As per media reports the government is seeking huge dividends
(Rs190bn) from oil PSUs to meet its fiscal shortfall (see
here). It is also reported that some companies might have to borrow money
to pay the required amount of dividend as the cash balance with them may not be
sufficient to meet the demand. Obviously the payout will at the expense of
cutting capex and impairing the future growth potential.
In summer of 2016 also, the "Finance Ministry" had
directed all profit making PSUs to use their surplus cash to buy back shares
and pay handsome dividend, besides considering issuing bonus shares or going
for stock split. (see
here) Since then the benchmark Nifty50 has gained over 42%, while the Nifty
CPSE has lost over 9%, underperforming the benchmark by massive 51%.
I have said it many time before, and I would like to reiterate
this again - for a common investors, finding any reason for investing in a
public sector enterprise (PSE) is extremely challenging; notwithstanding
whatever government suggests or claims.
From the experience of MTNL, NBCC, Coal India, etc. it is clear
that despite their dominant monopoly status, these companies are vulnerable to
failure due to policy intervention; simply because the government in India is
socialist by the constitutional mandate and an enterprise majorly controlled
the government cannot have even profit optimization as its primary objective.
Most of the PSEs in India’s suffer from one or more the
following limitations, that makes them unfit for investment by a common
investor.
(a) The management lacks
transparency and accountability.
(b) The management is
corrupt, incompetent and/or instable.
(c) Historically, the
management has brazenly violated the rights of minority shareholders.
(d) The companies operate
under a highly inconsistent policy environment.
(e Many companies do not
have control over pricing of their products, which is dictated by the
government usually under political considerations.
(f) Some companies like
power distributors are often forced to deal will bankrupt customers.
(g) The senior executives
are appointed on the basis other than expertise in the area of operation.
(h) Most of the companies
may be saddled with excessive bureaucracy without any control over the
appointments, promotions and compensation.
(i) Most companies are
egalitarian in their operating mission and more often work for social cause
rather than optimization of profit.
(j) The companies need
political sanctions for managing their capital structure.
Moreover, the ground reality of our economy today is that we are
hugely dependent on foreign capital to ensure growth. It is therefore
inevitable that government will have to keep relaxing foreign direct investment
norms and open more and more areas of the economy to stiff global competition.
Under these circumstances, many public sector undertakings with their
inefficient capital and wage structure may crumble.
Besides, the majority shareholder (government) has consistently
and blatantly oppressed the minority shareholders in these companies – by not
allowing them to fix the prices of their products, raise capital when required,
make investments where and when desirable and disallowing the managements to
restructure their costs (especially employee cost) during downturns.
Under these circumstances, there is little rationale for a
common investor to invest in PSEs or CPSE ETF. However, for the professional
investors who understand the risk and know how to take advantage of trading cycles,
it may be a different ball game altogether.
