The PSU conundrum

Along with higher dividend payment, public sector undertakings (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. And, dividend income is a significant component of non-tax revenue for the central government 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 by a significant margin.

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 five years, a sample of 55 listed PSUs in aggregate paid over 70 per cent 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 market capitalisation. 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.

Predictably, all these objectives cannot be attained simultaneously. If PSUs regularly pay higher dividends, they would have so much less to invest, which will affect growth over time. Subpar revenue and profit growth would affect the ability of government-owned firms to pay dividends. Slower growth and a weaker balance sheet will directly affect valuations and market capitalisation. Furthermore, 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. Government intervention and general rules of operations may not always allow PSUs to effectively compete with the private 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.

On the whole, though the circumstances in the current year are truly extraordinary and the government would want to raise as much resources as possible to meet its budgetary obligations, it would do well to review policies regarding PSUs with longer-term objectives in mind. The government should give PSUs and their boards the required autonomy to function, and allow them to compete and create value. The best way to increase market value on a sustainable basis is to increase profitability and earnings visibility. 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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