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VSNL payoff for monopoly termination

Krishnan Thiagarajan

BL Research Bureau

THE special dividend of Rs 40 per share (or 400 per cent) announced by VSNL appears to have been on the cards for quite some time.

Actually, the announcement by the Government to terminate VSNL's monopoly over international voice traffic from March 31, 2004 to March 31, 2002 in September 2000 set the stage for a probable ``special dividend'' to the shareholders of VSNL.

In 1997 and 1999 (in two tranches), the Government had divested part of its holdings through a secondary sale in which it had given a written assurance that the monopoly of VSNL will continue till 2004.

To some extent, this special dividend can be construed as partial compensation to shareholders for the Government going back on the assurance made to overseas investors.

In the normal course, the special dividends would have been announced from the compensation package payable by the Government to VSNL on the early termination of its monopoly. However, in this case, the Government has structured the compensation package for VSNL in kind, in the form of a licence to run National Long-Distance Services.

As a part of the compensation package, the Government plans to pay VSNL a sum equal to the amount paid by VSNL towards entry fee and licence fee for a period of five years and waiver of performance bank guarantee of Rs 400 crore towards network roll out. Hence, the special dividends have been announced from the existing cashflows of VSNL.

This special dividend of Rs 40 per share (or 400 per cent) will entail a financial outgo of Rs 1,140

crores. This, along with a normal dividend of Rs 10 per share (or

100 per cent), will result in an aggregate cash outflow of

Rs 1,425 crore.

Considering the zero debt status of VSNL, a strong reserve position of Rs 7,391 crore and cash profits of Rs 1,700 crore for the year ended March 31, 2001, this outflow may not involve any financial strain for the cash-rich international telephony major.

According to the existing shareholding pattern, the beneficiaries of this special dividend will be the Government which holds a 52.97 per cent equity stake in VSNL, with the balance being held by FIIs, GDR/ADR-holders and the general public.