Mumbai: Despite making losses in fiscal year 2011, several firms have recommended paying dividends. They will pay the dividends once shareholders approve.
Promoters’ stakes in these firms vary between 18% and 72%. This means that in some cases, promoters are the major beneficiaries of the dividend payout.
While India’s company law allows firms to pay dividends from profits only, under special conditions, they can make such payments out of accumulated profits of previous years.
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At least 16 companies, which posted net losses in fiscal year 2011 on a stand-alone basis, have declared dividends to their shareholders, a Mint analysis shows. Subsidiaries of some of them have made profits, leading to consolidated profits. While adoption and presentation of consolidated earnings is mandated by listing requirement, dividends are paid in accordance with norms laid down in Companies Act that take into consideration stand-alone profits.
According to the Act, firms can pay dividends only out of profits or from its reserves of accumulated profits, said Hitesh Buch, a practising company secretary.
Among the loss-making firms, Kesoram Industries Ltd has announced the maximum dividend of 55%, or Rs 5.50 per share carrying a face value of Rs 10, and Star Paper Mills Ltd, a dividend of 50%, or Rs 5. Rain Commodities Ltd and Vimta Labs Ltd plan to pay 46% and 20% dividend, respectively, while the rest of the firms have announced dividend payouts between 7.5% and 15%.
In absolute terms, Reliance Communications Ltd (R-Com) and Rain Commodities announced the maximum dividend to shareholders, about Rs 103 crore and Rs 32.58 crore, respectively. In R-Com, promoters hold 67.86% stake. So out of the Rs 103 crore dividend announced, promoters will get Rs 69 crore. In Rain Commodities, promoters holds 42.48%, and will get Rs 13.84 crore in the form of dividend.
An email sent to R-Com on Thursday remained unanswered.
Kesoram Industries’ plans to pay Rs 25.16 crore in form of dividend and DCM Shriram Consolidated Ltd, Rs 6.67 crore.
Other companies’ planned dividend payouts varied between Rs 10 lakh and Rs 4.82 crore.
The provision for even loss-making companies to pay dividends was incorporated in Companies Act so that firms that habitually pay dividends can continue to do so even in a cyclical downturn when they are making losses. However, in case the firm is paying dividend out of reserves, there are special conditions that it has to adhere to.
For instance, the norms say that in such cases, the rate of dividend shall not exceed the average rate of dividend of preceding five years or 10%, whichever is less. Also, the total amount drawn from the reserves should not exceed an amount equal to one-tenth of its paid-up capital.
A loss-making firm also needs to take approval from lenders before it declares dividend payouts.
Such provisions are meant to put curbs on how much dividends a loss-making firm can award its shareholders.
As of 31 March 2011, Rain Commodities had Rs 328.7 crore in reserves and surplus, Kesoram Industries Rs 1,251.62 crore, Vimta Labs Rs 120.60 crore and DCM Shriram Consolidated Rs 1,228.39 crore. Standard Industries Ltd had a reserve of Rs 125.53 crore and Star Paper Mills Rs 110.70 crore.
As of 31 March 2010, R-Com had Rs 49,466.88 crore in reserves and surplus. In fiscal 2011, R-Com posted a net loss of Rs 758 crore on a stand-alone basis. Kesoram Industries posted a net loss of Rs 210 crore due to higher total expenditure and interest cost.