The Center has decided to add dividend payments and share repurchases to the performance matrix of central government companies (CPSEs) starting this fiscal year, a move aimed at increasing investor interest in these companies. According to sources, the performance-related pay for the CPSE staff will be tied to “total shareholder return” (TRS), which will include annual targets for dividends and buybacks, excluding market capitalization, which is the only criterion currently being followed.
The TRS will be part of the annual Memorandum of Understanding (MoUs) that the public companies sign with the relevant ministries. An inter-ministerial committee, including the Ministry of Finance and the Niti Aayog, in addition to several administrative ministries, has endorsed the new standards, the sources added. Previously, the Department of Investment and Public Asset Management (Dipam) had called for “a predictable and diversified dividend regime,” which it believes would allow the CPSEs to avoid annual delinquency payments by freeing up funds only in the last year. quarter of a year. “A consistent dividend policy would also help revive investor interest and improve market sentiment for CPSE stocks, as predictability in regular/quarterly dividend payments would draw quality investors to CPSE stocks and keep them in the hope of a future dividend the department said in a note. In addition, the government as the largest shareholder would also receive predictable and periodic dividends,” according to the Dipam.
The change in the MoU’s performance criteria is expected to benefit government non-debt receipts – while the improvement in the m-cap and buybacks will boost revenue from divestments (non-debt), dividends will boost non-tax revenues. boost revenue.
The CPSEs, with an annual capex of at least Rs 500 crore, invested about Rs 2 trillion in FY20, Rs 2.15 trillion in FY21 and Rs 2.19 trillion in FY22, despite a pandemic when the private sector was in wait-and-see mode . “The change in market capitalization alone did not reflect the CPSE’s actual contribution to the treasury. In addition to the change in share price, TRS will include dividends, dividend tax and also buybacks by the CPSEs,” a senior official told FE.
The CPSEs bought back their own shares worth about Rs 19,000 crore in FY17. While the pace has slowed since then, buybacks by PSUs continue to be a source of divestment income for the Center. On June 17, the Center said it received Rs 497 crore from the share buyback by state-owned GAIL. A few more buybacks are in the pipeline this year. However, repurchase opportunities in many large CPSEs have declined as the Center’s holdings in many large publicly traded CPSEs such as Indian Oil Corporation and NTPC have already fallen to about 51%.
The Department of Public Enterprises (DPE) will soon revise the PRP guidelines on the lines mentioned above, the sources added. What this means is that any deviation in performance on these parameters can lead to a reduction in a company’s performance rating and, consequently, a reduction in the variable compensation of its staff.
Currently, PRP can be as high as 150% of base salary for CMDs, while it is 40% for lowest-ranking officers, if the PSU performance rating is “excellent” (a score greater than 90%), which is 100% PRP guarantees suitability. A reduction would lower the MoU rating from ‘excellent’ to ‘very good’ and from ‘very good’ to ‘good’, resulting in a reduction of 100% eligibility of performance-related reward for excellent rating to 80% and 60% , respectively. A score of less than 50% means that the staff will be refused PRP.
On November 9, 2020, Dipam had advised the CPSEs to aim to pay higher dividends, taking into account relevant factors such as profitability, capex requirements, cash/reserves and net worth, after noting that many CPSEs usually consider paying only a minimum dividend. pay according to the guidelines. Under the Dipam guidelines, CPSEs would pay a minimum annual dividend of 30% of after-tax profits or 5% of net worth, whichever is higher.
The government said in May 2016 that any CPSE with a net worth of more than Rs 2,000 crore and cash and bank balances of more than Rs 1,000 crore must exercise the option to buy back some of their shares with effect from FY17. Capital restructuring rules have paid off as 7 PSUs have repurchased shares worth Rs 18,963 crore or 41% of the total divestment receipt of Rs 46,247 crore in FY17.
In addition to rewarding shareholders, one of the arguments for PSU’s buybacks, usually at a premium to the prevailing price, was that such a move would attract the companies’ shares as the shares bought back would be nullified.