ntpc bonus debentures, and some reporting

NTPC has given away bonus debentures to its shareholders on 23 March 2015. While the corporate action has resulted in a free debt instrument in the hands of its shareholders carrying a floating rate coupon payable annually, there has been some interesting reports about its mechanism. 

It is interesting to note from this report that the company will be able to hold on to them for expansion projects; and this report which says that NTPC has issued bonus debentures for funding its expansion projects. I am not sure whether we should blame them for misguiding the readers, or blame the company for misguiding them who were unable to understand the concept in the first place. Just have a look at what the company has to say about this:

What the heck is happening here, who has paid out cash, and who has received cash? No one; and if there is no cash, where is the question of funding the projects?

Because no one has purchased these debentures, no cash has been received by NTPC. What has happened is simply the transfer from its equity to debt, thus increasing its debt ratio. Needless to say, equity has reduced and debt has increased. The debt portion will start paying interest which will be tax deductible for the company and taxable for the shareholders (now the debt holders). The book entry has managed to let the transferred amount behave like debt from now on. That's about it. 

If the profitability is not going to be affected (because of the additional interest charge), NTPC's return on equity should improve. 

I have written about NTPC before; the performance has been poor, and the stock is actually languishing. 

For someone who invested in the stock in January 2008, we can understand the frustration. The investor should be saying this: It really does not matter whether it will become a 90,000 MW company or not, what matters is its operating performance. How will it fare with its invested capital? Will it generate excess returns on its projects? Should it continue to reinvest its earnings so that it will increase its firm value (and consequently, the stock price), or should it stop reinvesting and start returning its excess cash?  

Capital allocation skills are tough, and under Indian conditions, boy, it's a double whammy.