It is one thing for the government to ask listed public companies to pay special dividends to meet its fiscal targets. Asking Hindustan Zinc Ltd (HZL), where it owns only a 29.5% stake, to do so takes it to another level. Here, the company may be partly to blame. In March, it had announced a special golden jubilee dividend of Rs24/share, amounting to Rs10,140 crore.
The government got Rs2,995 crore as dividend and Rs2,064 crore as dividend distribution tax. An HZL release on that occasion shows a beaming finance minister with a giant cut-out of the dividend cheque. The government wants a repeat of that windfall and, if possible, get 50% more on this occasion.
A Reuters report says the company is not keen on a dividend as it will also have to pay a dividend distribution tax. Why that did not stop it last time is not clear. It may prefer a share buy-back instead, which is more tax efficient, says the report, but a buy-back could reduce the government’s shareholding, falling foul of a Supreme Court order. If all shareholders don’t participate in equal proportion in a buy-back, selling shareholders will see their stake decline.
The government’s proposal will put HZL in a fix. A dividend is payable at the discretion of the board. It can say no. But that is a snub the government may not take lightly. In a sector such as mining, where the government has a large role to play, you want to be on its right side. The Vedanta group would like to buy out the government’s minority stake, once legal hurdles are removed. That too requires cooperation.
Minority shareholders won’t mind the special dividend request, as can be seen from the jump in HZL’s share on Wednesday. It has the cash for it, Rs25,166 crore as of 30 September, but lower compared to Rs35,235 crore as of 30 March. The decline was partly due to the previous special dividend and a subdued performance in the first half. Mined output had declined by 33%, based on the company’s mining plan, but is expected to rebound in the second half.
The December quarter shows it’s on track, with a 21% year-on-year increase in mined output. That and higher zinc prices should add to cash generation in the second half. HZL’s capex requirements in fiscal years 2017 and 2018 are approximately $250 million each (Rs1,700 crore at current rates), which can be easily funded, even after a higher dividend payout. A lower cash balance can improve its return on capital, especially in a falling interest rate scenario. That should help valuations too.
At current prices, the government’s stake in HZL is valued at Rs36,600 crore. Waiting to sell has not hurt the government, with HZL’s share gaining 132% from five years ago, compared to 2.1% for the BSE Metal index and 65.6% for the benchmark Sensex. The government may sell its stake eventually, but meanwhile HZL may have to contend with its growing fondness for special dividends.