Budget negative for state-owned oil and gas firms: Moody's

The government has budgeted for a 36 per cent increase in dividends from state-owned companies, more than the tax savings of about 20 per cent from abolition of the dividend distribution tax, which is credit negative for them, Moody's said on Tuesday.

"This is credit negative for state oil and gas companies - Indian Oil Corporation Limited, Oil and Natural Gas Corporation, Oil India Limited and Bharat Petroleum Corporation Limited - which are among the largest dividend contributors to the government," the global rating said.

Abolition of the dividend distribution tax is likely to have no significant impact on the credit quality of other rated non-financial companies as Moody's expects most will increase dividend payments to offset the tax savings.

The government has also budgeted for higher disinvestment proceeds, which, the agency expects, may result in more share buybacks from state-owned oil and gas companies in fiscal 2020, following an increase in buybacks in fiscal 2018.

"Share buybacks will result in negative free cash flow and weaker credit metrics at these companies. The large divestment proceeds also imply that the government will continue to push for the sale of BPCL, the risk of which is incorporated in the company's credit profile," Moody's said.

However, the abolition of dividend distribution tax could be credit positive for holding companies such as HT Global IT Solutions Holdings Limited and Marble II Pte Ltd which rely on dividend distribution from their subsidiaries to service their debt because this will reduce the cash leakage in transfer of cash from subsidiaries to the holding companies.

However, as the dividends will be taxed, the extent of benefit will depend on the effective tax rates of the holding companies, which are incorporated offshore in different tax jurisdictions.

In the budget, the government also proposed to extend the 5 per cent concessional rate of withholding tax on foreign currency borrowings by three years to June 30, 2023. This is credit positive for most rated companies that borrow in foreign currency, Moody's said.

( With inputs from IANS )