State-run NTPC, India’s largest power producer, plans to issue bonus debentures worth Rs 10,307 crore to its existing shareholders; it has fixed March 23 as the record date for the issue.
In December, NTPC’s board of directors had approved the proposal to issue secured, non-cumulative, non-convertible, redeemable, taxable fully paid-up bonus debentures of face value Rs 12.50 each against each equity share of Rs 10 held by shareholders, by utilising its free reserves. The plan has now received the requisite approval from the Ministry of Corporate Affairs (MCA).
NTPC proposes to list the debentures on BSE and the National Stock Exchange (NSE), redeemable at the end of the eighth, ninth and 10th years, in the ratio of 20 per cent, 40 per cent and 40 per cent of the face value, respectively.
While this is the first time a public sector undertaking (PSU) has adopted this route to reward its shareholders, there have been instances of private companies taking this route.
Analysts say the move is a win-win deal for all. While the shareholders will get rewarded, the outgo will not burden NTPC’s balance sheet — the proposal does not entail any immediate cash outflow, as the first tranche of redemption will take in place in the eighth year. Additionally, the government, being the largest shareholder in NTPC with a 74.96 per cent holding, also stands to gain.
Dalton Capital Advisors Managing Director U R Bhat says: “NTPC wants to show its intention of rewarding the investors without straining its balance sheet. Since these will be listed on BSE and NSE, an investor can sell and take the money if he or she wants. NTPC is issuing these instead of giving cash dividend. I think the move makes sense for the company, too, as it will already have calculated the working capital it needs over the next few years, beside any capital expenditure. So, in essence, NTPC has the balance sheet strength to put up projects without this money.”
The move, according to analysts, also helps the company save on the dividend distribution tax (DDT) of 15 per cent, paid from the profits/reserves of a company declaring dividends. An additional surcharge of five per cent and an education cess of three per cent are also levied on DDT.
“This is a well-thought instrument. Had the company rewarded its shareholders by dividends, it would have ended up paying DDT. That could have been a large sum, given the size of the proposal (Rs 10,307 crore). Since it is a bonus debenture, NTPC will get an opportunity to debit the interest in the books; it is a better tax-planning strategy,” points out Deven Choksey, managing director & chief executive, K R Choksey Securities.
Choksey suggests investors who prefer stable returns, especially from companies in the power utilities segment, should buy ahead of the March 23 record date.
While on the one hand they will be investing in a company likely to grow in the years ahead (taking the stock higher), on the other hand, investors will get a regular income by way of interest on the debentures. For the existing shareholders eligible for bonus debentures, he says, it makes sense to hold both the securities.
Jagannadham Thunuguntla, head of fundamental research at Karvy, also says NTPC is a fundamentally sound company, with stable growth, and a good dividend play.
“If someone is looking at making quick money or at a short-term play, there are better stocks available. However, if an investor is looking for stable returns and is willing to be patient with the holding, NTPC is a good story to bank on,” he says.