No longer tax-efficient: Cash-starved Coal India may give buyback a miss

The government may have asked several public sector companies, including Coal India (CIL), to go for share buybacks in the current fiscal year, but the state-owned miner is not considering the option owing to its financially weak position.

Most of the subsidiaries of CIL are facing a cash crunch because of slow growth in coal demand, coupled with record high outstanding payment from power generating companies.

“With the amended (income-tax) law, buyback is no longer a tax-efficient method. Earlier, only subsidiaries paid tax on share buybacks, but now the holding company as well as subsidiaries have to pay tax. Almost none of CIL’s subsidiaries is in such a comfortable cash position,” a senior CIL executive said, requesting anonymity.

According to the amendment made to Section 115QA of the Income-Tax Act vide the Finance Act, 2013, any company, listed or unlisted, is liable to pay 20 per cent tax, besides 12 per cent surcharge and applicable cess, on the buyback of shares from shareholders.

CIL’s own general reserves have fallen 30 per cent in the past five years. As for its eight subsidiaries, their reserves are Rs 2,000 crore or below. The last share buyback CIL did was in 2016-17, when it bought 108.9 million shares worth Rs 3,650 crore.

“Covid-19 has hit the payments to all the coal companies of CIL. There was a drop in demand for coal during the lockdown months. While demand is now picking up, there is a significant amount of overdue from power generating companies,” said the executive. 
 

The outstanding dues of power companies to CIL and its subsidiaries stood at Rs 22,126 crore as of September 2020.

“Maybe after two or three months, we can assess the situation and decide. We are looking at options whether we can do a share buyback or make dividend payment. It depends on payments and coal offtake from consumers,” said the executive.

During the April-October 2020 period, CIL’s coal production was 282 million tonnes, merely 2 million tonnes higher than that of the corresponding period last year. Coal offtake, however, was 3.5 per cent lower in October over last year.

“If we are to do a share buyback of up to 10 per cent, it needs only board approval. Above 10 per cent would need shareholders’ approval and that’s a time-taking process,” he said.

The Centre is relying on share buybacks by selected public sector utilities to meet its disinvestment target of Rs 2.1 trillion for 2020-21. Reports suggest firms that might consider buybacks are NTPC, Kudremukh Iron Ore, RITES, NMDC, and Engineers India. NTPC’s board will take a decision on the share buyback proposal on November 2.