The Finance Ministry has implemented a stringent dividend policy for Central Public Sector Enterprises (CPSEs). Furthermore, the policy mandates CPSEs to pay an annual dividend of 30% of Profit After Tax (PAT) or 30% of government equity, whichever is higher.
Initially, the Department of Expenditure established a 20% dividend policy in 2004. Subsequently, the government observed significant variations in CPSE dividend payments, prompting this policy revision.
The Fourteenth Finance Commission (FFC) specifically highlighted the government’s authority in dividend decisions. Moreover, this authority stems from the government’s position as the primary stakeholder in these enterprises.
Financial Implications and Government Expectations
The government has set an ambitious target of Rs 56,260 crore in dividend collection for the current fiscal year. Notably, this represents a significant increase from the previous year’s target of Rs 50,000 crore.
CPSEs must now carefully consider their cash reserves and free reserves before declaring dividends. Additionally, these enterprises must provide special dividends when they possess substantial cash reserves.
The policy particularly emphasises infrastructure CPSEs, including oil, petroleum, and chemical sectors. Therefore, these sectors must maintain a higher dividend payout ratio of 30%.
Financial Management Guidelines
The Finance Ministry has introduced comprehensive guidelines for capital investment requirements. Consequently, CPSEs must assess whether their investment needs can be met through market borrowing.
The FFC strongly recommends that CPSEs explore debt financing options before transferring funds to reserves. Hence, this approach aims to maintain favourable debt-equity ratios in these enterprises.
CPSEs with large cash reserves and sustainable profit margins may issue bonus shares. Meanwhile, the enterprises must explain any exceptions to these guidelines to the Secretary DEA (Department of Economic Affairs).
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Administrative Oversight and Compliance
All administrative ministries must closely monitor CPSEs under their control. Similarly, they must communicate budget estimates and revised estimates promptly to the Budget Division of DEA.
The policy ensures professional management practices in CPSEs through market borrowings. Nevertheless, enterprises must exhaust all options for raising additional resources before considering reserve transfers.
The government has established clear reporting mechanisms for policy implementation. Therefore, each ministry must maintain detailed records of compliance and exceptions.
Looking Forward
The revised guidelines demonstrate the government’s commitment to maximising returns from public sector enterprises. Indeed, this policy aims to balance corporate growth with government revenue requirements.
CPSEs must now adapt their financial planning to meet these enhanced dividend requirements. Consequently, this may influence their investment and expansion strategies in the coming years.
Following is a list of CPSEs Stocks that may come under these guidelines:
- Oil and Natural Gas Corporation (ONGC)
- Bharat Heavy Electricals Limited (BHEL)
- Steel Authority of India Limited (SAIL)
- National Thermal Power Corporation (NTPC)
- Indian Oil Corporation (IOC)
- Gas Authority of India Limited (GAIL)
- Power Finance Corporation (PFC)
- Rural Electrification Corporations (REC)
Written By Fazal Ul Vahab C H
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