The Gujarat government’s recently announced policy for minimum dividend distribution and bonus shares for its state public sector undertakings (PSUs) gives greater clarity to minority shareholders and will improve the firms’ attractiveness for investors, analysts said.
Besides, the directive will force the state PSUs to put their idle cash to good use, they added.
The seven listed Gujarat government PSUs were among the top performers on Dalal Street on April 26, with Gujarat Industries Power Co Ltd and Gujarat Mineral Development Corp Ltd surging as much as 20 percent.
The state government has mandated a minimum of 30 percent of net profit, or 5 percent of net worth, whichever is higher, to be a minimum level of dividend declared for shareholders. However, it has been mentioned in the order that this is only the minimum level and maximum permissible level of dividend should be declared.
“This development is positive for minority shareholders as they are assured of decent dividend based on the new dividend policy. If one applies this for a stock like GNFC, the dividend payout would be about Rs 500 crore, which works out to more than 5 percent yield against less than 2 percent yield currently,” veteran equity analyst Ambareesh Baliga told Moneycontrol.
All seven listed PSUs of the state are making profits.
For share buybacks, all state PSUs with a net worth of at least Rs 2,000 crore and cash and bank balance of Rs 1,000 crore have been mandated to exercise the option to buy back their own shares.
In the case of bonus shares, state PSUs that have defined reserve and surplus equal to or more than 10 times their paid-up equity share capital are required to issue bonus shares to their shareholders.
Positive for investors
“This is a very investor-friendly move which will lead to a rerating of Gujarat state-owned listed entities. This formula-driven dividend, buyback, bonus issuance and split policy will help institutional investors get transparency and clarity to derive total shareholder returns from the operating cash flow onwards,” market expert Ajay Bagga said.
In an interview with CNBC-TV18, Nilesh Shah, MD of Kotak Mahindra AMC echoed the views.
“The step taken by the government of Gujarat recommending their PSUs to follow dividend distribution policy is a welcome step as it gives clarity to minority shareholders as to how the company’s cash will be utilized,” he noted.
“This is something which is recommended probably for all companies to follow. It brings more clarity, and improves governance,” Shah added.
However, there were some voices of concern as well.
A market participant, who did not wish to be named, said such diktats harm the companies in the long run as they are forced to divert capital from more productive uses like capacity expansion and forays into new sectors.
“The focus should be on how to make PSUs more autonomous and efficient, not on making them captive cash cows,” he argued.
However, Bagga said most of these firms just keep sitting on cash or invest in sub-optimal avenues. Therefore, bringing a policy on dividends and buybacks will help foster fiscal discipline.
In the case of splitting of shares, Gujarat has mandated that where the market price or book value of a state PSU shares exceeds 50 times of its value, provided its existing face value of a share is more than Re 1.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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