Dividend policy please

The Securities and Exchange Board of India is mulling a new set of guidelines that will require companies making a market debut to disclose their dividend distribution policies upfront. This move is welcome, after the furore over the promoters of InterGlobe Aviation — owners of IndiGo Airlines — helping themselves to extra-large dividends just ahead of the company’s Initial Public Offer (IPO). While there is nothing prima facie wrong about a company adopting a liberal dividend policy, InterGlobe’s move raises two key questions in the minds of prospective investors. One, if the company is indeed so comfortably placed on its capital requirements that it can clean out its entire networth (based on projected profits for FY16) to pay out dividends, why does it need to raise fresh capital through an IPO? And, two, will the company continue to be equally generous with its dividend payouts once it becomes a publicly listed company? Disclosures in the company’s offer document on its future dividend policy would have set both these doubts to rest in the minds of investors. This would have also helped them bid more realistically in the IPO.

Indian investors face other challenges as well. For one, domestic companies tend to be quite stingy with their dividend payouts. Over 40 per cent of the 1,400 NSE-listed companies pay no dividends at all and the ones that do pay them have an average payout ratio of just 36 per cent. This is despite a good number of firms boasting surplus funds. By the end of FY15, roughly a third of the total assets of NSE-listed companies was parked either in investments or in cash/bank balances. This tendency of listed firms to hoard their profits rather than distribute them to shareholders has resulted in India offering one of the lowest dividend yields in the world. While the average dividend yield on the BSE Sensex is 1.4 per cent, markets such as China, Malaysia, Singapore and Thailand offer yields of 3-5 per cent. Two, even where companies pay out liberal dividends, they seldom adhere to a transparent or consistent payout policy. Cash-rich private sector firms have met investor demands for higher payouts with ad hoc special dividends and bonus offers, while state-owned ones seem to make dividend decisions based on the budgetary demands of the government. Instead, it would help investors if SEBI made it mandatory, not just for companies floating IPOs but for all listed companies, to clearly indicate the cash levels that would trigger a dividend and the payout ratio that will be maintained. Firms can be given the flexibility to decide on the actual payouts.

Our tax policies are also not conducive to more liberal dividend payouts. SEBI should lobby for doing away with the dividend distribution tax at source, which currently appropriates for the government a flat 20 per cent of the distributed profits that rightfully belong to the public shareholders of Indian companies.

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