India Inc's Achilles heel: BSE500 firms are sitting on a huge cash pile

75 of the BSE500 constituents could alone pay as much as Rs 1.1 trn to shareholders in buybacks and dividends from their 'extra cash'

India Inc continues to hoard large sums of cash, reveals the latest study by governance firm Institutional Investor Advisory Services (IiAS). The value of cash and cash equivalents of BSE500 constituents — based on their 2017-18 financials — aggregated to Rs 8.3 trillion, or 6.4 per cent of their market value.

IiAS says 75 companies from the pool can dole out Rs 1.1 trillion from the ‘extra cash’ to shareholders. The ‘extra cash’ figure amounts to the lower of 50 per cent of the net worth, cash/cash equivalent adjusting for outstanding debt, and buffer for contingent liability and expected expenditure.

“These (75) companies have large cash holdings, and can distribute about half of their on-balance-sheet cash to shareholders, as dividends or buybacks. The cash available for distribution approximates one year’s profit after tax for these companies,” said IiAS in a note. “Cash hoarding has plagued corporate India for several years — an issue we have been rallying against.”

In a similar study last year, IiAS had 92 firms that could have paid incremental dividends of Rs 34,000 crore. After the study, over a dozen companies, mainly IT firms including TCS and Infosys, returned Rs 37,200 crore to shareholders through buybacks.

TCS, Indian Oil, HCL Technologies and Bosch have completed large buybacks this financial year too. Earlier this week, Wipro announced a larger-than-expected buyback of Rs 15,000 crore.

“While we recognise that companies need to maintain liquidity for organic and inorganic growth, we question how much is enough… several firms continue to shy away from providing clarity to shareholders on what the expected dividend payout ratio could be,” said IiAS.

To address this, the Securities and Exchange Board of India (Sebi) has mandated the top 500 firms in terms of market cap to announce a dividend distribution policy. Under this, they have to disclose in their annual reports and websites the circumstances under which shareholders of listed entities may or may not expect dividend, the financial parameters that shall be considered while declaring dividend, and a policy on how the retained earnings will be utilised.

Post this diktat in 2016, most companies have formulated their dividend distribution policies. However, experts say some are just following this in letter and not spirit.

Based on the IiAS analysis, firms that could increase their dividend yield to above 15 per cent if they use their excess cash include Indian Energy Exchange, MOIL, Multi Commodity Exchange and BHEL. Among those that can part with a substantial portion of their on-balance-sheet cash include Abbott India, Symphony, Dr Lal Pathlabs and Bajaj Consumer Care.

IiAS says India Inc must, on an annual basis, articulate why the companies needs to maintain the excess liquidity.

“Maintaining large cash balances could result in firms’ increased risk appetite (given the available cushion), which could result in risky or unrelated diversifications. Several promoters have pledged their equity against debt, a large concern for the markets; using cash in the books to support promoter debt through complicated financial instruments is a possible concern of such high liquidity,” it says.