The plan to include dividends and buybacks in the criteria for performance-linked pay of public sector employees exposes the Centre’s confused thinking about the companies it owns. The inter-ministerial committee, which proposed the change, thinks the addition of these two yardsticks to the extant one—market capitalisation—will help gauge “total return to shareholders.” On the face of it, cash dividends reduce shareholder equity and buybacks inflate the stock value; so, the two act at cross purposes. Both boost immediate rewards to shareholders; however, forced distribution of rewards under an agreement with the promoter will impinge on the operational freedom of the firms, their long-term business and growth prospects, and undermine the return on capital deployed. The ostensible reason for the government’s move is to encourage new investors to purchase PSU stocks and aid the ambitious project to privatise most of these firms, except a few “strategic” ones. The real purpose, however, seems to be additional money that could flow into the exchequer as dividend and buyback receipts over the next few years.
The general perception is that PSUs are much worse than private-sector peers in terms of operational efficiency, profitability and market capitalisation. The facts are more nuanced. On an aggregate basis, about 250-odd central public sector enterprises (CPSEs) do make considerable profits (`1.43 trillion in FY19), even as nearly a third are habitual loss-makers, perennially calling on taxpayer money. A comparable incidence of sickness in the private sector gets differential treatment. During commodity price rallies like the current one, CPSE stocks have historically yielded high returns.
Commodity CPSEs have conventionally done well partly because of the assorted privileges they enjoy in the form of direct allotment of various physical (sovereign) assets, assured supply of inputs and even markets and lack of any or sufficient competition. To be sure, these advantages are being progressively withdrawn. But the clutches of sovereign-ordained obligations refuse to fritter away at the same speed. State-run oil marketers continue to be hamstrung by tacit government controls on fuel pricing. Also, CPSEs are required to reserve a quarter of their purchases for MSMEs; the mighty ones are often called upon to play White Knight roles that constrict their autonomy. That said, it is true that the private sector surge over the last three decades has reduced CPSEs’ share in gross value added in the economy and their relative shares in respective markets and organised labour.
The performance MoUs militate against steps taken to improve corporate governance in CPSEs, including induction of more non-government directors on the boards. CPSEs have stood the Centre in good stead in supporting gross capital formation in the economy. Over the last few years, several trillions of rupees have been invested by CPSEs under government prodding, even when low capacity utilisation levels made private-sector investors hesitant. There is a big opportunity cost of retaining moribund PSUs under firm bureaucratic grip. To increase investor confidence in these firms, the government must step aside from management and let professional corporate governance flourish. The true value of the stocks can be realised only when CPSEs have a level-playing field, are professionally run, agnostic to ownership, and markets respond in a natural way.