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G. Rambabu

NEW DELHI, March 17

MAHANAGAR Telephone Nigam Ltd proposes to invest Rs 300 crore in the cumulative preference share capital of the State-owned telecom equipment manufacturing company, ITI Ltd.

According to official sources, the preference shares will be redeemable at par in five equal instalments (end of 3rd, 4th, 5th, 6th and 7th year) at the rate of 8.75 per cent per annum. An understanding to this effect is likely to be signed between both the companies within the next couple of weeks.

The sources noted that the infusion of capital by MTNL in ITI through this route would stand to the benefit of both the companies.

As an investor, MTNL will be assured of an attractive return on the amount invested whereas for ITI, there will be saving on interest on the capital thus infused. Since preference shares form part of the total shareholder funds, it would help in the reduction of ITI's debt-equity ratio, without impacting the current shareholding pattern. The equity share capital of the company currently amounts to Rs 88 crore.

Apart from the fact that MTNL would be investing in a sister company in the same Ministry, ITI had also been its major supplier for several years and would continue to be so in future, they said.

They noted that the Finance Minister in his Budget speech for 2002-03 had proposed to insert a new provision in the Income-Tax Act so as to provide a deduction for domestic companies, which receive dividend from other companies and again distribute them as dividend.

The amount of deduction on dividend received by a domestic company from another shall be to the extent of dividend distributed by the recipient company.

Thus, so far as tax-free status of inter-corporate dividend is concerned, MTNL's equity capital being Rs 630 crore, the amount of dividend is expected to be more than dividend inflow from proposed investment, the same can be claimed as a deduction from income.

As for the benefits of capital infusion through redeemable preference share route, they noted that ITI's PBDIT margins were expected to improve substantially on account of change in product mix to include higher proportion of sales from products with higher contribution margins.

The reduction in interest cost would directly add to the net profit margin. ITI would, therefore, be able to pay equity and preference dividend comfortably every year.

The debt-equity ratio of the company is also expected to decline and interest-coverage ratio improve.

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