From THE HINDU group of publications
Sunday, October 14, 2001


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Bonus debentures -- More cos must do a HLL

S. Vaidya Nathan

HINDUSTAN Lever has come up with a somewhat unusual way of distributing surplus cash to its shareholders.

Any attempt by companies to return cash to shareholders ought to be welcomed, especially in India where such practices are rare.

India Inc for most part considers flow of funds back to shareholders anathema to business interest. So the tendency is to deploy the cash in various avenues. On many an occasion, this has led to shareholder losses.

Even Infosys Technologies, which is perhaps one of few well-managed companies, could not resist the temptation of dabbling in the stock market in the mid-1990s. Fortunately, the course correction was swift and it moved out of the market taking some losses in the process.

No surprise then that in numerous less well-managed companies, cash flows cause depletion of shareholder value. Over-investment in capacities, ambitious diversification moves, dabbling in the stock market, going in for acquisitions at fancy prices, and a plain case of sitting tight on cash are common.

But even these pale when one comes across the use of company funds to shore up promoter stakes through the buyback mechanism. This has been rampant the last six months. In this milieu, the HLL move to return Rs 1,320 crore to the shareholders stands out.

An unusual exercise: But the company has opted for a somewhat unusual method. No straight one-time dividend or buyback here. The novel scheme goes thus:

*An amount of Rs 1,320 crore from the general reserves would be utilised for issue and allotment of debentures.

*The debentures would have a face value of Rs 6 each.

*These would be allotted to the shareholders as bonus debentures in the ratio of one fully paid debenture of Rs 6 each for every Re 1 equity share held.

*The issue and allotment of debentures would be considered as a 'deemed dividend' under the provisions of the Income-Tax Act.

*The company would bear and pay, in addition, the dividend distribution tax at 10.2 per cent on the issue of bonus debentures from the general reserves.

*The total amount utilised would be Rs 1,455 crore, including the dividend tax.

*The debentures would be secured and redeemable at par in two equal installments on the second and third years of the issue of debentures.

*The debentures would carry an interest rate of 9 per cent per annum, payable annually.

*The scheme was constructed to enhance the efficiency of the balance-sheet in the context of excess cash carried for several years and is equitable for all shareholders.

*The move will not impair the company's ability to execute a large acquisition should an opportunity arise.

The missing element: HLL has detailed the scheme well, but it should explain to the shareholders the reasons for pursuing such a course rather than the more straight-forward dividend or buyback route.

The following are some of the issues on which the company can give more information to its shareholders:

*The reason for going the bonus debentures way.

*The implications of such a move for shareholders with a comparison of what might have been the case under the other options.

*Is it intended to stagger cash flows than face a lumpsum payment at one go now?

*If the cash flow is indeed surplus, why hold on to it now in the first place.

*What would be the benefits of such a staggering by way of use of cash by the company?

*What would be the tax implications of the move for the shareholders?

*Would these debentures be marketable by way of a listing?

*Had the company gone in for a buyback at a specific tender price, it may have avoided the dividend distribution tax of Rs 135 crore. That being the case, why is the company going ahead with the bonus debentures route? What are the implications for the various classes of shareholders such as the parent company, Unilever, and the minority shareholders (who may be in different tax brackets)?

*Is the move intended to preserve the existing level of listed equity capital and avoid any contraction here?

*What kind of implications would the move have on the company's growth plans and its financials?

Hopefully, the company will provide more details when the board meets to approve the proposal on October 16. Since the route is particularly unusual and the company large, fine details would provide shareholders with a better understanding of why the company is doing what it is.

A trigger hopefully: From a larger perspective, hopefully, the HLL move will serve as a trigger for more companies to come forward and return surplus cash. Though unusually structured, the move ensures that all shareholders are treated on an equal footing when cash is returned.

This is also a break from the trends of using low stock valuations to push through buybacks at uncertain market prices. Promoters who do not tender see their stake in the equity going up. Here too, the move can serve as a good example.

A 9 per cent interest is being offered. This ensures that the present value of cash flows is protected though payments will be deferred over a two-year period. Even if the limited purpose of companies looking long and hard at their cash flows to identify surplus is served, the HLL move will be a wake-up call for company managements and promoters.

Pic.: Mr M. S. Banga, Chairman, HLL...A welcome proposal to return surplus cash to shareholders.

Related links:
HLL plans bonus debenture issue, hike in FII limit
HLL bonus debentures: Lightening the load
HLL: Cashing it, in reverse

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