The Govt should collect money from all those who owe it instead of squeezing CPSEs for bridging fiscal gaps. This is neither healthy for the economy nor good for the enterprises
The Department of Investment and Public Asset Management (Dipam) has come out with a circular requiring Central Public Sector Enterprises (CPSEs) to pay interim dividend every quarter or half-yearly, depending on whether it is a relatively higher dividend (100 per cent or Rs 10 on a share of Rs 10) or less. Even those which can’t pay the prescribed “minimum” must give an interim dividend. Further, at least 90 per cent of the projected annual dividend should be paid as interim. Even as the bureaucrats justify this in terms of easing cash flow and improving the investment sentiment, the reality is that the Government is squeezing CPSEs to lessen its fiscal woes. However, there are better and potent ways to do this; for instance, by plugging leakages in direct and indirect tax collections. The Centre should collect money from where it is due, instead of squeezing CPSEs for bridging its fiscal gaps.
The CPSEs have also been asked to pay the final dividend of the last financial year (FY) (April-March) soon after the Annual General Meeting (AGM) is over (normally, it is held in September of the FY) in cases where the 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/her 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 and so on). While this is pre-tax profit, the surplus left after payment of tax or Profit After-Tax (PAT) is normally used for building resources such as capital reserves (to offset capital losses), securities premium reserve (used for buyback of shares), general reserves (used for working capital) and so on.
After appropriation to the reserves, the leftover amount is surplus cash, which can be used for paying the dividend. Therefore, the amount available for distributing the 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 the 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 the Dipam require the CPSEs to pay a minimum annual dividend of 30 per cent of PAT or five per cent of the 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 the “interim dividend.” This is a dividend payment made before a company’s Annual General Meeting (AGM) and the release of final financial statements (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), it takes time to prepare, process and finalise 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). 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 the interim dividend, the FY is almost over and the management has got a broad idea of the profit/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 the Dipam circular) during the FY, is appalling.
The performance of a company can never be consistent throughout the year. If it has made “X” amount of profit 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 be less or there could even be loss during subsequent quarters. In such a 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 finalised 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 the first half of the FY (during October/November) or payment of at least 90 per cent of the projected annual dividend, in one or more installments as interim dividend, are completely devoid of any logic.
By nature, an interim dividend can only be a small portion of the regular dividend. Yet, if 90 per cent is given as interim, it tantamounts 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 the 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. Against the Budget estimate of close to Rs 66,000 crore, it has so far received only Rs 10,000 crore.
This, together with a substantial decline in tax revenue (during April-September, this was only Rs 4,60,000 crore. This is a reduction of about 33 per cent over the corresponding period last year) and the surge in expenditure due to Covid-19 has made the Government desperate. No wonder, it is making highly unrealistic demands.
Shockingly, the directive has come at a time when the profits of CPSEs have plunged due to the 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 these 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 the Government too). How can the latter spend on projects and, at the same time, fill the coffers of the Centre?
To wriggle out of a tight fiscal situation, the Government is goading these public enterprises to dip into 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 the impact of the Coronavirus was not there), there was a shortfall of about Rs 2,00,000 crore in tax collections vis-à-vis even revised estimates. Under the Goods and Services Tax, there are fraudulent claims of input tax credit of close to Rs 1,00,000 crore since its launch from July 1, 2017. From the ‘Vivad se Vishwas’ initiative launched in the Budget for 2020-21 on direct tax demand of about Rs 10,00,000 crore under dispute, the expected recovery is about Rs 70,000 crore — a meagre seven per cent. 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. This is in no way healthy for the economy in the long run, nor is it sustainable for the CPSEs.
(The writer is a New Delhi-based policy analyst)
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