HLL: Gifting debentures in a novel way

By C. R. L. Narasimhan

The proposal of Hindustan Lever Ltd. to issue bonus debentures is shareholder friendly while it also ensures a more optimal cash management for the company. On October 16, the company's board will formally approve the proposal - a three year secured debenture of the face value of Rs. 6 each to be allotted to each shareholder. (HLL's share is of the denomination of Rs. 1 each). The debentures will carry an interest of 9 per cent to be paid annually. They will be redeemed in two equal instalments on the anniversary dates beginning the second year.

The novel proposal involves a drawing down of the company's huge reserves of Rs. 1,320 crores. The company will bear the income- tax on it as this transaction will be treated as deemed dividends. Altogether, the outgo will be Rs. 1,455 crores. The market has responded favourably. On October 10,the day of the announcement, HLL shares rose by Rs.18.25 to finish at Rs.230.25.

The proposal also reveals some deft thinking on the company's cash management strategy. Running down the reserves to reward the shareholders has taken the novel route of a short-period debenture to be issued as bonus. As the debentures are to be redeemed at the end of the second and third years, the investors get in effect deferred dividends.

Hence, the company while providing for a redemption reserve is not parting with cash this year. High up in its calculations has been the need to conserve cash either for an unanticipated acquisition or for an out of the ordinary capital expenditure. Given its normally robust cash flows, HLL's reserves would have been a drag if kept idle.

The company could have reared its investors either through a bonus equity issue or a share buy-back. The former would have widened the capital base and dragged down the EPS. Share buy-back in the Indian context has not had the same impact as it has in the developed markets.

The other method of rewarding shareholders is through high dividends. But the company is already known for its dividend record and exceeding that record in one or two years may set a precedent that will be difficult to follow.

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