Examining annual reports of companies for the fiscal year that ended 31 March, one is flabbergasted that several large companies paid dividends to shareholders, while sustaining cash losses from operations.
Clearly, the cash for paying such dividends could have come through investment income or via borrowings or from new shareholders. While the current law does not prescribe a relationship between dividend payment and cash generated from operations, such behaviour raises questions of business sense and propriety.
Does it make business sense for a company to pay dividends to its shareholders while simultaneously starving for cash to manage its operations? In some of these cases, where the companies are majority-owned by promoters, questions of propriety and rights of minority shareholders crop up. Are the boards of directors of such firms discharging their fiduciary obligations when recommending such dividend payments to shareholders?
Unitech Ltd sustained a net cash loss of Rs143 crore from operations in the fiscal year that ended 31 March, but it paid dividends of Rs47 crore in this period. Since the company additionally required cash of Rs1,034 crore for investment activities, the only source for cash to pay dividends was financing activities. Unitech borrowed Rs126 crore and raised cash of Rs215 crore through sale of securities in this period. Would it not have been better for the company to avoid the 37% extra borrowing by refraining from declaring dividends?
The argument that the dividends are declared for the previous year is superfluous as the company sustained an even greater cash loss of Rs1,034 crore from operations and required a further Rs3,187 crore for investment activities in the previous fiscal year.
DLF Ltd incurred a net cash loss of Rs566 crore from operations in the fiscal year to March, but it paid dividends of Rs401 crore in this period. This company required cash of Rs4,202 crore for investment activities. The company’s borrowings went up by Rs4,519 crore. Wouldn’t this company and its shareholders have been better served by refraining from dividend payments and reducing their debt burden? In this case too, the argument that dividends are declared for the previous year falls flat, since the company sustained a cash loss of Rs2,597 crore from operations and required further cash of Rs6,014 crore for investment activities.
This behaviour does not appear to be restricted to real estate companies. ICICI Bank Ltd incurred a net cash loss of Rs14,188 crore from operations in the fiscal year to March, but it paid dividends of Rs1,369 crore in this period. The amount of Rs3,857 crore generated from investment activities during this period was not sufficient to offset the cash loss from operations, and the company raised Rs2,949 crore in addition to using funds raised in the previous year for funding operations and dividend payments.
Could ICICI Bank have avoided the 46% extra debt burden by refraining from declaring dividends? ICICI Bank, too, sustained cash loss of Rs11,631 crore from operations in the previous fiscal year and required Rs17,561 crore for investment activities in the previous fiscal year; so the argument that dividend payments are for a previous year doesn’t hold water.
Were the boards of such companies justified in declaring dividends while staring at massive cash losses? Parliament is debating the Companies Bill, 2009, whose objective is to modernize the five-decade-old Companies Act. One of the objectives of the new Bill is the articulation of shareholders’ democracy with protection of rights of minority stakeholders. The Bill needs to stipulate that funding of dividend payments through borrowings or by issue of new shares needs to stop. The rule should be simple: No profit, no dividend; no cash, no dividend.
Puranika Narayana Bhatta runs a finance and operations consulting firm in Bangalore. Comment at email@example.com