Capital market regulator Securities and Exchange Board of India’s (Sebi) recent comment that companies should have a dividend policy has sparked a debate on whether India Inc is paying enough dividend.
Proxy advisory and corporate governance firm IiAS believes, “There is huge potential for higher dividend payout by Indian companies”. IiAS says that Indian companies hold the purse strings tight when it comes to paying dividend to shareholders.
An analysis done by the firm, at least 77 companies in the BSE 500 index could pay dividend aggregating to almost Rs 36,000 crore — double the amount these companies paid to shareholders in
Sebi hasn’t yet made public the policy it intends to put in place on dividend payouts but experts say that companies at the outset must state the portion of the profits it would pay to shareholders.
“Most companies never follow a policy for paying dividends. A lot of times it happens that earnings surge but that don’t translate into higher dividends,” said SP Tulsian, head of consultancy and broking firm sptulsian.com.
Tulsian is of the view that companies should outright set the portion of profits they will pay to shareholders. Also, if a company sells a division or land the money should be distributed to shareholders, he said citing the recent example of drugmarker Strides Arcolab.
Strides had returned cash to shareholders that it received by selling one its unit to US-based pharma firm Mylan in 2013. The dividend paid by the company was a whopping Rs 800 per share.
Experts believe companies tend to pile up cash on their balance sheet with the intention of developing a war chest for inorganic growth. Cash is also accumulated on fears that the company may
not be able to do fund raising smoothly when the need arises.
IiAS argues that higher dividend payout increases shareholders interest in the stock and thus makes fund raising easier for companies.
“Dividend payments demonstrate a company’s confidence to continually generate earnings in future and show that its earnings are real,” it states.
According to analysts, MRF, Oracle Financial Services and Shree Cements are some of the companies that have good track record of paying dividends. Companies including Whirlpool India, Jubilant Foodworks, Gujarat Pipavav, Oracle Financial Services Software and Just Dial didn’t pay dividends in 2013, despite being profitable, says IiAS.
Unlike most other countries, Indian regulations don’t mandate Indian companies to have a dividend policy. For instance, in Brazil companies have to specify the minimum percentage of dividends from its net income it would pay to shareholders.
At a corporate governance seminar last week, Sebi chief UK Sinha, while stating a policy on dividend payouts is in the works, said that globally companies hoarding cash are facing stiff resistance from shareholders.
Governance experts say Sebi’s new policy should mandate all companies to have a dividend policy which could be ratified by the shareholders. Also, companies which don’t pay dividends despite being profitable should provide for a detailed explanation for doing so.
“Companies that have large investments in non-core businesses should give the rationale for these investments and the timeframe for exiting them,” says IiAS. Typically, cash-rich companies in India invest their excess funds into banking deposits or money-market schemes offered by mutual fund houses.