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Along with higher dividend payment, PSUs will now be mandatorily required to outline a plan for non-core asset monetisation. On the face of it, this might sound a reasonable ask as selling non-core assets would help generate cash, which can be shared with the government.
Dividend income is a significant component of non-tax revenue for the central govt and, unlike tax revenue, it doesn't need to share it with states. Higher dividends from PSUs can be useful, particularly in a year like this, when the overall revenues are likely to fall short.
The problem, however, is that the government has been squeezing PSUs for many years and they may not be in a position to increase dividend payments this year.
Over the past 5 yrs, a sample of 55 listed PSUs paid 70%+ of their profits as dividend. The pay-out ratio for PSUs was more than twice that of Nifty50 firms. Interestingly, besides dividend payment, listed PSUs are also expected to outline what they are doing to increase mkt cap.
A higher market capitalisation would naturally result in better realisation for the government at the time of disinvestment. However, all this shows a fundamental disconnect in the way the government treats PSUs and what it expects from them.
To be fair, the problem is not recent. The government often treats PSUs, including state-owned banks, as its extension to fulfil budgetary needs — both in terms of revenue and expenditure.
It not only expects PSUs to pay more dividends but also do the heavy lifting in terms of pushing capital expenditure. Additionally, it now expects PSUs to increase market capitalisation.
If PSUs regularly pay higher dividends, they would have so much less to invest, which will affect growth over time. Slower growth and a weaker balance sheet will directly affect valuations and market capitalisation.
One of the biggest reasons for low valuation of PSUs in the stock market is the fear of constant government interference.
The interests of minority shareholders are not always aligned with the government of the day. Govt intervention and general rules of operations may not always allow PSUs to effectively compete with the Pvt sector.
Thus, PSUs generally tend to struggle when exposed to competition. About 70 per cent of profits among PSUs come from sectors, such as petroleum and coal, where private sector presence is negligible.
Forcing PSUs to sell assets to bridge the government’s revenue shortfall and demanding higher dividends would affect their growth potential. This could actually end up destroying value with longer-term budgetary consequences.
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