CHAPTER 2
RETURN ON INVESTMENT

2.1    Details of return on investment in Government Companies and Corporations are given in Appendix I indicating their aggregate positions with regard to accumulated loss, net worth, Sales/Turnover, Profit/Loss before and after depreciation, depreciation, interest, provision for tax, dividend, etc. Details of percentage of net worth to paid-up capital, cash loss, percentage of dividend to paid-up capital, export sales as percentage of net sales, percentage of sales subject to price control during 1998-99 to 2000-01 are indicated in Appendix - VI. In the last two years, the overall percentage of net worth to paid up capital in PSUs under all Ministries and Departments increased from 183.23 in 1998-99 to 193.52 in 2000-01. However, at the same time, cash loss also went up from Rs.7,292.82 crore in 1998-99 to Rs.9,124.53 crore in 2000-01 (i.e. by 25.12 percent) and accumulated loss of all PSUs went up by Rs. 9,902.53 crore (18.60 per cent), i.e., from Rs.53,254.16 crore in 1998-99 to Rs.63,156.69 crore in 2000-01.

(i)    Table below indicates that while the number of PSUs earning profits had increased, the number of PSUs that had declared / paid dividend during the last 3 years ended 31 March 2001 had declined from 92 in 1999-2000 to 90 in 2000-01. However, dividend declared during the year as a percentage of net profit earned by these PSUs went up by over 4.67 percentage points as compared to dividend declared/paid during 1999-2000. In absolute terms the dividend declared by the PSUs in 2000-01 had increased by Rs.2,728.71 crore (47.71 per cent) i.e. from Rs. 5,719.93 crore in 1999-2000 to Rs.8,448.64 crore in 2000-01 (See Chart 6). However, 52 PSUs which earned an aggregate profit of Rs.667.70 crore in the current year did not declare any dividend.

(Rs. in crore)

(ii)    Out of the total profit of Rs.38,815.75 crore earned by 142 PSUs, as much as 79 per cent (Rs.30,822.82 crore) was contributed by only 26 PSUs under four sectors viz., Coal and lignite, Petroleum, Power and Telecommunication in which the product prices are administratively determined or regulated to varying degrees. The sector wise break up of these 26 PSUs is given in the following table:

(iii)    In 9 PSUs under 9 Ministries / Departments (Ministry/Department of Civil Aviation, Coal, Commerce, Heavy Industry and Public Enterprises, Planning and Programme Implementation, Power, Science, though their total Net Worth had exceeded the paid up capital twice over, these PSUs had neither declared dividend nor issued any bonus shares. Only 6 PSUs namely, National Insurance Company Limited, New India Assurance Company Limited, Oriental Insurance Company Limited, United India Insurance Company Limited, Bharat Petroleum CorporationLimited and Kochi Refineries Limited issued bonus shares amounting to Rs. 458.93 crore during 2000-01.

2.3    Dividend Policy

(i)    The guidelines issued by the Ministry of Finance in 1995 and 1996 envisaged that all profit-making PSUs that were essentially commercial enterprises would declare a minimum dividend of 20 per cent either on equity or on post-tax profit, whichever was higher. Minimum dividend payable by PSUs in Oil, Petroleum, Chemical and other infrastructure sectors was desired at 30 per cent of post-tax profit as well. The Ministry had further emphasised that the objective of the Government was to achieve minimum return of 5 per cent on overall investment in all PSUs across the board as against 1.82 per cent achieved in 1993-94.

(ii)    In the current year, out of total dividend of Rs 8,448.64 crore declared/ paid by 90 Public Sector Undertakings, dividend received by Government of India amounted to Rs.6,742.69 crore. Thus, the return on aggregate investment of Rs. 45,502.28 crore in equity capital of these 69 PSUs was 14.82 per cent. Similarly, the central government companies had received Rs.640.84 crore as dividend on their investment of Rs 2,979.83 crore in the equity of various subsidiaries (also Government Companies) and thus earned a return of 21.51 per cent.

(iii)    While 90 PSUs under 27 Ministries/Departments had declared dividend in the current year, no dividend was declared by 52 PSUs under 7 Ministries/Department. The return on net worth of Rs.1,80,289.47 crore in all PSUs was 3.74 percent only. The return on the total investment of Rs.79080.53 crore by the Government of India in all the PSUs was Rs.6742.69 crore, i.e. 8.53 percent. This rate of return was higher than the prescribed benchmark of 5 percent on over all investment, but less than 30 percent of post tax profit. This is despite the fact that only 90 out of 142 profit making PSUs had declared dividend. The average pay out of dividend was more than 13.5 percent (the rate of interest chargeable on Government Loans) in 16 ministries/departments. However, 53 PSUs declared/paid dividend of more than 15 percent individually, 16 PSUs declared/paid dividend at the rates ranging between 6 to 15 percent and 21 PSUs declared/paid dividend at less than 6 percent of the paid up capital.

(iv)    The PSUs under the Ministry of Petroleum and Natural Gas, covered under the administrative price mechanism, contributed 41.46 per cent (Rs.3,503.21 crore) of the total dividend (Rs.8,448.64 crore) declared by various PSUs in 2000-01. In the Oil Sector, 6 PSUs out of 9 major PSUs could pay dividend at rates equal to 20 per cent of equity as well as 30 per cent of post tax profit, as stipulated. The remaining PSUs paid dividend above 20 per cent of their paid up capital but not 30 percent of the post tax profit prescribed in Government guidelines as indicated in the following Table:

The provisions under section 205 of the Companies Act, 1956 stipulate that unless specifically exempted by the Government of India, profits of companies should be appropriated only after providing for depreciation at the rate prescribed in the Act. In the case of National Aluminium Company Limited (NALCO) the Government by exercising its special powers under section 205 of the Companies Act, 1956 has allowed the management to declare dividend without providing for arrears of depreciation for several years. Similar exemptions were given by the Government to the Company during the previous four years. The dividend so declared by NALCO during 2000-01 without providing for arrears of depreciation (Rs.210.25 crore) amounted to Rs.284.01 crore including Rs.26.29 crore as tax on dividend.

2.4    Audit of accounts of Food Corporation of India for 1997-98

During the year, audit of accounts of Food Corporation of India for the year 1997-98 was conducted by CAG as sole auditor (refer para 1.1.(v)) and Audit Report was issued to the Government of India on 28 September 2001 under section 34(4) of Food Corporations Act, 1964. Working results of the Corporation for 1997-98 indicated that the expenditure in excess of income was Rs.7,712.43 crore. This expenditure is being claimed as subsidy from the Government of India. The financial state of affairs of the Corporation for the three years ended 31 March 1998 was as under:

(Rs. in crore)

2.5    Loss making PSUs

The number of PSUs that suffered loss during the last 3 years ending 31 March 2001 are given in the following table:

(Rs. in crore)

The loss in most of the PSUs included in the above table has been accumulating over the years. In the new dispensation brought about by the liberalisation of economy, large number of PSUs which had grown exponentially over the years in a virtually non-competitive environment are now facing increasingly severe competition. While many of the PSUs are learning to survive and grow by adapting themselves to the new situation, a large group of PSUs, significant both in number and investment are today beset with serious problems like slow growth, low productivity, inefficient management, poor project planning and unmanageable time and cost over runs in project implementation, inadequate emphasis on research and development, inadequate or unfocussed marketing, shortage of working capital, etc. Low or zero rates of return on the capital invested in these PSUs has stunted or hindered economic growth in the country as a whole. The challenges facing these PSUs are to cut costs, increase productivity, market their products and services aggressively, increase profitability and to generate surplus. All these parameters hinge ultimately upon the degree of asset utilisation, technological innovations and human resources management.

2.6    Capital Erosion

(i)    An investment of Rs.12,605.34 crore invested as on 31 March 2001, in the equity capital of 93 Companies under 22 Ministries / Departments (See Appendix - VII) has been completely eroded as a result of losses accumulated by these Companies. Consequently, the net worth of these Companies at present is negative (See also Chart 7) and recovery of all the loans given by the Government and other agencies to these Companies has become doubtful. Of these 93 companies, 34 are under the Ministry of Heavy Industry and Public Enterprises and 16 are under Ministry of Textiles. The total Central Government loans outstanding against these Companies as on 31 March 2001 amounted to Rs 15,841.08 crore. The total loans not paid on due dates amounted to Rs.6,284.84 crore (46 PSUs) as on 31 March 2001. Further, interest overdue on the outstanding loans was Rs.11,942.74 crore (56 PSUs) and penal interest leviable for non payment of loans on due dates amounted to Rs.3,602.43 crore (40 PSUs). Of these 93 Companies, 61 have already been referred to the BIFR as indicated in Appendix - VII. Out of the companies referred to BIFR, revival packages had been approved by the BIFR only in case of 20 companies. Of these, action has already been initiated in respect of 11 Companies for their revival as recommended by the BIFR. Of the remaining 41 cases referred to BIFR, 27 cases were outstanding for more than 5 years and 14 cases up to five years.

(ii)    The Companies referred to above include 36 companies (Appendix - VII) having share capital exceeding Rs.50 crore (which had been fully eroded) as on 31 March 2001.

2.7    Profitability Analysis

Company wise profititability analysis indicating correlation of profit after tax to Net worth and capital employed, profit before depreciation, interest and tax to sale, net assets and capital employed and dividend to equity is given at Appendix - VIII. This revealed that all the ratios declined in 2000-01 over previous year in about 100 (PAT/Network - 112; PAT/Capital Employed - 114; PBDIT/Net Assets - 102 and PBDIT/Capital Employed - 87) companies. A further analysis revealed that there are negative variations (more than 20 percent) as compared to previous year in the profit before depreciation, interest and tax to sale in 9 PSUs, profit before depreciation, interest and tax to net asset in 46 PSUs and profit before depreciation, interest and tax to capital employed in 15 PSUs and profit after tax to net worth in 24 PSUs, profit after tax to capital employed in 15 PSUs. A summary table indicating the trend of these ratios over a period of three years is given below: