Govt wants cash-rich CPSEs to buy back shares from market

New Delhi: The central government has asked central public sector enterprises (CPSEs) with a net worth of at least ₹ 2,000 crore and cash balance of more than ₹ 1,000 crore to buy back their shares from the stock market in a bit to achieve the stiff disinvestment target for 2016-17.

In its guidelines on capital restructuring of CPSEs released on Tuesday, the Department of Investment and Public Asset Management (DIPAM), earlier known as Department of Disinvestment, has said that it has adopted a comprehensive approach for efficient management ofits investments in CPSEs.

The government has set a disinvestment target of ₹ 56,500 crore for 2016-17. Of this, ₹ 36,000 crore is expected to come from minority stake sales and ₹ 20,500 crore from strategic stake sales.

Finance minister Arun Jaitley had on 16 May said that cash-rich, state-run companies could buy back their shares from the market, followed by strategic stake sales once the market improves. “Lot of the units are very cash-rich and can afford a buyback. We can thereafter have strategic sales,” he said.

State-run National Aluminium Co. Ltd, or Nalco, had last week announced a buy back of 644.3 million shares, or 25% of the paid-up capital, from the public shareholders.

Coal India Ltd, the world’s largest coal producer, had more than ₹ 53,000 crore in cash, as of the year ended 31 March 2015. NMDC Ltd, Oil and Natural Gas Corp. Ltd (ONGC) and NTPC Ltd together held ₹ 50,000 crore as of March 2015, according to Capitaline, a financial database provider.

The guidelines also set rules for payment of dividends, issue of bonus shares and splitting of shares.

While the guidelines for payment of dividend shall be applicable from 31 March 2016, the guidelines for issue of bonus shares, buyback and splitting of shares shall be applicable from 1 April 2016, DIPAM said.

Every CPSE now has been mandated to pay a minimum annual dividend of 30% of profit- after-tax, or 5% of net worth— whichever is higher.

For an exception, the CPSE needs to be certified by the administrative department after analysing the company’s financials.

For cash-rich CPSEs, which do not have expansion plans, DIPAM guidelines said buyback of shares improve investors’ confidence in the company and is likely to help the company to raise capital in future when it requires funds for expansion/diversification for growth. “Thus it supports their market capitalization, which is in the overall long-term interest of the company,” it added.

DIPAM also asked CPSEs to issue bonus shares to the government when their defined reserves and surplus are equal to or more than five times of its paid-up capital. “In case if it is decided to not issue bonus shares, the nominee ‘official director’ shall ensure that the board analyses the justification for the decision, and reasons for the same be recorded specifically,” it added. However, every CPSE with defined reserves and surplus more than 10 times of its paid up equity capital is mandated to issue bonus shares.

CPSEs with high share prices have also been asked to split their stocks to make their shares more affordable to retail investors.

“A CPSE, where market price, or the book value of its share, exceeds 50 times of its face value will split-off its shares appropriately—provided its existing face value of the share is equal to or more than ₹ 1,” it added.