Forced dividends and stock buybacks can’t help in improving market perception of listed PSUs
To lend the economy a helping hand, should Central Public Sector Undertakings (PSUs) double down on capital expansion, step up dividend distribution rates or return capital through stock buybacks? Their promoter — the Government of India — appears to be quite confused in pressuring them to consider all three conflicting courses of action. In October, after conducting half-yearly performance reviews, the Centre ticked off energy PSUs for achieving less than a third of their capital expenditure targets for FY21 and urged them to exceed them by end of the year. Later in the same month, it was requesting eight PSUs to consider share buybacks to reward shareholders. Three PSUs have since announced buybacks totalling to over ₹4,200 crore. In November, it reminded PSUs of their obligation laid out in 2016, to pay out a minimum 30 per cent of their profit after taxes or 5 per cent of net worth as dividend and urged them to step up their distribution rates, even if it meant dipping into reserves. The above diktats appear to be aimed at improving abysmal market valuations of listed PSUs while helping their promoter bridge the fiscal gap but they may end up achieving neither objective.
While there’s nothing wrong in the Centre, as majority shareholder, asking PSUs to either put their cash to productive use or distribute it, the decision needs to be driven entirely by the commercial considerations of each enterprise, the state of the sector the firm operates in, its capex requirements and its ability to generate shareholder returns higher than capital costs. As a promoter looking to divest its stakes, the Centre has the most to lose if its cash demands impair the ability of sound PSUs to build capacities for the future and generate healthy shareholder returns, rendering them unappealing to investors.