State-run NTPC has approved the issuance of bonus debentures to shareholders, a move intended to utilise the free reserves of the company. As of March 31, 2014, NTPC was sitting on cash worth Rs 72,418 crore.
Existing shareholders will get one fully paid-up bonus debentures having face value of Rs 12.5 against each equity share of Rs 10 face value. Coupon rate on the debenture will be 50 basis points higher that the annualised average 10-year G-Sec yield. NTPC will issue bonds worth Rs 10,300 crore.
According to the company, the issue of debentures will help NTPC improve its return on equity (RoE). With Rs 10,300 crore shaved off from reserves and converted to debt, NTPC's equity base will come down helping the RoE.
NTPC's net profit will also be impacted because the company will have to deduct interest for debentures from profits earned. However, the reduction in net profit will be lower than the reduction in share capital, leading to higher RoE.
RoE, calculated as net profit/share capital, is used to compare the profitability of a company to that of other firms in the same industry. Higher RoE is viewed as positive by investors.
Investors will have to pay taxes on interest earned on the bonus debentures. NTPC, however, said that post issue of debentures total return to shareholders(from equity and debentures) will be tax neutral, which means the total returns to shareholders will be same as they are getting now.
Shares in NTPC ended 2.03 per cent lower at Rs 140.05 apiece against 1.12 per cent fall in Nifty on Wednesday.
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