Room for paying more dividend by India Inc, say experts

Sebi hasn't yet made public policy it intends to put in place on dividend payouts

The Securities and Exchange Board of India’s recent comment that companies should have a dividend policy has sparked a debate on whether India Inc is paying enough of it. Proxy advisory and corporate governance entity IiAS believes, “There is huge potential for higher dividend payout by Indian companies.”

According to its analysis, at least 77 companies in the BSE 500 index could pay dividends aggregating to a total of Rs 36,000 crore, double the amount these companies paid to shareholders in 2012-13.

“Most companies never follow a policy for paying dividends. A lot of times, it happens that earnings surge but that doesn't translate into higher dividends,” said S P Tulsian, head of consultancy and broking firm sptulsian.com.

He feels companies should at the outset state 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. He cited the recent example of drug maker Strides Arcolab. Strides had given to shareholders the cash it got by selling one of its units to US-based Mylan in 2013. The dividend paid was Rs 800 a share.

Companies tend to accumulate cash for acquisitions and on worry that fund raising might be smooth when the need arises.

IiAS argues higher dividend payout raises shareholder interest in a stock and, thus, makes fund raising easier for companies.

“Dividend payments demonstrate a company’s confidence to continually generate earnings in the future and show that its earnings are real,” it states.

Analysts say MRF, Oracle Financial Services and Shree Cements are some with a good record of paying dividends.

In 2013, Whirlpool India, Jubilant FoodWorks, Gujarat Pipavav, Oracle Financial Services Software and Just Dial didn’t pay dividends, despite being profitable, says IiAS.

Unlike in most other countries, Indian regulations don’t mandate Indian companies to have a dividend policy. In Brazil, for instance, companies have to specify the minimum percentage of dividends from net income they’d pay to shareholders.

At a corporate governance seminar last week, Sebi chief U K Sinha said a policy on dividend payouts was in the works. Globally, he said, companies hoarding cash were 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 a detailed explanation.

“Companies that have large investments in non-core businesses should give the rationale for these investments and the timeframe for exiting these,” says IiAS.

Typically, cash-rich companies in India invest their excess funds into banking deposits or money-market schemes offered by mutual fund houses.