Vide a letter addressed to the central public sector enterprises (CPSEs) the department of investment and public asset management (Dipam) under Ministry of Finance has asked (i) enterprises which pay relatively higher dividend (100% or Rs 10/- on a share of Rs 10/-) may consider paying interim dividend every quarter after declaration of quarterly results; (ii) enterprises which pay less than 100% may consider paying interim dividend usually on half-yearly basis; (iii) those which can’t pay as per the prescribed ‘minimum’ should pay interim dividend during October/November each year based on projected profit after tax (PAT) following second quarter (July – September) results.
All CPSEs should consider paying at least 90% of projected annual dividend, in one or more installments, as interim dividend.
They have also been asked to pay final dividend of last financial year (FY) (April – March) soon after the Annual General Meeting (AGM) is over (normally, it is held in September of FY) in cases where interim dividend has not been paid out fully during the last FY and there is a balance to be paid out as final dividend.
A shareholder is eligible to receive dividend on the share capital held by him in a company if it makes profit in a year. The profit made is the revenue generated from its operations (sale of products or services or any other income source) minus expenses (on raw materials/other inputs, wages and salaries, interest payments etc). While, this is pre-tax profit, the surplus left after payment of tax or PAT is normally used for building reserves such as capital reserves (to offset capital losses), securities premium reserve (used for buyback of shares), general reserves (used for working capital) etc.
After appropriation to the reserves, the left over amount is surplus cash which can be used for paying dividend. Therefore, the amount available for distributing dividend is a derived figure through a complex process that has to keep in mind the overarching interest of running the enterprise in a ‘robust’ and ‘sustainable’ manner. This has to come from the company management. Unfortunately, in case of CPSEs, leveraging its majority ownership and control, the government follows a top down approach issuing directions from time to time.
As a general principle, the guidelines issued by Dipam require CPSEs pay a minimum annual dividend of 30% of PAT or 5% of net worth, whichever is higher. This is seriously flawed. Given its financial position, the enterprise may not be able to afford the dividend as per this diktat of the government. Yet, being forced to give can result in derailment of its business plans and impact its viability.
This was bad enough. Now, the Dipam has come out with excruciating directions on what is bandied as ‘interim dividend’. An interim dividend is a dividend payment made before a company’s annual general meeting (AGM) and the release of final financial statements (read: audited accounts and the balance sheet). Its declaration is normally accompanied by release of the company’s interim financial statements. What is the need for interim dividend?
For any given FY (say, 2019-20 ending March 31, 2020), it takes time to prepare, process and finalize the financial statements, get these audited and approved in the AGM which normally happens six months after the end of the FY. This means that the regular dividend can’t be declared till that time (or September 2020 in the mentioned example). Having to wait that long can make the shareholders jittery. The idea of declaring interim dividend – normally done towards the end or February/March of the concerned FY – is to put some cash in their hands.
This practice is fairly logical as at the time of declaring interim dividend, the FY is almost over and the management has got a broad idea of the profits (or loss) the company is expected to make. But, to stretch it to a point whereby the CPSE is asked to give ‘interim dividend’ at the end of each of the four quarters or half yearly (as contemplated in Dipam circular) during the FY is appalling.
The performance of a company can never be consistent throughout the year. If, it has made profit say ‘X’ during the first quarter (April – June) of the FY, it does not necessarily follow that in the remaining quarters, it will sustain this trend. The profit could less or there could even be loss during subsequent quarters. In such scenario, if interim dividend is paid in the first quarter, it will spell financial trouble for the enterprise even as payment once made can’t be reversed after financials are finalized for the whole year.
Furthermore, directions such as forcing companies which can’t pay dividend as per the prescribed ‘minimum’, to pay interim dividend and that too at the end of first half of FY (during October/November) or payment of at least 90% of projected annual dividend, in one or more installments, as interim dividend are completely devoid of any logic. By nature, interim dividend can only be a small portion of the regular dividend. Yet, if 90% is given as interim, it tantamount to demeaning the very concept itself.
Bureaucrats have sought to justify quarterly/half-yearly payments citing that bunching of interim dividend payouts in February-March may compete with their cash availability for year – end payments to suppliers as well as towards advance tax. They also aver that this will improve investment sentiment by assuring investors of regular and certain dividend receipt during the year. The argument is untenable.
When to make payments to the suppliers and discharge other liabilities is purely a commercial matter and the company management is best equipped to ensure that these are met satisfactorily without causing any cash flow problem. As regards, investment sentiment, the investor sees the fundamentals of an enterprise and its ability to ensure a reasonable return on investment on a sustained basis – not by how frequently the dividend payment is made. The real reason behind issuing the obnoxious guidelines lies elsewhere.
The Union Government gets a good portion of its non-tax revenue as dividend receipts from CPSEs – surplus transfer from the Reserve Bank of India (RBI) and telecom spectrum receipts being other major components. In recent years, these receipts have declined (courtesy, reduction in its shareholding in many profitable enterprises via disinvestment). For the current year, the situation has worsened further. Against the Budget estimate of close to Rs 66,000 crore, it has so far received only Rs 10,000 crore.
This together with substantial decline in tax revenue (during April – September, 2020, this was only Rs 460,000 crore – reduction of about 33% over the corresponding period of last year) and surge in Covid – 19 expenditure has made the government desperate. No wonder, it is making highly unrealistic demand – as manifest in Dipam office memorandum dated November 9, 2020.
Shockingly, the directive has come at a time when the profits of CPSEs have plunged due to the Covid-19 pandemic. If, their financials don’t justify payment of dividend (at the rate desired by the Centre), how does one expect them to pay? This looks even more anomalous when seen in juxtaposition with the government goading those very CPSEs to undertake spending on a massive scale (to make up for the substantial decline in investment by the private sector and during the current year, by government too), How can the latter spend on projects and at the same time, fill the coffers of former?
To wriggle out of the situation, it is goading these enterprises to dip into even their accumulated reserves on the one hand and take recourse to borrowings on the other. True, this way, they will be able to fund capital spending. But, this will make the enterprises over-leveraged; surely, this is not a sustainable way of financing investment.
The government can’t have the cake and eat it too. It can’t keep on denuding the CPSEs and yet expect them to remain healthy and contribute to capital formation. To meet the rising expenditure and keep fiscal deficit within the prescribed ceiling, no doubt it needs to raise resources. But, there are better ways.
For instance, during 2019-20 (then, Covid -19 impact was not there), there was a shortfall of about Rs 200,000 crore in tax collection vis-à-vis even revised estimate. Under GST (Goods and Services Tax), there are fraudulent claims of input tax credit (ITC) of close to Rs 100,000 crore since its launch from July 1, 2017. The ‘Vivad se Vishwas’ (VSV) launched in the Budget for 2020-21 on direct tax demand of about Rs 1000,000 crore under dispute, the expected recovery is about Rs 70,000 crore – a meager 7%. The list is unending.
The message is loud and clear. The government should collect money from all those who owe it instead of squeezing CPSEs for bridging its fiscal gaps.