DIPAM Issues Revised Capital Restructuring Norms for CPSEs

1. On 18th November 2024, the Finance Ministry issued new guidelines for capital restructuring by Central Public Sector Enterprises (CPSEs).
2. These changes focus on improving the financial flexibility of CPSEs, increasing shareholder value, and improving their performance.

What is Central Public Sector Enterprises (CPSEs) ? Central Public Sector Enterprises (CPSEs) refer to government-owned companies or entities where the Central Government holds a controlling stake of 51% or more in the share capital. The term includes several types of entities: Government Companies: These are companies in which the Central Government owns at least 51% of the paid-up share capital, or a combination of the Central and State Governments together hold at least 51%. A government company can also be a subsidiary of another government company. Definition (Companies Act, 2013, Section 2(45)): A "Government Company" is defined as any company in which at least 51% of the paid-up share capital is held by the Central Government or by one or more State Governments, either directly or indirectly. This also includes subsidiaries of such government companies. Statutory Corporations: These are entities created by an Act of Parliament or state legislature and are owned or controlled by the government. Statutory Corporations are also considered CPSEs when they meet the ownership criteria. Subsidiaries of Government Companies: Any company that is a subsidiary of a Government company, where the Central Government's stake is 51% or more, is also categorized as a CPSE. Government-Controlled Other Companies: These are companies where the Central Government, or a combination of the Central and State Governments, hold substantial control, though they may not meet the strict ownership percentage criteria of 51% shareholding. Exclusions from CPSEs: Departmentally Run Public Enterprises: Enterprises directly managed by the government without being incorporated as companies. Banking Institutions: Banks owned or controlled by the government, such as public sector banks. Insurance Companies: Public sector insurance companies.

Key Features of the Revised Guidelines:

a) Dividend Payment Rules:

1. As per the guidelines issued by the Department of Investment and Capital Asset Management (DIPAM), CPSEs are now required to pay at least 30% of their net profit or 4% of their net worth, whichever is higher, as an annual dividend to shareholders.
   1. DIPAM comes under the Ministry of Finance.
   2. Functions: Deals with matters relating to management of Central Government investments in Central Public Sector Enterprises (CPSEs)
   3. 3 major areas of its work relate to Strategic Disinvestment and Privatisation, Minority Stake Sales and Capital Restructuring, bonus, dividends, etc.

Example: Let’s consider two different CPSEs for clarity: Example 1: Based on Net Profit Net Profit (PAT): ₹100 crore Required Dividend (30% of PAT): 30%×100 crore=30 crore In this case, the company would need to pay ₹30 crore as the dividend, since it meets the 30% requirement. Example 2: Based on Net Worth Net Worth: ₹1,200 crore Required Dividend (4% of Net Worth): 4%×1,200 crore=48 crore In this case, the company would need to pay ₹48 crore as the dividend, because 4% of the Net Worth is greater than 30% of the Net Profit.

2. For financial sector CPSEs like NBFCs, the minimum dividend is 30% of profit after tax (PAT), but this is subject to any existing legal limits.
   1. It means that a company is required to distribute at least 30% of its Profit After Tax (PAT) as dividends to its shareholders.
   2. Non-Banking Financial Companies (NBFCs) are financial institutions that provide a variety of financial services similar to banks but do not have a full banking license and cannot engage in activities like accepting demand deposits (savings or checking accounts) or offering direct payment settlement services.
3. The new rules are stricter than the 2016 guidelines, which required 30% of profit after tax (PAT) or 5% of net worth as the minimum dividend.

b) Share Buyback Option:

1. CPSEs whose share price has been below its book value for the last six months and meet the following conditions may buy back their shares:
   1. Net worth of at least ₹3,000 crore.
   2. Cash and bank balance of over ₹1,500 crore.

Example: Let’s say a CPSE has the following financials: Net worth: ₹5,000 crore (meets the ₹3,000 crore condition) Cash and Bank Balance: ₹2,000 crore (meets the ₹1,500 crore condition) Share Price: ₹50 per share Book Value: ₹100 per share If the share price has been trading below the book value (₹100 per share) for the last six months, the CPSE may decide to buy back its shares from the market. It believes that its stock is undervalued (trading at ₹50 instead of ₹100), and by buying back shares, it can reduce the number of outstanding shares, possibly increasing the value of the remaining shares.

c) Issuing Bonus Shares:

1. CPSEs may issue bonus shares if their reserves and surplus are at least 20 times their paid-up equity share capital.

d) Share Split Option:

1. If a listed CPSE’s share price is more than 150 times its face value for six months in a row, it can consider splitting its shares.
2. However, there must be a cooling-off period of at least three years between two share splits.
   • A cooling-off period is essentially a waiting period, designed to prevent rash decisions, conflicts of interest, or undue pressure, giving time for reflection or to comply with specific regulatory requirements

Applicability of the Guidelines:

1. The revised rules apply to all CPSEs, including subsidiaries where the parent CPSE owns more than 51% stake.
2. These guidelines do not apply to public sector banks, public sector insurance companies, or other bodies that are not allowed to distribute profits (e.g., companies under Section 8 of the Companies Act).
3. The new rules will be in effect from the current financial year 2024-25.

Interim Dividends and Payment Schedule:

1. Listed CPSEs must pay at least 90% of their expected annual dividend as interim dividends, either in one or more installments.
   • An interim dividend is a dividend payment made by a company to its shareholders before the end of the financial year
2. CPSEs may choose to pay interim dividends after each quarterly result, or at least twice a year.
3. The final dividend for the previous year should be paid soon after the Annual General Meeting (AGM), which is usually held in September.

Key Differences Between Interim and Final Dividends:

Aspect	Interim Dividend	Final Dividend
Declared	During the year (based on interim results)	After the financial year (based on audited results)
Approval	Declared by the Board of Directors	Approved by shareholders at the AGM
Payment Frequency	Paid multiple times in a year (quarterly, semi-annually)	Paid once, at the end of the financial year
Basis	Based on unaudited financial results	Based on final audited results

For Unlisted CPSEs:

1. Unlisted CPSEs can pay a final dividend once a year based on the audited financial results of the previous year.

Objectives of the Revised Guidelines:

1. The new rules aim to increase the value of CPSEs and provide better returns for shareholders.
2. The changes give CPSEs more flexibility in managing their operations and finances, encouraging them to perform better.
3. The guidelines are designed to allow more investors to participate in the growth and success of CPSEs, which could lead to greater profitability.

Governance and Oversight:

1. A committee called the Committee for Monitoring of Capital Management and Dividend by CPSEs (CMCDC) will discuss any issues related to capital management or restructuring.
2. The Secretary of DIPAM will lead this committee, which will oversee the implementation of the guidelines and ensure they are followed.

Importance and Impact:

1. Financial Flexibility : By requiring more dividends and allowing share buybacks, the guidelines give CPSEs more flexibility in managing their finances and operations.
2. Shareholder Value : The rules are designed to increase shareholder value by making CPSEs more accountable to investors and ensuring higher returns.
3. Efficiency & Performance : The guidelines aim to improve the efficiency and overall performance of CPSEs, making them more attractive to investors.
4. Capital Restructuring : By allowing CPSEs to buy back shares, issue bonus shares, or split shares, the new rules provide several ways for CPSEs to manage their capital structure effectively.

Conclusion:

The revised guidelines for capital restructuring by DIPAM are a big step toward improving the financial health of CPSEs. By focusing on higher dividend payments, offering share buyback and bonus share options, and allowing share splits, the guidelines aim to make CPSEs more efficient and profitable. These changes will not only improve shareholder returns but also help CPSEs grow and attract more investors.

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