AS CASH SWELLS, DISTRIBUTION GETS INNOVATIVE
By Ruma Dubey
When companies sit on a lot of cash, there is always the big question of –what to do with it? Though this sounds like a very good problem to have, wishing we had such issues; when the cash pile too huge, the solution is not easy.
The traditional use of cash is to distribute it as either dividend or bonus issue. Shareholders are also enthused when companies announce that they plan to use the cash to make new acquisitions, as this is a direct organic accrual to the company and shareholder for the long term. A bonus is a direct quick fix capital appreciation but benefits of acquisition are far better.
When the pursuit of money gets you more money than required, surely companies have to think of ways and means to make best utilization of the same. And off late, companies have been coming out with innovative ways to use this cash.
Today, Castrol announced an excellent way to distribute its cash, a different kind of a bonus to its shareholders. It announced a reduction in its share price from Rs.10 to Rs.5 and instead of adjusting this into the share capital, the company, in a first of its kind move, is returning the remaining Rs.5 to its shareholders and reducing the share capital. After the offer, the share capital of Castrol will be reduced to Rs 247.28 crore from the current Rs.494.60 crore. Shareholders will also be exempted from any tax liability. This is a fantastic way to return excess cash to the shareholders, without bloating up the share capital through a bonus issue. As at 31st Dec’12, the company has cash of Rs.575 crore and reserves of Rs.155 crore. Though the fact stands that promoters would stand to benefit the most – as they hold 71% stake and of this cash distribution of Rs.247 crore, they will get Rs.176 crore. Many have called this as a very smart way to transfer the excess cash/reserves to promoters and that too, tax free.
Prior to this, in May’13, Zee Entertainment, announced a different bonus for its shareholders – to commemorate 20 years of its existence, it decided to distribute Rs.2000 crore, through a preference issue of shares – a new kind of bonus. The company issued 21 redeemable preference shares of Re.1 each for every one equity share of the same face value held by the shareholders. These redeemable preference shares carry an interest rate of 6% pa. This meant that shareholders get 21 redeemable preference shares, valued at Rs.21 as they are not yet listed. This has a tenure of eight years and fourth year onwards, the company will redeem one-fifth of the nominal value of these preference shares – if Rs.2000 crore is the value, from fourth year onwards, Rs.400 crore will be paid back to the shareholders. Most of the shareholders were unhappy with this complex bonus and preferred a simple bonus issue or even a liberal dividend. Once again, many felt this kind of a complex bonus benefitted the promoters though it was stated to be for the benefit of the minority shareholders – promoters hold 43.36% stake and of the Rs.2000 crore, they will stand to gain Rs.860 crore.
Apart from issuing equity bonus shares, issue of debenture bonus is also another strategy adopted by some companies. HUL was the first company to do that, way back in 2001. Dr.Reddy’s also announced a similar bonus in 2011. For every 1,000 shares of Dr Reddy's held by the investor in March 2011, the company allotted 6,000 bonus debentures with a face value of Rs 5, carrying an interest rate of 9.25%, redeemable at the end of March 2014. The interest payment works out to Rs 2,775 and on maturity, an investor holding 1,000 shares will receive the principal amount of Rs 30,000. Coromandel International, Britannia Industries too have announced similar bonus. This is once again a very good way to distribute rewards to the shareholders and this is while not adding to the capital and not distributing the cash immediately.
In the coming days, such innovative ways could be the way in which companies might start distributing its cash. Castrol has always been good with its shareholders and so has HUL. Promoters will gain but so will the shareholders – this is a better situation than only the shareholders gaining.
Yes, choosing companies with high cash balances is good but only those who are liberal with their payouts and not miserly, merely sitting on it, waiting for the ‘right’ time to come.