To ensure that central public sector enterprises (CPSEs) use the broader autonomy recently given to them by the cabinet to invest in their subsidiaries and sell joint ventures, the government will link the gains to performance-related pay. For top executives and other employees of this company. The capital management guidelines will also be amended accordingly to ensure that the value is maximized for the shareholders.
On May 18, the Union Cabinet empowered CPSE boards to privatize, invest or close their subsidiaries and sell stakes in joint ventures. The move would accelerate the government’s efforts to unlock capital, which is either stuck or sub-optimally allocated to state resources and will be put to more productive use. Prior to the final decision, CPSE’s subsidiaries and JVs had the freedom to create, but did not have the ability to sell / exit.
There are about 380 CPSEs, including subsidiaries, but they have a large number of joint ventures.
“They (CPSEs) need to come out of their many investments, non-core businesses and units to improve the quality of the company which could drag on their assets,” a senior finance ministry official told FEK.
Performance appraisal will be re-evaluated by the Department of Public Enterprise (DPE) through Memorandum of Understanding (MoU) guidelines and Capital Management Guidelines of the Department of Investment and Public Asset Management (DIPM). Each CPSE signed an annual Memorandum of Understanding with their respective administrative ministries to improve the return perspective to increase the appetite of investors for top-line, bottom-line and CPSE, most of which will be privatized by the government in the coming years under current policy.
Staff CPSEs may lose their PRP if they fail to meet the targets of rationalization of subsidiaries / JVs with market capitalization goals, return on employed capital, asset turnover ratio, among other parameters specified in the annual MOU.
Currently, PRP can be up to 150% of basic pay for CMDs while it is 40% for lowest grade officers, if PSU performance rating is ‘Outstanding’ (score above 90%), which ensures 100% PRP qualification up to a downgrade MoU rating ‘Outstanding’ Will drop from ‘very good’ to ‘very good’ and from ‘very good’ to ‘good’, resulting in a reduction in performance-linked pay from 100% eligibility to 80% and 60%, respectively, for an excellent rating. Less than 50% score means employees may be denied PRP.
“There will be a monitoring process on the CPSE board through their memorandum of understanding, capital management guidelines and their nominees through the administrative ministry,” the official said.
Many large for-profit CPSEs like Coal India, ONGC and NTPC have valuable subsidiaries or joint ventures. The decision of the cabinet will enable them to monetize some of these assets through the approval process of the cabinet or the administrative ministry and / or the process involving Deepam. Partnership investments in joint ventures or privatization of subsidiaries in non-core areas and those that are not doing well will create wealth for new investments as well as generate higher dividends for shareholders.
Earlier, Deepam advised CPSEs to try to pay higher dividends considering relevant factors like profitability, capex requirements, cash / reserves and net worth, many CPSEs usually consider paying only a minimum dividend as per guidelines. According to the Deepam guidelines, CPSEs will pay a minimum annual dividend of 30% of profit after tax or 5% of net worth, whichever is higher.