Taking a leaf out of the DIPAM book, the Gujarat government recently announced a new policy for minimum dividend distribution and bonus shares for its State public sector undertakings (PSUs).

Accordingly, the government has mandated State-owned companies to give a minimum of 30 per cent of net profit, or 5 per cent of net worth, whichever is higher, as a minimum dividend to shareholders. However, there is no restriction on the maximum permissible level.

Besides, every State PSU with at least ₹2,000 crore net worth and cash and bank balance of ₹1,000 crore will have to exercise the option of buyback of its own shares, the new policy on corporate action by State government PSUs has said. State PSUs, with defined reserves and surplus equal to or more than 10 times their paid-up equity share capital, must issue bonus shares to shareholders, it further said.

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Further, the PSUs are mandated to split their shares where the market price or book value of the shares exceeds 50 times its value, provided the existing face value of the share is more than ₹1.

Rising dividend receipt

In 2020, the Department of Investment and Public Asset Management had issued an advisory regarding ‘consistent dividend policy’ under which CPSEs were mandated to pay a dividend of 30 per cent of profit after tax or 5 per cent of the net worth, whichever is higher. They were also asked to pay interim dividend at the end of every quarter instead of bunching them for the year-end.

Comprehensive guidelines have been laid out by DIPAM for capital restructuring of CPSEs through a consistent dividend policy, ensuring buyback of shares, issue of bonus shares and splitting of shares. “This has encouraged companies to leverage net worth for higher investment and use funds judiciously and in a focused manner,” DIPAM said.

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Following this, the Centre’s dividend receipt has been on the rise. As against FY21’s ₹39,750 crore as dividend receipt from CPSEs, the Centre had mopped up ₹59,101 crore in FY22 and given the current trend, it is expected to be healthy for FY23 as well.

Missing spirit

Market regulator SEBI, in 2016 had, mandated the top 500 companies by market capitalisation to formulate a dividend distribution policy (DDP) which shall be disclosed in their annual reports and on their websites. In 2021, it was extended to top 1,000 companies.

The DDP should include — the circumstances under which the shareholders of the listed entities may or may not expect dividend; the financial parameters that should be considered while declaring dividend; internal and external factors that should be considered for declaration of dividend; policy as to how the retained earnings shall be utilised; and parameters that would be adopted with regard to various classes of shares.

However, it did not serve the desired result. Most companies followed the letter by announcing mere statements but the spirit was missing, as they are not willing to share their profits with dividend or buyback. There were at least two dozen companies whose annual net profit topped ₹10,000 crore but the dividend yield of Nifty50 stocks had risen from just 1.17 to 1.4 in the last five years.

The time has come for companies, especially those sitting on high reserves and cash balances, to voluntarily consider dividend/buyback without compromising on the growth path. There are quite a few companies that can show a large heart.

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