Mumbai, Feb. 6: Tata Steel is tidying up its balance sheet: it has decided to dip into its reserves to wipe out a Rs 1,550 crore debit balance on account of miscellaneous expenditure.
There is no company law proviso that prevents companies from dipping into reserves that were created for other purposes. In fact, several companies, including the Tatas, had resorted to this last year. But it does raise rather prosaic questions about the ethics of the whole exercise.
“It is an obvious attempt to spruce up the balance sheet,” said analysts tracking the company. “It will mean that the company will remove Rs 1,550 crore from the share premium account and the capital redemption reserve and adjust it against past debits under the miscellaneous expenditure account which they have not charged yet,” the analyst explained.
By removing the credits available in the share premium account, the chances of a bonus in the near future recedes further.
In a terse statement issued to the stock exchanges, the company said: “The board of Tata Iron & Steel Company, at its meeting held today, has approved a proposal to adjust the debit balance of miscellaneous expenditure account not exceeding Rs 1,550 crore against the balance standing to the credit of the capital redemption reserve account and securities premium account of the company as on March 31, 2002”.
“The proposal is subject to the approval/confirmation of the shareholders and the Mumbai High Court and/or such other regulatory authorities as may be required in accordance with the laws in force,” the statement added.
The development probably led to the Tata Steel share closing higher at Rs 156.70, up Rs 2.25 or 1.46 per cent against its previous close of Rs 154.45.
“It will improve the perception of the company among the experts,” said an analyst. The return on equity will immediately shoot up as the balance sheet looks better.
The Tatas encountered some sharp criticism last year when they restructered the Telco balance sheet. At that time, the Tatas reiterated that it was within the ambit of law.
“It is fully in accordance with the law and there is no legal impropriety,” concurs Sailesh Haribhakti, a leading authority on corporate accounts and taxation.
The largest private sector steel major along with other local players are currently enjoying the good times as steel prices are again on the upward curve.
Tata Steel is now reaping the advantages of having restructured its operations by refurbishing and modernising its steel plants in Jamshedpur and also drastically changing its product-mix to include more cold rolled products, and branding them.