drive to make PSUs more competitive and autonomous, the Budget also set up an ambitious disinvestment target of ₹61,000 crore for this fiscal. But the global commodity rout has since decimated the profits and market valuations for PSUs, effectively halting the disinvestment programme in its tracks. Now the Centre wants these firms to help the exchequer with higher dividend payouts. The finance ministry recently fired off a missive to all Central PSUs asking them to pay either 30 per cent of their net profit or 30 per cent of the government’s equity, whichever is higher, as dividend. North Block justified this with the argument that PSUs ought to chip in when the going gets tough on behalf of their ‘majority shareholder’. But the Centre should realise that its frequent flip-flops not only handicaps PSUs in competing with their private peers, but also sends out all the wrong signals on the nature of PSU autonomy.

Yes, it is pragmatic to scale down the PSU disinvestment target for this year. Given that PSU stake sales represent a one-off opportunity to unlock cash from some of its most valuable assets, it is unwise to time these sales in hostile market conditions. But for the Centre to try and apply a one-size-fits-all dividend policy because disinvestments aren’t taking off, is irrational. One, dividend demands impose an additional burden on profitable PSUs. Two, for any firm, public or private, dividend distribution should be made with nothing else but an eye on commercial considerations. If ploughing back cash into the business can yield better shareholder returns, then this is a better course of action than distributing it. The current global downturn may be just the right time for some PSUs to initiate long-term projects with an eye on future payoffs. For instance, the recent rout in global oil prices offers an opportunity for State-owned oil exploration firms to acquire strategic oil assets overseas at bargain valuations.

Therefore, instead of demanding a minimum dividend from PSUs, the Centre should call for the board of each State-owned firm to draw up a detailed strategic plan, with a forecast of its likely cash flows, capital expenditure and dividend policy over the next few years. Not only would this give the Centre better visibility on its own finances in the long term, but show faith that the Centre can be a good promoter of public firms.

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