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Click here to view Reserves/paid-up ratio of PSUs
IF PUBLIC sector undertakings (PSUs) decide to abide by the guidelines of the department of public enterprises (DPE), then investors in more than half of the listed PSUs could be in for a windfall. DPE guidelines state that PSUs having reserves in excess of three times their paid-up capital should consider issuance of bonus shares. On December 8, ET had reported that the government had instructed IndianOil (IOC) to consider a bonus issue on this parameter. During FY'07, IOC's reserves were 28 times its paid-up capital. According to a study by ET Intelligence Group, more than half of the actively-traded PSUs meet this requirement.
To put it in perspective, out of the 83 listed PSUs, 52 companies have reported accumulated reserves and surplus that were more than three times their respective paid-up capital during FY'07. This, viewed in the backdrop of the DPE guidelines and the government's instructions to IOC, may hint at a possibility of bonus announcement by these PSUs.
The list includes PSUs from various sectors including banking, petroleum production and refining, metals and engineering. On the top of the list is the lignite producer Gujarat Mineral Development Corporation. The reserves of this Rs 600 crore mining company were 126 times more than its paid-up capital by the end of FY'07. It is followed by Tide Water Oil Company, a Rs 421-crore oil and greases manufacturer and State Bank of India, the largest bank in the country, which had earned over Rs 39,000 crore in interest income during FY'07.
It needs to be noted that DPE has issued only a guideline. "The DPE guideline need to be looked more as a directive than a mandatory rule. What the guideline means is that on a face value of Rs 10, the PSUs having book value of more than Rs 40 per share may consider giving a bonus issue," says SP Tulsian, an investment advisor. This means PSUs may still observe their discretion while taking a decision in this regard.
Another point to be noted is that a bonus issue may not be advisable for companies which have been witnessing a decline in their net profits or those companies where earnings visibility is low. In such cases, a bonus issue may reduce the dividend per share paid by the company. This is particularly relevant for oil marketing companies (OMCs). Profits of OMCs are reeling under the burden of fuel subsidies. "Currently there is no certainty about future profitability of oil companies. Unless the situation improves and gives us some confidence of servicing the increased equity capital, it will be imprudent to consider any bonus issue," says SK Joshi, finance director, BPCL.
Experts think that the directive would not serve much purpose as it mainly results into a mere adjustment in the books of account of the companies. Mr Tulsian says, "A bonus issue would increase the paid-up capital by reducing the reserves of a company. This means there is no change in the net worth of the company. Further, such a decision would not increase the free floating shares of the company in the market."
Free float for some of the PSUs including NMDC, National Fertiliser and RCF is below 10% of the total number of paid-up shares as the government holding in these companies is very high. Some of these stocks have seen a huge jump in prices on the bourses in recent times. Mr Tulsian thinks that splitting the number of shares would lead to improved free float of the shares of such companies instead of giving bonus shares and may curtail speculative movements in share prices.
(With inputs from Joseph Pereira)
Click here to view Reserves/paid-up ratio of PSUs
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