VSNL will make its second big payout this year
Videsh Sanchar Nigam Ltd (VSNL) will pay out a total of 23.5bn rupees, or $500m, of which the government can expect to collect about 14.6bn rupees or $300mn.
The Indian government will be the biggest gainer as it owns a majority stake of 52.97% in the firm.
But analysts say the special dividend is an astute move by the government as divesting the company along with its huge cash-pile would be likely to spark protests.
Smiles all round
VSNL has a monopoly of overseas phone services and is India's biggest internet services provider (ISP).
The sale of half the state's stake in VSNL will be the most ambitious transfer of a company to the private sector yet to take place in India, correspondents say.
The government plans to sell 25% of VSNL to a stategic partner who will take over the running of the firm, and a further 1.97% to the workforce.
Among the bidders to take over VSNL are two Indian groups, the Tata and Reliance groups, and United States firms TyCom and Century.
The special payout "makes sense for everybody. The government is happy, ordinary shareholders are happy and so is the buyer as it will have to shell out that much less," said one analyst.
Cash mountain
Last month, the government said VSNL had a cash-pile of between 40bn and 45bn rupees ($836-$940m) which would be distributed to shareholders.
In a statement to the Bombay Stock Exchange, the firm said that "no serious financial problems are anticipated" as a result of the proposed dividend payout.
It is the second special dividend the cash-rich company has proposed this year.
The government is expected to ask potential buyers of VSNL to submit bids in late December, correspondents said.