Summary: The Finance Ministry has introduced new guidelines to restructure the capital framework of Central Public Sector Enterprises (CPSEs), aiming to boost efficiency and shareholder value. As per the rules, CPSEs are now required to pay an annual dividend of at least 30% of net profit or 4% of net worth, whichever is higher. This change also extends to financial CPSEs like Non-Banking Financial Companies (NBFCs), unless legally restricted. Key updates include provisions for share buybacks by CPSEs with market prices below book value for six months, provided they have a net worth exceeding ₹3,000 crore and cash reserves over ₹1,500 crore. Companies with reserves at least 20 times their paid-up equity capital may issue bonus shares, while share splits are allowed for listed CPSEs with market prices exceeding 150 times their face value for six months, subject to a three-year gap before another split. Subsidiaries with over 51% government ownership are also covered under these guidelines. A dedicated committee led by the DIPAM Secretary will oversee all capital management matters. Starting FY 2024-25, CPSEs must pay interim dividends quarterly or at least twice yearly, with listed entities required to distribute 90% of their expected annual dividend as interim payments. These rules exclude public banks, insurers, and non-profit entities under Section 8 of the Companies Act. By offering greater financial and operational flexibility, the updated framework seeks to enhance CPSE performance and attract more investor interest.
GOVERNMENT OVERHAULS CPSES: HIGHER DIVIDENDS, SHARE BUYBACKS, AND SPLITS ON THE CARDS
The Finance Ministry presented new rules for changing the capital structure of Central Public Sector Enterprises (CPSEs). These rules say they must pay a yearly dividend of at least 30% of their net profit or 4% of their net worth. They must pay whichever amount is higher. This change hopes to increase shareholder value and make CPSEs work better.
The Department of Investment and Capital Asset Management (DIPAM) published the rules. They say financial CPSEs, like Non Banking Financial Companies (NBFCs), should also follow the 30% profit after tax dividend rule, unless there are legal limits.
In 2016, the rule was 30% of profit after tax or 5% of net worth. There were no rules for financial sector CPSEs. Companies with market prices below their book value for six months can consider buying back shares. These companies must have at least ₹3,000 crore in net worth and more than ₹1,500 crore in cash reserves. Share buybacks help improve their financial situation.
CPSEs can issue bonus shares when their reserves and surplus are 20 times or more their paid up equity capital. A listed CPSE may split shares if its market price stays over 150 times the face value for six months. A cooling off period of three years is required before another split. Share splitting offers more flexibility.
The rules cover CPSE subsidiaries where the main company holds over 51% shares. The Committee for Monitoring of Capital Management and Dividend by CPSEs (CMCDC), led by the Secretary of DIPAM, will look at all capital matters.
These rules do not apply to public banks, public insurance agencies or companies that cannot share profits, like those under Section 8 of the Companies Act.
Starting in the 2024 25 financial year, these rules motivate CPSEs to pay interim dividends every three months or at least twice yearly. Listed CPSEs must pay at least 90% of the expected annual dividend in interim payments. Final dividends must follow soon after the Annual General Meeting in September.
DIPAM highlighted these changes to improve CPSE value and shareholder rewards. Importantly, these rules give more financial and operational flexibility. This better flexibility could attract more investors to create value in CPSEs.
Author Bio
