The government’s compulsion to bridge its fiscal deficit by using cash lying with listed public sector units (PSU) has taken various shapes such as share sales and special dividends. On Wednesday, NMDC Ltd and MOIL Ltd announced their boards have approved a buyback of shares. Earlier, National Aluminium Company Ltd had announced one. All three are following the tender route for buyback, where the price is fixed, as opposed to the stock market buyback route.
There can be no objection to the government selling shares via an offer for sale. It improves liquidity in some cases too and does not affect the company’s financials. Of course, prospective investors need to be convinced about valuations. In a free market, they may keep away for various reasons. That’s when government-owned financial institutions step in to fill the gap, raising red flags over the independence of their investment decisions.
Buybacks do away with all such problems, especially the tender route. In 2012, the buyback regulations pertaining to tender buybacks were amended. Shares tendered will be accepted based on proportionate shareholding, tilting the scale towards promoters. Earlier, it was based on shares tendered as a percentage of the buyback size, friendlier towards minority shareholders. This column had argued then that this change will benefit the government if PSUs buy back shares.
Since all shareholders can tender shares, why should anyone object to it? A buyback is done by a company for one or more of the following reasons: the share is undervalued, the company has surplus cash and the management believes that returning this cash will be the best way to lighten its balance sheet and also improve valuations. In this case, it is difficult to not believe the main reason for the buyback is a nudge from the government. After all, a number of PSUs could not have suddenly discovered the urge to do it.
Even the announcement from the companies does not lay down a cogent reasoning, saying why they want to do a buyback, why now, what their capital expenditure plans are, and how this cash outflow will not affect their growth plans. The buyback documents may have those details, perhaps.
Take Nalco. The company plans to spend Rs.2,835 crore to buy back up to 25% of its equity capital. Its balance-sheet as of 31 March shows a cash and equivalents balance of Rs.5,010 crore, over half of which will be used up by the buyback. That seems a relatively high outgo for a company in a capital intensive business, with several plans under implementation. Sure, it can borrow as it has a debt-free balance sheet, but couldn’t it have waited a few years before doing a buyback?
NMDC has always had ample cash on its books but this buyback will change that. It plans to buy back 20.2% of its equity capital by paying out Rs.7,528 crore. That takes out 51% of its cash balance of Rs.14,809 crore, which actually fell compared to the previous year’s balance of Rs.18,486 crore. An Edelweiss Research note on the buyback says it has capital expenditure commitments of Rs.5,500 crore for a steel project. Its cash balance is enough to meet the buyback requirements but will crimp its ability to maintain FY16’s dividend payout ratio. However, it expects a minimal impact on earnings.
More public sector units may follow suit, with Coal India Ltd being mentioned in news reports as a possible candidate. Utilising spare cash is always a good thing. The first preference is always to reinvest in the business to create assets that generate cash over a longer time period. This holds true for cyclical businesses—where most PSUs operate in. While a buyback is a legitimate way to return cash to shareholders, whether PSUs would have done it, if not for the government’s need to fill its coffers, is a question that should bother minority shareholders.
Source: Mint