DIPAM-Guideliness-on-capital-restructuring-and-Dividend

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15 Aug 2024

DIPAM-Guideliness-on-capital-restructuring-and-Dividend

DEPARTMENT OF INVESTMENT AND PUBLIC ASSET MANAGEMENT (DIPAM) GUIDELINES

The Department of Investment and Public Asset Management (DIPAM) has issued comprehensive guidelines on the financial management practices for Central Public Sector Enterprises (CPSEs) with particular focus on dividend distribution, capital restructuring, and utilization of retained earnings. These guidelines serve as a framework to ensure that CPSEs maintain a balance between rewarding shareholders and reinvesting in growth, while also adhering to the government’s objectives for efficient capital management.

1. Dividend Distribution Policy for CPSEs

According to the SEBI (LODR) Regulations, 2015, top 1000 listed companies in India must formulate a dividend distribution policy. For CPSEs, DIPAM has mandated that every CPSE must pay a minimum annual dividend of 30% of Profit After Tax (PAT) or 5% of net worth, whichever is higher. This guideline ensures that CPSEs return a significant portion of their profits to shareholders, while also balancing the need to reinvest profits for future growth.

The policy sets out specific financial parameters to be considered before declaring a dividend, including:

Net-worth and borrowing capacity: Ensures that dividends are paid without jeopardizing the financial stability of the CPSE.

Long-term borrowings: The level of debt already on the balance sheet is considered, ensuring that dividend payments do not impair the company’s ability to meet its obligations.

CAPEX/Business Expansion Needs: The necessity of retaining earnings for future capital expenditures and business expansion is weighed against the desire to pay dividends.

Retention of profit: Retained earnings are to be primarily utilized for growth and maximizing shareholder value.

Cash and bank balance: The availability of liquid assets is crucial for determining the capacity to pay dividends.

2. Utilization of Retained Earnings

Retained earnings, as per the guidelines, are to be used strategically to enhance the company’s growth prospects. The CPSEs are directed to consider:

Short-term and long-term plans: Ensuring alignment of retained earnings with the company's growth strategies.

Diversification opportunities: Exploring new business avenues that can generate additional revenue streams.

Government guidelines: Adherence to government policies related to the issuance of bonus shares, buybacks, and other capital restructuring activities.

3. Capital Restructuring of CPSEs

The concept of capital restructuring in CPSEs, while not explicitly defined under the Companies Act, 2013, is comprehensively addressed under DIPAM’s guidelines. It includes:

Reduction of Share Capital (Section 66): CPSEs can reduce share capital through various methods such as extinguishing shares or reducing liability on shares.

Buyback of Securities (Section 68): CPSEs may buy back their shares, particularly when they have a strong balance sheet, with net worth and cash reserves above a certain threshold. This helps in optimizing capital structure and returning excess cash to shareholders.

Issue of Preference Shares (Section 55): CPSEs can issue redeemable preference shares to raise funds or restructure existing capital.

Compromise and Arrangement (Sections 230-232): This covers mergers, demergers, and other arrangements affecting the capital structure.

A. Buyback of Shares

CPSEs are required to analyze their financial position annually to determine the feasibility of a share buyback. The following parameters are to be evaluated:

Cash and bank balance: Determines liquidity available for buybacks.

CAPEX and business expansion: Ensures that buybacks do not hinder planned capital expenditures.

Net-worth and borrowing capacity: Evaluates the impact of buybacks on the company’s financial leverage.

Market price/book value: Assesses whether the current market valuation of shares justifies a buyback.

If a CPSE has a net worth of at least Rs. 2000 crore and cash and bank balance exceeding Rs. 1000 crore, it is encouraged to consider a buyback to optimize capital structure.

B. Issue of Bonus Shares

The issuance of bonus shares is to be considered by CPSEs when their reserves and surplus exceed five times the paid-up equity share capital. This ensures that excess reserves are effectively utilized to increase the capital base and reward shareholders. If reserves are more than ten times the paid-up equity share capital, issuing bonus shares becomes a requirement unless justified otherwise.

C. Splitting of Shares

To enhance participation of small investors and increase market liquidity, CPSEs are encouraged to split shares when the market price or book value exceeds 50 times the face value. This makes shares more affordable for small investors, broadening the shareholder base and enhancing trading volumes.

4. Compliance and Exemptions

CPSEs are expected to adhere to these guidelines diligently. However, if any CPSE finds it challenging to comply, it must seek specific exemptions from DIPAM, Ministry of Finance, and the Government of India. Such requests must be justified with detailed analyses and supported by the respective Administrative Ministry/Department and the Financial Adviser.

5. Role of the Department of Public Enterprises (DPE)

The Department of Public Enterprises (DPE) plays a crucial role in monitoring compliance with these guidelines. It conducts an annual survey to assess the implementation of these guidelines across CPSEs. The findings are published in the Public Enterprises Survey, which provides a comprehensive overview of the financial health and capital management practices of CPSEs.

Conclusion

DIPAM’s guidelines on dividend distribution and capital restructuring are critical for maintaining the financial prudence and growth trajectory of CPSEs. These guidelines ensure that CPSEs balance the need to reward shareholders with the imperative of reinvesting profits for long-term growth. By mandating regular analyses and adherence to specific financial parameters, these guidelines promote transparency, accountability, and efficiency in the management of public assets.

DRAFT AGENDA

ITEM NO.:

SUBJECT: To consider the action to be undertaken in Compliance of DIPAM Guidelines on Capital Restructuring in FY 2024-25

CATEGORY: Information

SPONSORED BY: Company Secretary

BACKGROUND:

The Department of Investment & Public Asset Management (DIPAM) issued Guidelines on Capital Restructuring of Central Public Sector Enterprises (CPSEs) under Office Memorandum F. No 5/2/2016-Policy dated 27th May 2016. These guidelines aim to optimize the Government's investment management in CPSEs.

These guidelines apply to all corporate bodies where the Government of India (GOI) or government-controlled entities hold a controlling interest. CPSEs must ensure compliance by addressing these matters in the Board meeting.

MAIN BODY:

Consolidated Guidelines on General Principles and Mechanism for Capital Restructuring in CPSEs:

Coverage	Dividend	Buy Back	Bonus Shares	Splitting
Applicability	From 01.04.2018	From 01.04.2018 or thereafter	From 01.04.2018 or thereafter	From 01.04.2018 or thereafter
Objective	Maintaining a healthy balance in capital and net worth	Improving investor confidence by utilizing surplus cash where CPSEs do not have plans to deploy surplus funds for business purposes	Bringing balance between paid-up capital and accumulated reserves	Encouraging participation of small investors for increased market liquidity and trading volume of shares
Eligibility/Applicability	Payment of a minimum annual dividend at 30% of PAT or 5% of net worth, whichever is higher. Expectation for CPSEs to pay the maximum dividend. Administrative Ministry to analyze that fund retention will ensure optimal leveraging for higher investment by PSEs.	Each CPSE with a net worth of at least Rs [X] crore & cash and bank balance over Rs [Y] crore should consider buyback. BOD to analyze surplus cash available for buyback in the first meeting after FY closure.	Issue of bonus shares in CPSEs must occur where reserves and surplus equal or exceed 10 times the paid-up equity capital. BOD may examine issuing bonus shares when reserves and surplus are equal to or more than 5 times of paid-up share capital. The Government nominee must ensure BOD specifically records reasons for non-issue of bonus shares.	Where the market price/book value of a share increases 50 times its face value, CPSE should consider splitting shares appropriately but not below Re. 1 per share.

Action to be taken in FY 2024-25:

- Dividend: Based on financial results of FY 2023-24, the proposed dividend calculation is as follows:

Higher of:

- 30% of PAT (Rs. X Cr.) = Rs. Y Cr.
- 5% Net Worth (Rs. Z Cr.) = Rs. A Cr.

Accordingly, the Board recommended a Final Dividend for FY 2023-24 at Rs. B (i.e., C%) per paid-up equity share of Re. 10/- each, subject to shareholder approval in the ensuing Annual General Meeting. This equates to Rs. D Crore and complies with the DIPAM Guidelines.

- Buyback: The Company's Net-worth is Rs. [E] Cr. (after deducting the grant received of Rs. [F] Cr.) as of March 31, 2024, which is below the prescribed limits, hence Buyback is not applicable in FY 2024-25.

- Bonus Shares: The Company has Reserves and Surplus of Rs. [G] Cr. as of March 31, 2024, which is less than 10 times its paid-up equity share capital (Rs. [H] Cr.). Therefore, the criteria for issuing bonus shares are not met in FY 2024-25.

- Share Splitting: The market price/book value is less than 50 times the face value of Rs. 10; therefore, splitting shares is not required.

CONCLUSION:

The Board of Directors recommended the Final Dividend of Rs. B per equity share of Rs. 10/- each (i.e., C%) amounting to Rs. D crore on the Equity Share Capital of the Company for FY 2023-24, subject to shareholder approval at the 60th Annual General Meeting. This is in compliance with DIPAM Guidelines on Capital Restructuring.

The Board may take note of the applicability of compliance as per DIPAM Guidelines on Capital Restructuring and pass the following resolution with or without modifications:

Resolution:

“RESOLVED THAT the applicability and status of DIPAM Guidelines Compliance in FY 2024-25 be and is hereby noted.”

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Article Compiled by:-

~Neel Lakhtariya

+91 9582627751

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.