Last Updated on Apr 25, 2022 by Aradhana Gotur
Government-run companies constituting the public sector has played a prominent role in the country’s development. When India became an independent nation, the need to develop an industrial base was acutely felt. This led to the establishment of Public Sector Enterprises. These were further classified as State Level Public Enterprises (SLPEs), Public Sector Banks (PSBs), and Central Public Sector Enterprises (CPSEs), with the Government holding a majority stake.
The growth opportunities made the government departments a lucrative area for job opportunities. Further, as these entities were pushed to compete in the free market, the need to increase their autonomy arose.
In 1997, the government thus awarded different statuses to some of these companies. The purpose was solely to provide flexibility in operations and autonomy in making decisions. This helped companies survive the growing competition. Not just this, it had a direct impact on their reputation and was beneficial in gaining the trust of investors. This, in turn, made their stocks a popular investing opportunity.
The Government of India awarded companies with three statuses – Maharatna, Navratna, and Miniratna.
Let us understand these in detail.
This article covers:
What are Miniratna stocks?
As per the latest update, there are 78 Miniratna companies in India. The Miniratna stocks fall under two categories – I and II. To be qualified as a Miniratna, certain conditions must be met:
For Category I Miniratnas: The company must have earned continuous profits in the last 3 yrs. Moreover, they should have earned a pre-tax profit of Rs 30 cr. or more in at least one of the three previous years. There are currently 63 such CPSEs.
For Category II Miniratnas: The company must have made a continuous profit over the past 3 yrs and maintained a positive net worth. The present number of such CPSEs is 15.
The benefit of this status comes in the form of improved efficiency and competitiveness. It also gives these companies the freedom to utilise funds based on predetermined limits.
- Category I Miniratna can invest up to Rs 500 cr or an amount equal to their net worth, whichever is less.
- Category II Miniratnas have the option to invest Rs 300 cr or 50% of their net worth, whichever is lower.
This investment can be made without prior approval from the government. Due to this, many opportunities have opened up for these organisations. There is also wider scope and support to these companies for expansion.
What are Navratna stocks?
Navratna companies enjoy more operational flexibility and freedom than Miniratna companies. To be qualified as a Navratna, the company must first be a Miniratna company with 4 independent board members. In addition, the following conditions have to be met:
- It must score a 60 out of 100 on the following parameters:
- Profit before dividend, interest, and tax (PBDIT) [25 points]
- Earnings before interest, depreciation, and tax (EBITDA) to capital employed [15 points]
- Manpower cost to cost of production of product or service [15 points]
- Earnings per share (EPS) [10 points]
- Profit before interest and tax (PBIT) to turnover [15 points]
- Inter-sectoral comparison [20 points]
- Under the memorandum of understanding (MoU), they should have obtained a rating of ‘very good’ or ‘excellent’ in three of five previous years.
Upon meeting these criteria, the CPSE is classified as a Navratna company. Initially, the government awarded the Navratna status to nine companies. This figure has now grown, and at present, there are 14 CPSEs with this status.
The primary benefit gained is that the company enjoys complete autonomy. It can invest without the government’s approval. However, the amount invested has some restrictions. After approval of the status, the company is free to put in up to Rs 1,000 cr or 15% of its net worth on a single project/ 30% of net worth in the entire year, whichever is less.
As a result, Navratna companies have gained financial freedom. This has also increased their efficiency and growth prospects.
The following are the 14 Navratna stocks:
- Bharat Electronics Ltd. (BEL)
- Hindustan Aeronautics Ltd. (HAL)
- Oil India Ltd.
- Engineers India Ltd. (EIL)
- NBCC India Ltd.
- NMDC Ltd.
- NLC India Ltd.
- Power Grid Corporation of India Ltd.
- Shipping Corporation of India Ltd.
- Container Corporation of India Ltd.
- Rural Electrification Corporation Ltd.
- Rashtriya Ispat Ltd.
- Mahanagar Telephone Nigam Ltd.
What is the impact of these statuses?
There are many benefits that these titles bring apart from financial freedom and autonomy. In a country like India, that could be a make or break point for companies overviewed by the government. Moreover, they get empowered to improve organisational performance without government meddling in the company’s affairs This, in turn, leads to better structure, job opportunities, and payscale. It also aids in a greater emphasis on the training and development of employees.
In terms of growth, these companies get the opportunity to expand at a faster rate. They are free to enter into joint ventures and mergers. They also have the option to take over other organisations and form subsidiaries. They are also free to raise debt in the domestic market, as well as from foreign sources, subject to RBI approval. The government is actively working to make these companies global giants.
Navratna and Miniratna are not ordinary labels assigned to random companies. After meeting a long list of criteria, are few companies awarded these prestigious statuses. Both Navratna and Miniratna enjoy autonomy in decision-making and excellent reputation in the markets. They function more efficiently with minimum to zero government interference.
More companies are coming forward to qualify themselves under these statuses. However, if you plan on investing in these companies, do make sure you research well about their future prospects.