PSU stocks: New rules for share buyback, bonus issue, stock split and dividend
Nov 19, 2024
Synopsis
The finance ministry has updated capital restructuring guidelines for non-bank public sector enterprises (PSUs) to ensure optimal fund utilization. The revised norms for listed Central Public Sector Enterprises (CPSEs) include changes to dividend payouts, share splits, buybacks, and bonus issuances.
To ensure optimal utilization of funds by PSUs, the finance ministry has revised capital restructuring guidelines for non-bank public sectors, directing the listed Central Public Sector Enterprises (CPSEs) to revise their norms for dividend payout, split of shares, buyback, and issuance or bonus of shares beside others.
The ministry said that it had decided to review its comprehensive guidelines which it laid down in 2016, so that the policy can be aligned to reflect the need for flexibility for CPSEs to undertake financial and capital restructuring.
The new mandate aims to enhance the value of the CPSEs and total returns for the shareholders, it focuses on improving the performance and efficiency of CPSEs by providing them with more operational and financial flexibility and it enables CPSEs to play an effective role in economic growth of the country, the ministry said in a notification.
The Nifty CPSE index is up 53% in the last one year.
Dividend Payout
The new rules from the finance ministry mandate PSUs to pay a minimum annual dividend of at least 30% of net profit or 4% of the net worth, whichever is higher.
“Financial sector CPSEs like NBFCs may pay a minimum annual dividend of 30% of PAT subject to the limit, if any, under any extant legal provisions,” the mandate from the finance ministry said.
“The minimum dividend as indicated above is only a minimum benchmark. CPSEs are advised to strive to pay higher dividends taking into account relevant factors such as profitability, capex requirements with due leveraging, cash reserves and net worth”, the new guidelines said.
The government has advised these PSUs to maintain a staggered dividend regime to avoid end-loading of annual payments. “Payment of dividend at regular intervals helps revive investor interest and improve market sentiment for CPSE stocks, as regular dividend attracts investors to CPSE stocks and retain them in the hope of a future dividend,” said the guidelines.
Stock split
The government has advised listed CPSEs to consider splitting their shares if they trade above 150 times the face value for six months. The mandate from the finance ministry said that there should be a cooling-off period of at least three years between two successive share splits.
Share buyback
The guidelines mandate the PSUs to consider a buyback if their shares are priced less than book value consistently for the last six months and they have net worth of Rs 3,000 crore and company stocks and a net worth of Rs 3000 crore and cash & bank balance of over Rs 1,500 crore may consider the option to buy-back their shares.
The finance ministry noted that the cash and bank balances of some CPSEs may be high due to the receipt of advance and milestone payments. “Therefore, cash and bank balances for the purpose of buyback shall mean own cash i.e. cash holdings minus the advances received from clients for project work. For assessing the net worth of a CPSE, general reserves and surplus plus paid-up share capital of the CPSE are required to be used,” the guidelines said.
Bonus share issue
The government wants CPSEs to consider bonus share issues when their defined reserves and surplus are equal to or over 20 times its paid-up equity share capital.
Issuing bonus shares can enhance liquidity and marketability by making the shares more affordable and attractive to a broader range of investors, the finance ministry guidelines noted.
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[The Economic Times]
