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Pay dividends before you list

Aug 11, 2009

As per a leading business daily, the government plans to collect around Rs 100 bn from certain cash rich public sector companies. Besides listed companies such as NMDC and MMTC, unlisted companies like BSNL and Coal India will also be asked to pay a special dividend to the government before they are listed. Once the companies are listed, public shareholders will also be entitled to the dividends. It may be noted that in the Union Budget 2009-10, the government had raised its target for dividend income by Rs 100 bn to Rs 498 bn, up from Rs 397 bn for the previous year. In our opinion, prudent financial management dictates that funds that are not being gainfully deployed in the business should be returned to the shareholders. That enables the shareholder to allocate capital. There is no reason why this basic lesson of corporate finance should not apply equally to public sector undertakings.

Reality is finally catching up
Reality is finally catching up with the India Meteorological Department (IMD). As per a leading business daily, the IMD has revised its forecast for the second time in three months. The forecast for monsoon rains is now only 87% of the long-period average, as compared to the 93% forecast made in June. In fact, the IMD now says that state governments are free to declare drought. It may be noted that yesterday, Bihar declared 26 out of its 38 districts as 'natural calamity-hit'. Uttar Pradesh has declared drought in 47 districts. The most direct impact of poor monsoons will be felt on the production of rice with the area under cultivation declining by 6 million hectares. A close second is sugar. Agro based industries and those dependent on rural markets will also be impacted. The broadest impact will be in terms of consumer price inflation.

US recession to end this quarter?
As reported by Reuters, a survey of US based economists indicates that 90% of them believe the US recession will end by this quarter. Apparently, this view is based on the recent US data showing GDP contraction at only 1 % in the April-June quarter after plunging 6.4 % in the January-March quarter. Housing and labor market data also support this view.

However, Wilbur Ross, the investor famous for acquiring and turning around failed companies, says that the US economic crisis is not over by a long shot. He believes the enthusiasm is exaggerated. The US unemployment data is still so bad that it should invoke horror. Also, housing prices might have gone up on a QoQ basis, but are still down on a YoY basis. As reported on Bloomberg, Ross believes the US recovery will not be before mid 2010. Investors are so desperate to hear positive news that they are drawing cheerful conclusions from negative data. Time will tell who is right.

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