Summary: The Department of Investment and Public Asset Management (DIPAM) issued comprehensive guidelines on capital restructuring and dividend distribution for Central Public Sector Enterprises (CPSEs). According to these guidelines, CPSEs are required to pay a minimum annual dividend of 30% of profit after tax (PAT) or 5% of their net worth, whichever is higher, unless a lower dividend is justified based on financial parameters. CPSEs must also evaluate their capital restructuring options, such as buybacks and bonus share issuance, based on factors like net worth, cash reserves, and capital expenditure plans. Specifically, CPSEs with a net worth of over ₹2,000 crore and cash reserves exceeding ₹1,000 crore are mandated to consider buybacks. Additionally, CPSEs with free reserves exceeding 10 times their paid-up equity must issue bonus shares. The guidelines also encourage the splitting of shares if their market price exceeds 50 times the face value, facilitating small investor participation. If a CPSE cannot comply with these rules, an exemption must be obtained from DIPAM. These provisions aim to ensure efficient capital management and promote shareholder value in CPSEs.
DEPARTMENT OF INVESTMENT AND PUBLIC ASSET MANAGEMENT (DIPAM) GUIDELINES
1. DIPAM GUIDELINES ON DIVIDEND FOR CENTRAL PUBLIC SECTOR ENTERPRISES (CPSE)”
According to Regulation 43A of the SEBI (LODR) Regulations, 2015 TOP 1000 LISTED COMPANIES shall formulate a dividend distribution policy which shall be disclosed in their annual reports and on their websites.
The objective of this Policy is to establish the parameters to be considered by the Board of Directors of the Company before declaring or recommending dividend/interim dividend as it balances the amount of profit to be distributed amongst shareholders with the requirement of deployment of internal accruals for sustenance and growth plans of the Company.
Capital Restructuring of Central Public Sector Enterprises (CPSE)” issued by DIPAM, mandates every CPSE to pay a minimum annual dividend of 30% of PAT or 5% of the net-worth, {whichever is higher} subject to the maximum dividend permissible under the extant legal provisions.
CPSEs are expected to pay the maximum dividend permissible under the Act under which a CPSE has been set up, unless lower dividend proposed to be paid is justified after the analyses of the Financial Parameters on a case to case basis at the level of Administrative Ministry/Department with the approval of Financial Advisers.
♦ Financial Parameters to Be Considered For The Purpose Of Paying Dividend:
1. Net-worth and Capacity to borrow;
2. Long-term borrowings;
3. CAPEX/Business Expansion needs;
4. Retention of profit for further leveraging in line with the CAPEX needs; and
5. Cash and bank balance
♦ Utilization Of Retained Earnings:
- The retained earnings shall be utilised primarily for the growth prospect of the company for the maximisation of the shareholder’s fund. The company shall take following factors into consideration for the utilisation of the retained earnings:
1. Short term and long term plans of the Company.
2. Diversification opportunities.
3. Government guidelines with regard to issue of bonus, buyback etc.
4. Any other criteria which the Board of Directors may consider appropriate.
2. GUIDELINES ON CAPITAL RESTRUCTURING OF CENTRAL PUBLIC SECTOR ENTERPRISES (CPSE)”
- Capital restructuring:
- The term “capital restructuring” isn’t explicitly defined in the Companies Act, 2013 but in the context of the act it may involve several provisions related to:
a) REDUCTION OF SHARE CAPITAL (SECTION 66): A company can reduce its share capital by extinguishing or reducing liability on any of its shares, cancelling any paid-up share capital, or paying off any paid-up share capital.
b) BUYBACK OF SECURITIES (SECTION 68): A company may buy back its own shares or other specified securities from its existing shareholders, employees, or in the open market.
c) ISSUE OF PREFERENCE SHARES (SECTION 55): A company can issue preference shares that are redeemable at a fixed time or on demand.
d) COMPROMISE AND ARRANGEMENT (SECTIONS 230-232): This involves schemes of mergers, demergers, or other arrangements that may affect the capital structure.
> These guidelines for payment of dividend, issue of bonus shares and buyback of shares shall not apply to the body corporate which is prohibited from distribution of profits to its members, e.g. companies set up under section 8 of the Companies Act, 2013
A. BUYBACK OF SHARES:
Every CPSE shall analyse in 01st Board meeting after the closure of the financial year the following parameters for the purpose of buyback:
i. Cash and Bank balance
ii. Capital Expenditure and business expansion as committed with reference to the CAPEX incurred in the last 3 years
iii. Net-worth [Free reserves and paid-up capital, including other reserves (if any)
iv. Long term borrowing and further capacity to borrow on the basis of its ‘Net worth
v. Any other financial commitments in the near future
vi. Business/other receivables and contingent liabilities, if any;
vii. Market price/book value of share.
Based on this analysis, it needs to be clearly brought out that surplus cash and bank balance with the CPSE shall be considered for restructuring of capital through buyback. However, every CPSE having net-worth of atleast Rs. 2000 crore and cash and bank Balance of over Rs. 1000 crore shall exercise the option to buy-back their shares.
B. ISSUE OF BONUS SHARES:
Every CPSE should analyse/ deliberate in their Board meeting! Finance Committee, the issue of bonus shares when their reserves and surplus are equal to or more than 5 times of it’s paid up equity share capital. In case, if it is decided not to 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.
However, every CPSE shall issue bonus shares if their free reserves, the share premium account, and the capital redemption reserve account are equal to or more than 10 times of it’s paid up equity share capital.
C. SPLITTING OF SHARES:
It has been endeavour of the government to encourage participation of small investors in the capital market so as to increase the depth of the market, liquidity and trading volume of the shares. However, due to high price of shares sometimes small investors can-not invest in the company. In view of this, the Board of the CPSEs needs to discuss and decide on the desirability of splitting the share.
CPSE where market price or 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 Rs. 1.
> In case, any CPSE is not able to comply with any of the above guidelines, specific exemption has to be obtained from DIPAM, Ministry of Finance & Government of India through their Administrative Ministry/Department.
> They shall ensure the compliance of these guidelines and refer proposals for exemption(s) to the DIPAM along with their opinion/comments and concurrence of the Financial Adviser in the matter.
> The Department of Public Enterprises (DPE) which conducts an annual survey may consider an appropriate modification, if required, in their existing format to adequately capture various aspects of the above guidelines for the efficient management of Gal’s investment in CPSEs. The findings of the Survey may also be suitably incorporated in its annual publication on “Public Enterprises Survey”.
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