Boosting Valuations: Gujarat Government's New Policy on Dividend by State PSUs

On April 26th, the Gujarat government announced a new policy for minimum levels of dividend distribution and bonus shares for state-owned enterprises, or PSUs. This policy has had a significant impact on the stock market, with the shares of most public sector companies in Gujarat rallying 8-15 percent in a single day.

Gujarat Industries Power Co Ltd and Gujarat Mineral Development Corp Ltd were among the biggest beneficiaries of the policy, surging as much as 20 percent on April 26th. Other PSUs, including Gujarat State Fertilisers & Chemicals Ltd, Gujarat Alkalies & Chemicals Ltd, Gujarat Narmada Valley Fertilizers & Chemicals, Gujarat Cotex, and Gujarat Craft Industries, also experienced significant gains in intraday trading.

The new policy aims to add to the valuations of Gujarat PSUs and is applicable to all seven listed PSUs of the state that are making profits. This is a positive development for investors who have been looking for new opportunities to invest their money and for the state government, which will benefit from increased revenue. In this blog post, we will delve into the specifics of this policy and analyze the impact of the policy.

The New Dividend Policy

Under this new policy, Gujarat has mandated a minimum of 30 percent of net profit, or 5 percent of net worth, whichever is higher, to be a minimum level of dividend declared for shareholders. However, only the minimum level and maximum permissible level of dividend should be declared. This policy aims to ensure that these companies contribute to the state's revenue and maintain fiscal discipline.

Additionally, every state PSU with a net worth of at least Rs 2,000 crore and cash and bank balance of Rs 1,000 crore has been mandated to exercise the option to buy back their own shares. A share buyback is a process in which a company repurchases its own shares from the open market or its shareholders.

Bonus shares are additional shares issued by a company to its existing shareholders without any cost. The new policy encourages state PSUs to issue bonus shares if they have accumulated sufficient reserves and if the issuance is in the best interest of the company and its shareholders. State PSUs that have defined reserve and surplus equal to or more than 10 times their paid-up equity share capital are required to issue bonus shares to their shareholders. The policy also states that the issuance of bonus shares should not lead to a significant dilution of the company's earnings per share (EPS).

Moreover, Gujarat has also mandated that in the case of splitting of shares, where the market price or book value of a state PSU shares exceeds 50 times of its value, provided its existing face value of a share is more than Re 1. A share split is a process in which a company increases the number of its outstanding shares by issuing more shares to its existing shareholders. The new policy allows state PSUs to consider share splits if the company's share price has become too high, making it difficult for retail investors to invest.

Assessing the Impact of Gujarat's New Dividend Policy: A Hypothetical Example

To analyze the impact of the new dividend policy, let's consider a hypothetical example of a state PSU with the following financial data:

Net Profit: INR 1,000,000 Net Worth: INR 10,000,000

According to the policy, the minimum dividend payout would be:

1. 30% of Net Profit: 0.3 * 1,000,000 = INR 300,000

2. 5% of Net Worth: 0.05 * 10,000,000 = INR 500,000

Since the policy requires the higher of the two amounts, the PSU would need to pay a dividend of INR 500,000.

Now, let's assume that the Gujarat Government holds a 60% stake in this PSU. The government's share of the dividend payout would be:

Government's Share = 0.6 * 500,000 = INR 300,000

This additional revenue can be used by the government to fund various development projects and social welfare initiatives.

The policy's impact on the state PSUs can be analyzed by comparing the dividend payout ratio before and after the implementation of the policy. For instance, if a PSU had a dividend payout ratio of 20% before the policy, the new policy would require the company to increase its payout ratio to 30% (or higher, depending on its net worth). This increase in the payout ratio would encourage the PSU to improve its operational efficiency and profitability to meet the new dividend requirements.

Gujarat PSUs Impacted by New Dividend Policy

Some of the prominent state PSUs in Gujarat include:

1. Gujarat State Fertilizers & Chemicals Limited (GSFC)

2. Gujarat State Petronet Limited (GSPL)

3. Gujarat Mineral Development Corporation Limited (GMDC)

4. Gujarat Alkalies and Chemicals Limited (GACL)

5. Gujarat Narmada Valley Fertilizers & Chemicals Limited (GNFC)

6. Gujarat State Electricity Corporation Limited (GSECL)

7. Gujarat State Road Transport Corporation (GSRTC)

8. Gujarat Industrial Development Corporation (GIDC)

Implications of the Comprehensive Policy

1. Enhanced Corporate Governance: The comprehensive policy on dividends, buybacks, bonus shares, and share splits will improve corporate governance within state PSUs by promoting greater transparency and accountability.

2. Improved Financial Management: The policy will encourage state PSUs to manage their financial resources more efficiently, ensuring that they maintain a healthy balance between growth, profitability, and shareholder returns.

3. Attracting Investment: The policy will make state PSUs more attractive to investors by providing clear guidelines on dividends, buybacks, bonus shares, and share splits. This will help boost investor confidence and potentially attract more investment in these companies.

4. Encouraging Efficiency: The policy will encourage state PSUs to improve their operational efficiency and profitability, as they will need to meet the minimum dividend payout requirements and ensure that buybacks, bonus shares, and share splits are in the best interest of the company and its shareholders.

Summing Up

The Gujarat Government's comprehensive policy on dividends, buybacks, bonus shares, and share splits for state PSUs is a forward-looking initiative that aims to promote financial stability, efficient resource allocation, and improved corporate governance within these organizations. By providing clear guidelines on these financial matters, the government is ensuring that state PSUs are managed more effectively and in the best interests of their stakeholders. Also, by requiring PSUs to distribute a portion of their profits as dividends, the government is ensuring a steady stream of income that can be used to fund important development projects and social welfare initiatives. This policy is expected to have a positive impact on the state's economy and contribute to the overall growth and prosperity of Gujarat. Investors may also benefit from increased dividends and the potential for share buybacks and bonus shares.