Sudhir Kumar Rakesh, IAS ( Retd.)
Patna : Concerns are being voiced in certain quarters regarding the ability of Indian corporate sector to bounce back from the after effects of COVID-19 induced economic crisis. A brief study with regard to Reserves and Surpluses situation of NIFTY 50 Companies in India provides some comfort. If one analyses the Reserves and Surpluses, which most of the NIFTY 50 companies had on their balance-sheets, as on March 31, 2019, it appears that many of these companies have followed prudence as far as keeping some money aside for a rainy day goes.
The creation of healthy reserves on their balance sheets is a prudent thing for large corporates to do. In the aftermath of the 2008 global financial crisis, this was one important lesson which should have been learnt by most corporate entities across the globe. Tested against this parameter, Indian corporates definitely present a reassuring scenario.
Data with regard to a few of the NIFTY 50 companies of India is discussed in the succeeding paragraphs. Figures relating to their Reserves and Surpluses relate to March 31, 2019, and have been taken from their balance sheet for FY 2018-19. The market capitalisation figures for these companies relate to April 15, 2020.
Reliance Industries Limited (RIL) was the company with highest market cap on April 15, 2020 – with a market cap of approximately ‘729000 (Rupees Seven Lakh Twenty Nine Thousand) crore. It had Reserves and Surpluses of approximately `399000 (Rupees Three Lakh Ninety Nine Thousand) crore on March 31, 2019, on its balance sheet, which works out to about 54.7 percent of its Market Cap as on April 15, 2020.
Tata Consultancy Services (TCS) was the company with second highest market cap of approximately `651000 (Rupees Six Lakh Fifty One Thousand) crore on April 15, 2020. It had Reserves and Surpluses of approximately `399000 (Rupees Three Lakh Ninety Nine Thousand) crore on March 31, 2019, on its balance sheet, which worked out to about 12.06 percent of its Market Cap as on April 15, 2020.
Hindustan Uni Lever (HUL) was the company with third highest market cap of approximately `539000 (Rupees Five Lakh Thirty Nine Thousand) crore on April 15, 2020. It had Reserves and Surpluses of approximately `7418 (Rupees Seven Thousand Four Hundred Eighteen) crore on March 31, 2019 on its balance sheet, which worked out to about 1.38 percent of its Market Cap as on April, 15 2020. The figures of Reserves and Surpluses as well as this amount as a percentage of the company’s Market Cap was one of the lowest compared to other NIFTY 50 companies.
HDFC Bank was the company with fourth highest market cap of approximately `473500 (Rupees Four Lakh Seventy Three Thousand Five Hundred) crore on April 15, 2020. It had Reserves and Surpluses of approximately `148661 (Rupees One Lakh Forty Eight Thousand Six Hundred Sixty One) crore on March 31, 2019, on its balance sheet, which worked out to about 31.40 percent of its Market Cap as on April 15, 2020.
Similar analysis with regard to certain other NIFTY 50 companies throws up an interesting pattern.
Reliance Industries Limited (RIL), State Bank of India (SBI), ONGC (Oil and Natural Gas Corporation), HDFC Bank, ICICI Bank and Indian Oil Corporation (IOC) had the highest amount as Reserves and Surpluses on their balance sheets on March 31, 2019. Their respective figures are : Reliance Industries Limited (RIL) – Rs. 3,99,000 crore; State Bank of India (SBI) – Rs. 2,20,000 crore; ONGC (Oil and Natural Gas Corporation) – Rs. 1,97,000 crore; HDFC Bank – Rs. 1,48,661 crore; ICICI Bank – Rs. 1,07,000 crore and Indian Oil Corporation (IOC) – Rs. 1,00,000 crore. All these figures have been rounded off for convenience.
The above figures shows that the largest banks in India are having adequate Reserves and Surpluses on their balance sheets. Apart from State Bank of India (SBI) – Rs. 2,20,000 crore; HDFC Bank – Rs. 1,48,661 crore and ICICI Bank – Rs. 1,07,000 crore, Axis Bank with a present Market Cap of approximately Rs. 1,18,000 crore was having Rs. 66,160 crore (56.07 percent) as Reserves and Surpluses on March 31, 2019. IndusInd Bank, with a Market Cap of around Rs. 29,500 crore on April 15, 2020, was having Rs. 27,672 crore (87.27 percent) as Reserves and Surpluses on march 31, 2019.
Another interesting feature is that certain public sector corporates like SBI, ONGC and IOC were having more Reserves and Surpluses on March 31, 2019, than what was their total Market Cap as on April 15, 2020. Of course, Market Caps of all these companies have gone down dramatically between March 31, 2019 and April 15, 2020. Yet the figures tell some story!
Since a reserve fund sets aside money for covering scheduled, routine and unscheduled expenses that would otherwise be drawn from a general fund, Governments/Financial institutions/Corporates are required to establish reserve funds. Though the size of the fund may vary, the typical goal is to deposit funds on a regular basis in an account that accrues interest, thereby increasing the fund’s value while not in use. Because expenses may arise unexpectedly, the creation of a reserve fund of adequate size is required in times of emergency like the current CORONA virus induced crisis.
The point being made here is that if large corporates in India have taken care to set up adequate reserves, they may be able to tide over the present crisis. These corporates may tell their shareholders that dividends may not be provided this year and that the Reserves and Surpluses fund will be deployed to meet this unexpected crisis. Shareholders will definitely understand this logic. They will also be happy to know that they had invested in a company which was prudent enough to create reserves and surpluses which will be deployed to face the current economic crisis.
There may be certain smaller companies, even large companies with less foresight, which may not have created adequate reserves and surpluses on their balance sheets. If these companies have been in existence for a long time, then this kind of management policy can not be called prudent. Those companies may have to face difficulties.
However, if most of the NIFTY 50 companies are having adequate reserves and surpluses, they may not require immediate financial assistance from the State. They will be able to tide over this crisis on their own. Moreover, fiscal and monetary steps being taken by the Government and the RBI will further assist these companies.
Thus, there appears to be no reason for predicting doom and gloom as far as the Indian economy is concerned. India is going to come out much stronger post this CORONA crisis.