Nestle India will return part of the amount in the company''s share premium and general reserve accounts to shareholders. A total of up to Rs86.32 crore would be distributed under the plan. The Nestle board has already approved the proposal and the money would be distributed among shareholders as cash by way of a special dividend.
Returning surplus cash to shareholders is not common in India as most Indian companies invest such surpluses in expansion. When they don''t have investment plans in their core businesses, they easily find sufficient investment opportunities to get good returns. Many large companies have full-fledged investment management teams to oversee their portfolio investments in the stock and money markets.
However, this practice is very common in mature markets where earning above average returns from portfolio investments is not very easy. In the biggest ever cash return to shareholders, Microsoft had paid $32 billion in 2004 as a special dividend at the rate of $3 per share. To put it in perspective, the sum returned by Microsoft was more than the current market capitalisation of Infosys. Microsoft has returned more than $85 billion, including the special dividend in 2004, to shareholders since 2001.
Under the scheme announced by Nestle, an amount of Rs43.23 crore lying in the share premium account and an amount of up to Rs.43.09 crore voluntarily transferred by the company to its general reserve account would be returned. The transfers to general reserve happened during the years 1981 to 1997, in excess of the prescribed 10 per cent of the profits of the company under the provisions of the Companies (Transfer of Profits to Reserves) Rules, 1975. The company would pay all the taxes as applicable at the time of distribution.
"The board has approved the scheme in the interest of the shareholders as returning cash will give them an opportunity to earn better returns as compared to those, which the company can earn by investing in short-term liquid instruments. All the shareholders will receive proportionate amount for every equity share held in the Company", a statement by Nestle India said.
Return of surplus funds to shareholders would bring down the capital employed by the company and help improve the return ratios for shareholders. "The scheme will further enhance the return on equity, provide an opportunity to leverage the balance sheet which in turn could further optimise the cost of capital and thus improve the economic value", the statement added.
On the 9.64 crore equity shares outstanding of Nestle India, shareholders would receive Rs8.95 per share held. Promoters including Nestle SA, who hold 61.85 per cent of total issued capital, would be the biggest beneficiaries and would get Rs53.4 crore.
The scheme is subject to approval by shareholders, creditors and High Court. The company said it would file the necessary application to the High Court and would convene meetings of shareholders and creditors to seek their consent.