PSUs that cannot invest their surpluses should issue special dividends

Finance minister P Chidambaram says public sector undertakings (PSUs) that fail to meet their planned investment targets must surrender their funds. This is fair and correct.
PSUs should not be allowed to sit on a mountain of cash at a time when the economy desperately needs investments to grow. They should spend the cash-pile to expand capacity, especially in sectors such as power, coal and gas where capex needs are huge.

Failure to do so is unfair to the dominant shareholder - the government - that provides capital to build assets and create value for the company. It also deprives the shareholder of alternative investment choices. About 25 central PSUs including blue-chip companies such as ONGC, Coal India, Gail, NTPC, SAIL and Bhel are said to have surplus funds of about Rs 2.5 lakh crore.

That is not small change. They should surrender unused funds. An investor deploys capital in a company because it can generate returns superior to what a bank deposit can.

If the company has no better use for its surplus than to keep it as bank deposits, it might as well return the cash to its shareholders, who might have alternative investment plans for it and, in any case, do not need a corporate intermediary for creating fixed deposits.

The government should use these funds to step up investment. This is justifiable during difficult times. How can surplus reserves be transferred to the government? The first option is for PSUs to pay special dividends. The second option is a buy-back of shares by the PSU. The third is for the PSUs to use their surpluses to buy out minor stakes ofthe government in other PSUs.

The second and third options could cut out private shareholders, and are avoidable. Special dividends will benefit all shareholders and shore up revenues. However, better than all these will be speedy adoption of goods and services tax that can plug the fiscal deficit sustainably.

Implementing a few big-ticket projects such as the infrastructure corridor connecting Delhi to Mumbai by new roads and rail lines, creating new cities in the process, will help revive the economy.