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Millennium Post

UPA wanted to rob public sector of Rs 2 trilion cash reserves

Because, both are dishonest acts as they could put such cash-stripped companies to great financial risk choking their growth and threatening their survival. Suffice it to say that the world over most companies – private or public – turned sick and failed for want of adequate cash reserves to fund expansion, diversification and in-time technology upgradation.

In good times, their owners have siphoned out the reserves for their personal or group gains by forcing fat dividends, bonus issues and cheaply lending out to rescue sick sister concerns or acquiring assets for another group firm or firms. Such large transfer of corporate funds to fill promoters’ pockets may not be entirely illegal, but it is hardly ethical and speaks volume of poor corporate governance.

Former UPA regime finance minister Palaniappan Chidambaram’s bid to rob some of the cash-rich PSUs of their free reserves to cover his inefficient budget management leading to higher-than-anticipated revenue deficits was almost similar to the acts of the country’s some of the old textile mining and metal barons in the 1960s that turned almost the entire sectors sick leading to their large-scale nationalization in the 1970s.

Thankfully, Chidambaram’s attempt to siphon away PSU cash reserves came a bit late in the UPA government’s life and largely failed though he managed ‘steal’ some of the ‘surplus’ PSE cash by forcing them make additional interim dividend to help him reduce the budget deficit. The PSEs, the growth and expansion of which were stunted by wrong government policies, administrative indecisions by scam-scared bureaucrats and term-end political paralysis substantially diminishing the authority of the prime minister himself, were happy to welcome their new political masters, hoping that their cash reserves are safe under the new dispensation.

Unfortunately, the vested interests are sparing nothing to chance for the new government to see the logic behind Chidambaram’s highly innovative deficit-financing module. The massive government revenue deficit at the end of the third quarter of 2014-15 and uncertainty over the completion of the remaining PSU disinvestment offers have added fodder to the logic. How the government finally acts will depend on the result of the spectrum action beginning February 25.

Meanwhile, the interest groups within the government and outside using so-called financial experts are relentlessly propagating the virtue of stripping those PSUs of free reserves to make sure that they are forced into large borrowing for project implementation and expansion. If they succeed, the act will provide a relief to both the cash starved government and private sector rivals, whose finances are under pressure due to less comfortable cash reserves and high borrowing rates.

However, the floating campaign that the public sector is sitting on a cash pile of Rs. 2,00,000 crore is like a dressed up, sexy corporate balance sheet whose vital statistics hide more than they reveal.

Firstly, the so-called cash pile does not belong to the public sector as a whole. It is a sum total of free reserves – accumulated mostly out of retained post-dividend earnings -- of some 54 reasonably decent profit making PSUs out of over 200 central public sector enterprises (CPSEs). Given the size of operation and turnover of some of the companies, the operating reserves ratio of most of them is just around normal. They are shareholder’s funds waiting to be deployed in business growth and expansion to add to the shareholder value and improve stakeholder or market perception.

They are not lying idle. They are invested in business or, temporarily, in other short-term instruments earning returns. They provide a kind of financial shield to the PSUs against eventualities. Oil and energy sector PSUs, which have good cash reserves, are already facing some eventualities following global oil price crash, high exploration cost and increasing coal imports.

Of the 54 PSUs, Coal India (CIL) had the highest amount of cash and equivalents of Rs 54,780.20 crore amongst public sector undertakings (PSUs) as of 31 Mar 2014.

It was followed by ONGC with Rs 24,480.10 crore; NMDC Rs 18,657.20 crore; NTPC Rs 17,050.70 crore; BHEL Rs 12,020 crore; Oil India Rs 11,860.10 crore; NHPC Rs 6,142.80 crore, NALCO Rs 5,292.31 crore and Bharat Electronics Rs 4,604.50 crore.

All of them will have to substantially scale up their capital expenditure in the next three to four years if the country’s GDP has to grow eight to nine per cent, annually, 2016-17 onwards and its ‘Make-in-India’ bid becomes a success. Their current fund position will hardly be enough. They will have to generate more surplus to keep expanding. It will make the so-called ‘cash-pile’ claim look hollow and something without much substance. PSUs will need a lot more funds. And, there’s nothing like drawing from internal accrual and reinvesting in business.

A low debt-equity ratio will provide strong financial muscle to PSUs to bargain for easier borrowing terms. If it is okay with Reliance Industries (RIL) boasting itself as a debt-free company and its other ordinary shareholders, including many state-controlled ones, are happy about it, why should the government or the 14th Finance Commission grudge against the low borrowing levels of some PSUs? In fact, the PSUs’ financial ratios in the past four years had deteriorated.

Their cash reserves remained stagnant and had actually dipped in the past two years. PSUs have been forced to borrow to fund ongoing projects due to slower top-line growth, decline in profits and compulsion to maintain dividend payouts. In the past five years, their net profit grew at a compound annual rate of only 10.9 per cent, slower than capex of 13.7 per cent. In 2008-09, PSUs distributed 33.1 per cent of their net profit as dividend. The ratio jumped to 45.5 per cent in 2013-14. In all, PSUs distributed over Rs 47,000 crore as dividend, last fiscal, or nearly 40 per cent of all dividend payouts by the country’s all listed non-banking and non-finance companies.

It resulted in a drop of PSUs’ retained earnings, forcing them to borrow more to meet the shortfall in internal accruals.

In last five yrs, the gross borrowing of PSUs grew at a compound annual rate of 22.3 per cent while net debt had compounded annually at 41.9 per cent. As a result, the PSUs’ net debt-to-equity ratio shot up to 0.7 at the end of 2013-14 from 0.2 at 2008-09 end. It is misleading to suggest that PSUs are sitting on idle money when the private sector was accumulating cash even faster. Then why single out the PSUs? Why not the entire corporate sector is asked to reduce its cash hoard, either through higher capital expenditure (capex) or by putting more cash in the hands of shareholders through bigger dividend payouts?
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