Dividend payouts—which are optional for all listed companies in India—have also been handsome in the case of PSUs.

The dividend payout ratio, which shows how much of their profits companies part with each year as dividends, reveals that PSUs have been dipping into their cash reserves to pay dividends. For example, in the last financial year, Indian Oil Corporation, Bharat Petroleum, and National Aluminum paid its shareholders more than the net profits they earned.

These moves, coupled with the government’s intention to disinvest stakes in some of these PSUs in the future, could prove to be a double whammy for these companies.

PSU shares

Unlike in the US, high dividend yields and buybacks don’t make companies attractive to retail or institutional investors in India. “If the money goes out of the business (through dividend or buyback), which needs to be re-invested, then the value of a business drops,” a mutual fund manager told Quartz requesting anonymity. “So, this isn’t good for you as an investor as the dividend doesn’t cover the loss in valuation.”

Now, with the government trying to raise funds in some of these PSUs by selling its stake, there could be an oversupply of shares of these companies, which will lead to a fall in their prices.

This is neither good for the government nor for retail and institutional investors.

“PSU stocks are trading significantly below fair value as the government has been following a wrong policy of selling its own stake in a piecemeal manner. The government is frequently diluting its stake. This policy has led to the destruction of wealth for itself,” said Devarsh Vakil, deputy head, retail research, HDFC Securities.

So while dividends and buybacks may provide a quick fix in the short-run, these policies are surely hurting investors and companies in the long-run.

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