Public sector major NTPC extended its gains on Tuesday after the board of directors of the company approved issuance of bonus debentures in the ratio of 1:1.25.
Buying interest in the stock has intensified since last Wednesday after the company, in a BSE filing, said the board will mull issuance of 125 bonus debentures for every 100 shares held.
After rallying as high as R143.7, the NTPC scrip closed the session at R142.8, up R4, or 2.9%. The rally took its four-day-long streak to 11.5%.
The issuance is seen as a positive for the state producer as it will improve its capital structure as well as improve the return on equity (RoE) profile.
According to HSBC, the outcome is a positive for minority shareholders due to lower tax incidence and a likely addition of 110 basis points to the current RoE of 11.3%.
The foreign brokerage argues that the debentures will also improve the company’s capital structure under which it currently maintains a much lower debt-to-equity ratio (0.8 times) against the permitted proportion of 70:30 under regulated return model. The lower DE ratio currently implies lower reported RoE.
In a BSE filing, the company said the board has approved a scheme of arrangement for the issuance of “secured, non-cumulative, non-convertible, taxable fully paid-up debentures” by utilising its free reserves, pursuant to certain provisions of the Company’s Act.
It also said the proceeds from the issuance of 8,245.46 crore debentures amounting to R10,306.83 crore will be utilised for capital expenditure in new and ongoing projects, including coal mining, renovation and modernisation, and re-financing of the continuing projects. The aggregate face value of the debentures would be treated as “deemed dividend” and be applicable for dividend distribution tax to be paid by the company.
NTPC quoted its free reserves at R72,418 crore as of March 31, 2014.
The bonus debentures are proposed to be rated and listed on stock exchanges yielding a coupon of annualised “reference G-sec” plus 50 bps. The reference rate will be derived by averaging the 10-year G-Sec base yield of five working days preceding the record date. The thus-arrived rate will be restricted to two decimal points without rounding off, to compute the “reference G-Sec”.
Bonus debenture is an instrument through which a company distributes part of its accumulated profits from its reserves to its shareholders. However, it has better implications than both bonus shares and traditional dividend distribution. This is because issuing bonus debentures does not result in dilation of equity nor does it lead to substantial immediate cash outgo.
The principle amount that constitutes a bigger portion of debentures is only paid at the time of redemption and the immediate cash outgo is only limited to the current year’s interest payment. Annual interest payments are adjusted against the company’s future profits.
