Unable to raise funds by divesting its stake in Coal India, the government did the next best thing to raise fund: it 'asked' Coal India to announce a 'special dividend'. A dividend of Rs 29 per share for a company that trades at Rs 290 is more like a 'bumper dividend'. This gives a dividend yield of 10%.
Since the government is a 90% shareholder of the company, it will be getting Rs 16,200 crore through this dividend. It is clearly a move by the government to fill its coffers since it has failed in meeting its divestment target for the year.
However, in compelling Coal India to announce the special dividend, the government will impact the financials of the largest coal producer in the world. The dividend amount of Rs 18,000 crore is more than the profit that the company generated on a consolidated basis in the previous year. In the year ending March 2013, the company posted a net profit of Rs 17,356.4 crore. In the first six month of the present fiscal the company has posted a net profit of Rs 6,783.3 crore on a consolidated basis.
The government could not have chosen a worse time for taking out money from the company. Coal India has barely been able to increase its production. In the current year, production has increased by 3.3% while dispatch has grown by only 1.9%. It has fallen short on the production and dispatch target set by itself for the year.
The company has been found guilty by Competition Commission of India (CCI) of selling sub-standard product at higher prices and has been fined Rs 1,773 crore. The company has been asked to 'cease and desist' from such practices and hinted at breaking the monopoly of the company by creating smaller companies.
Sitting with a pile of Rs 53,000 crore in cash the company was a sitting duck for a finance minister who is desperately looking for ways to raise funds. Coal India's management needs to be blamed for not finding suitable avenues to invest its cash pile. Though there has been cases were government sat on a takeover decisions of the company, at the end of the day the company's management have not been persuasive enough to push their case. For a company that cannot utilise the cash it generates, it is better to give it away to its shareholders.
Its inability to utilise its cash, poor financial and operational performance and little control over its selling price resulted in the company's management and its merchant bankers failing to attract any investors in the company.
While the share price of the company is surely to rise on account of the steep dividend, there will be little reason to hold on to the company, post the dividend has been milked.