The cynical view is that Tata Consultancy Services’ special dividend payout of ₹40 a share, absorbing nearly ₹8,000 crore, was mainly intended to benefit Tata Sons, which as the company’s promoter, stands to receive nearly three-fourths of this payout. Yes, of course the sum is more than helpful for Tata Sons to fund new investments in telecom and airlines and meet older debt obligations. But given that listed firms use myriad other ways, including related party loans and inter-corporate deposits, to share surpluses with promoters, shouldn’t we be appreciating TCS for taking the dividend route? Indeed, it would be welcome if other leading members of India Inc did likewise as it would have a salutary effect on investor sentiment.

Despite the downturn, listed companies have seen surplus cash piling up in their balance sheets over the last four years. Between March 2010 and March 2014, the top 500 companies saw their cash surpluses expand from ₹3 lakh crore to ₹5.3 lakh crore, making up nearly 15 per cent of their total assets. Yet they have been loath to raise dividend rates, choosing to retain 70 per cent of their annual profits. Thanks to such stinginess, Indian stock markets today offer one of the lowest dividend yields in the world; even Asian counterparts such as Shanghai, Taiwan, Singapore and Malaysia offer 3 per cent, over twice the 1.3 per cent yield from Indian companies. Asked why they can’t pay out higher dividends, companies offer explanations ranging from needing cash for a rainy day to being perpetually ‘on the prowl’ for acquisitions. But these justifications don't wash as cash-rich firms can always tap the markets when they need capital.

Meanwhile India Inc’s skimpy dividends have several adverse implications. To start with, idle cash is a turn-off for investors. After all, an investor takes equity stakes in a company to profit from healthy returns on its core business. If a chunk of the capital is idling in bank deposits, how can it generate sufficient return on equity to compensate for risk? Two, hoarding of cash leads to a misallocation of resources. Today, while the top 20 listed companies in sectors such as software, mining and energy are sitting on enormous cash balances, others in the infrastructure and power segments are scrounging for funds to complete projects or repay debt. Liberal dividends can unlock the cash lying with mature businesses and allow shareholders to re-deploy it for better returns. Given this, the Centre has certainly done investors a disservice by raising the dividend distribution tax, which should have been reduced or done away with to encourage fatter dividend pay-outs.

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