Budget 2017

Government Asks State-Run Firms to Pay Higher Dividends

The government has asked state-run firms to pay dividends of at least 30 per cent of their profits after tax or their equity, whichever is greater, as part of efforts to curb the budget deficit.
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Government Asks State-Run Firms to Pay Higher Dividends
To help the Exchequer deal with "fiscal crunch", the government has asked central public sector enterprises to pay 30 per cent dividend and cash-rich PSUs like Coal India to issue bonus shares.
    
The central public sector enterprises (CPSEs) have also been suggested to rely on market borrowings for capital requirements as it would "enforce more professionalism".
    
"... keeping in view the fact that Government of India is a majority shareholder in CPSEs, it has been decided that henceforth...a CPSE would pay an annual dividend of 30 per cent of PAT or 30 per cent of GoI's equity holding, whichever is higher," the Finance Ministry said.
    
Also, CPSE with "large cash/free reserves and sustainable profit may issue bonus shares", it added while issuing the dividends payment policy for public owned companies.
    
The policy further said that due account should be taken of case and free reserves with the CPSE, and accordingly special dividend would "need to be paid" to the government, as a return for its equity investments.
    
As per the Budget Estimates for 2015-16, Rs 36,000 crore is expected to come as dividend from public sector entities during the current fiscal.
    
The government will face a tough time in adhering to fiscal deficit target of 3.9 per cent of GDP in view of likely fall in direct tax collection and low disinvestment receipt.
    
The 14th Finance Commission (FFC) had remarked that unlike operational matters in which the Board and management should have autonomy, transfer to reserves and payment of dividends is a policy matter which the government, as owner, should decide.
    
"According to FFC, the dividends policy should cater to the requirements of the government also, as it would in case of any prudent investor/owner.
    
"This is especially true in times of current fiscal cruch...when the government has to cater to other public interests too," the statement said.
     
It further said said the capital investment requirements of CPSEs may be kept in view but it needs to be specifically assessed whether those investment requirements can be fully or
partly met out of market borrowing, to leverage the favourable debt-equity ratios in the state-owned firms.
    
"In fact reliance on market borrowings would enforce more professionalism in the CPSEs," the statement, signed by Department of Economic Affairs Secretary Shaktikanta Das said.

The FFC has suggested that the transfer to reserves may be permitted only after the entity has exhausted the options and limits of raising additional resources through debt in terms of a defined enterprise limit on the optimum debt equity ratio, the ministry said.
    
The Ministry noted that many CPSEs were not adhering to the guidelines with regard to dividend payment. In 2004, the Department of Expenditure had communicated to CPSEs to pay a dividend of 20 per cent on PAT or 20 per cent on equity, whichever is higher. It was 30 per cent for CPSEs in oil, petroleum, chemical and other infrastructure sector.
    
In absence of clear policy, the 2004 guidelines continue to operate, the statement added.
    
The government expects revenue collection to fall short of the budgetary target by 5-7 per cent, mainly because of subdued growth in direct taxes.

Besides, there are fears that the government may not meet its disinvestment target.

The Finance Ministry is staring at a shortfall of Rs 50,000 crore in disinvestment target for the current fiscal.

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