Key Points Regarding Dividends and Disinvestment in CPSEs

Key Points Regarding Dividends and Disinvestment in CPSEs

Subject: Economy

Section: Indian Economy and National Income 

1. Dividends in CPSEs:
   • Dividends from Central Public Sector Enterprises (CPSEs) are expected to surpass ₹50,000 crore for the third consecutive fiscal year.
   • The collections from dividends have already exceeded the Budget Estimate for the current fiscal.
   • Dividend and disinvestment proceeds contribute to non-tax revenue and are managed by the Department of Investment and Public Asset Management (DIPAM).
2. Disinvestment Scenario:
   • The strategic disinvestment of entities like IDBI Bank, Shipping Corporation, BEML, PDIL, HLL Life Care Ltd, and NMDC Steel Ltd is still pending.
3. Guidelines for Dividends:
   • CPSEs follow guidelines set by the Finance Ministry, requiring the payment of an annual dividend of 30% of Profit After Tax (PAT) or 30% of the government’s equity, whichever is higher.
   • The guidelines also consider factors like cash and free reserves, with CPSEs having the option to issue bonus shares or pay special dividends based on their financial position.
4. Consistent Dividend Policy:
   • In 2020, an advisory recommended a consistent dividend policy for CPSEs.
   • CPSEs paying higher dividends (100% dividend or ₹10 per share) were encouraged to consider quarterly dividend payments, while others could follow a half-yearly frequency.
   • The advisory suggested that CPSEs should aim to pay at least 90% of the projected annual dividend in one or more interim dividend installments.

Evolution of Divestment in India:

1. Initiation (1991):
   • Divestment in India emerged as a by-product of economic reforms initiated in 1991.
   • The objective was to redefine the role of the government versus the market.
2. Formalization (1996):
   • The Divestment Commission was established in 1996 to examine and recommend withdrawal from non-strategic sectors.
3. Department of Divestment (1999):
   • The Department of Divestment was formed in December 1999.
   • Later, in September 2001, it became the Ministry of Disinvestment.
   • Shifted to the Ministry of Finance in May 2004.
   • Renamed as the Department of Investment and Public Asset Management (DIPAM).
4. Objectives of Divestment:
   • Redefine the government’s role versus the market.
   • Inject market discipline in PSUs’ decision-making.
   • Revive loss-making public enterprises.
   • Generate additional resources for fiscal deficit and capital expenditure.

Maharatna and Navratna Categories for CPSEs:

Maharatna Category:

1. Criteria for Qualification:
   • Must have Navratna status.
   • Listed on the Indian stock exchange with prescribed public shareholding.
   • Average annual turnover > Rs. 25,000 crores (last 3 years).
   • Average annual net worth > Rs. 15,000 crores (last 3 years).
   • Average annual net profit after tax > Rs. 5,000 crores (last 3 years).
   • Significant global presence/international operations.

Navratna Category:

1. Criteria for Qualification:
   • Must have Navratna status.
   • Miniratna Category – I or Schedule ‘A’ CPSEs.
   • ‘Excellent’ or ‘Very Good’ rating in 3 of the last 5 years.
   • Average annual turnover > Rs. 25,000 crores (last 3 years).
   • Average annual net worth > Rs. 15,000 crores (last 3 years).
   • Composite score of 60 or above in 6 performance indicators including Net Profit to Net Worth, Cost of Services, Earnings per Share, etc.

Miniratna Category-I:

1. Criteria for Qualification:
   • Made profit in the last 3 years continuously.
   • Pre-tax profit is Rs. 30 crores or more in at least 1 of the last 3 years.
   • Positive net worth status.
   • Listed on the Indian stock exchange with prescribed public shareholding.

Miniratna Category-II:

1. Criteria for Qualification:
   • Made profit for the last 3 years continuously.
   • Positive net worth status.
   • Not defaulted in the repayment of loans/interest payment on any loans due to the Government.
   • Not dependent upon budgetary support or Government guarantees.

Tax and Non-Tax Receipts:

Tax Receipts:

Tax receipts refer to the revenue collected by the government through various taxes imposed on individuals, businesses, and other entities. Taxes are a primary source of government revenue and are utilized to fund public services, infrastructure development, social welfare programs, and other government expenditures. There are two main categories of taxes:

1. Direct Taxes:
   • These are taxes levied directly on individuals and entities based on their income or profits.
   • Examples include income tax, corporate tax, and wealth tax.
2. Indirect Taxes:
   • These are taxes imposed on the production and consumption of goods and services.
   • Examples include goods and services tax (GST), excise duty, and customs duty.

Non-Tax Receipts:

Non-tax receipts encompass various sources of revenue for the government that are not derived from taxes. These receipts contribute to the government’s income and financial resources. Key components of non-tax receipts include:

1. Dividends and Profits:
   • Revenue earned by the government from its investments in public sector enterprises, often in the form of dividends.
2. Interest Receipts:
   • Interest earned on loans extended by the government, including loans to other countries.
3. Fee and User Charges:
   • Revenue generated from fees and charges for specific government services, licenses, permits, or the use of government-owned assets.
4. Disinvestment Proceeds:
   • Funds generated from the sale of government-owned assets, such as shares in public sector enterprises, strategic disinvestment, and privatization.
5. Grants and Aid:
   • Financial assistance received from other governments, international organizations, or entities for specific projects, programs, or developmental purposes.
6. Recoveries:
   • Amounts recovered by the government, including loan repayments and recoveries from individuals or entities.

DIPAM (Department of Investment and Public Asset Management):

DIPAM is a government department under the Ministry of Finance in India. It plays a crucial role in the management of the government’s investments and assets.

DIPAM is involved in the strategic disinvestment of public sector enterprises and the monetization of non-core assets.

Its key functions include:

1. Strategic Disinvestment:
   • Planning and executing the strategic sale of government equity in public sector enterprises.
2. Monetization of Non-Core Assets:
   • Identifying and monetizing non-core assets owned by the government.
3. Financial Management:
   • Managing the government’s financial investments, including disinvestment proceeds.
4. Asset Management:
   • Efficient management of government assets to enhance returns.
5. Policy Formulation:
   • Formulating policies related to disinvestment and asset management.

Interim Budget vs. Vote on Account – Key Differences

1. Nature and Timing:
   • Interim Budget: Presented during an election year, covering expenses and revenues until a new government is formed after the general elections.
   • Vote on Account: Passed as a convention through the Interim Budget to approve essential government expenditures, such as salaries and ongoing expenses, before the elections. Valid for up to two months, extendable if necessary.
2. Content:
   • Interim Budget: Includes estimates of expenditure, revenue, fiscal deficit, financial performance, and projections for the upcoming financial year. Cannot include major policy announcements or schemes, following Election Commission guidelines.
   • Vote on Account: Lists only the expenditure borne by the government, focusing on essential costs.
3. Discussion and Approval:
   • Interim Budget: Requires discussion in the Lok Sabha and formal approval.
   • Vote on Account: Passed by the Lok Sabha without discussion, as it deals specifically with expenditure.
4. Tax Regime Impact:
   • Interim Budget: Can propose changes in the tax regime, allowing adjustments to taxes.
   • Vote on Account: Cannot change taxes under any circumstances.
5. Validity Period:
   • Interim Budget: Similar to a full budget but covers projections for a few months.
   • Vote on Account: Usually valid for two months but can be extended if necessary.