The NDA government has found a unique funding solution to bridge the fiscal deficit — one entailing the transfer of Rs 20,000 crore from rich Central public sector enterprises (CPSEs) to the national exchequer by way of bonus debentures issued to the government.
The concurrence of both the ministries of coal and power is learnt to have been taken for the issue of bonus debentures by Coal India (CIL) and NTPC respectively.
The concept, to be utilised for the first time by the CPSEs, will not only provide the government with an amount equivalent to the value of debentures at the time of liquidation but also with fixed interest for the time it holds them. While the process may take around five to six months after it is approved by the company’s board of directors, sources close to the development told The Indian Express that both CIL and NTPC plan to issue bonus debentures amounting to around Rs 10,000 crore each.
While the upper limit of bonus debentures are capped at the sum of general reserve and surplus of profit and loss account, cash and bank balance for NTPC and CIL amounted to Rs 15,311 crore and Rs 9,817 crore, respectively, as on March 31, 2014.
It is however, important to note that the recipient (the Centre) does not have to pay face value of the instrument as it is paid by the company from its reserves and surplus. A note prepared by the coal ministry said that it will benefit the government. “First DDT (dividend distribution tax) will be payable to government on bonus debentures. Second, these instruments can be traded and liquidated and this will be in addition to the dividend paid to government.”
Market experts say that it is a good move and will benefit both government and company. “While disinvestment leads to correction in share price, the bonus debenture results into reduction in cash reserve of the company and also increases the company’s debt which finally results into a rise in its Return on Equity of the company and thereby a pick up in share price of the company,” said the head of an investment banking firm on conditions of anonymity.
The note, however, points out a couple of issues that may invite criticism as bonus debentures affect company’s finances. While it will curtail the profit for the year to the extent of interest liability, it may also impact by way of provisioning for redemption when payment has to be made.