Dividend payments: The `unresolved dilemma'

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Our Bureau

New Delhi, Feb. 26

EVEN as the Railways is to fork out a dividend of Rs 3,938 crore to the Centre during the coming fiscal, a big question mark remains on the nature of these payments.

This, in turn, springs from the `unresolved dilemma' over whether the capital invested by the Centre in the Railways represents equity or debt.

The Railways pays dividend to the Centre at a fixed rate of 7 per cent on capital-at-charge, which is the cumulative budget support extended by the latter to the Railways over the years.

The fixed rate is computed on capital-at-charge, after netting out for certain budget-supported investments in strategic projects or non-remunerative lines exempted from payment of dividend.

By this reckoning, the adjusted capital-at-charge as on March 31, 2006 is estimated at Rs 51,971 crore, on which a 7-per cent dividend payable works out to Rs 3,638 crore for 2005-06.

Inclusive of a deferred dividend of Rs 300 crore (carryover from previous year's unpaid amount), the total dividend outgo for the year will be Rs 3,938 crore.

Experts said, considering that the dividend is paid in the form of a fixed rate, it actually resembles interest on loan rather than servicing of equity.

While loans are repayable over a period, here, the capital-at-charge does not get amortised and the 7-per cent fixed rate is discharged on a loan in `perpetuity'. Moreover, as far as dividends go, companies distribute these from their net profit.

In this case, too, the Railways technically makes dividend payments after netting for total working expenses and appropriations to the depreciation reserve fund and the pension fund.

Dividends are, thus, paid out of the net revenue of the Railways, which is akin to the net profits earned by companies.

However, during several years - 2000-01, for instance - the Railways has ended up forking out dividends in excess of its net revenue (see Table).

Also, to the extent the Railways pays dividend to the exchequer, the budget support from the Centre gets reduced in net terms. During 2005-06, the budget support to the Railways, net of dividend paid by the latter, would come to Rs 3,293 crore. The 7-per cent fixed rate that the Railways pays to the Centre is also higher than the cost at which it raises funds from the market through the Indian Railways Finance Corporation.

During 2003-04, the corporation's average cost of borrowings amounted to 5.59 per cent.

Even in the current year, it will be only about 6.5 per cent.

In his Budget speech, the Rail Minister, Mr Lalu Prasad, said the Railway Convention Committee had recommended a reduction in the rate of dividend from 7 per cent to 6.5 per cent.

But since the resolution for these recommendations has not yet been adopted by Parliament, "the dividend for the current year (2004-05) and for the next year (2005-06) has been provided at the same rates as adopted for 2003-04."

(This article was published in the Business Line print edition dated February 27, 2005)
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