In the red, but still doling out dividends

In the red, but still doling out dividends

Mumbai: What do BSL Ltd, Industrial Investment Trust Ltd, Micro Inks Ltd, New India Sugar Mills Ltd, Prime Textiles Ltd, Rain Commodities Ltd, KSE Ltd and New Delhi Television Ltd (NDTV) have in common?

They are all Indian publicly traded companies that posted a net loss in fiscal 2007, but still paid dividends—in some cases as high as 45%—to their shareholders.

The Oxford English Dictionary defines dividend as “a sum of money that is divided among a number of people, such as the part of a company’s profits paid to its shareholders or the winnings from a football pool".

So why are loss-making companies paying out dividends to shareholders?

Some do it in order to keep the tradition of a dividend payout, especially if the loss in the previous year was somewhat of an aberration. Others do it because they remain bullish about overall prospects and have healthy reserves from past years.

But most loss-making companies in India simply pay dividends to keep their promoters, who own significant shares in the company, happy.


“Ideally, no company should pay dividend when it is making loss organically," says Amitabh Chakraborty, president (equity), Religare Securities Ltd, a brokerage firm. “Some companies, very rarely, do so if they have a strong reserve. But I don’t see any reason why a company would continue paying dividend despite losses unless it wants to keep its shareholders happy. Of course, the promoters’ stake might have an answer here."

Indeed, promoters’ stakes in these companies vary between 34% and 75%, which means that the promoters were the major beneficiaries of the dividend payout even as the company itself was in the red for the year.

Except for one company, KSE, all the others on this list either declined to comment or wouldn’t want to go on the record. R. Sankaranarayanan, company secretary of KSE, said the company did not want to break the commitment to its shareholders of paying dividend continuously.

“We have a history of paying dividends since 1976," he said. “The losses we faced last year were due to high raw material cost that we could not pass on...suddenly. But, to maintain the tradition, we paid a dividend of 10% of our capital out of accumulated profits of the past years."

KSE, which is listed on the Bombay Stock Exchange, posted a loss of Rs1.01 crore in fiscal 2007, but reported profits in the previous three years. It paid a total dividend of about Rs32 lakh.

Micro Inks paid as much as 45%, or Rs4.50 a share, dividend while Rain Commodities paid 35%, or Rs3.50 per share. Industrial Investment Trust and NDTV paid 20% each while the rest of the firms had dividend payouts that varied between 5% and 10%.

In absolute terms, Micro Inks and Rain Commodities paid the maximum dividend to their shareholders, about 1 crore each. NDTV’s dividend payout was crore and that of Industrial Investment Trust 2 crore. The other companies’ dividend payouts were less than crore each.

There is no law or regulation that says only profit-making companies can pay dividends.

“Dividend can be distributed out of reserves, but in that case it cannot be more than 10% of the equity," says the company secretary of a large corporation who didn’t want to be identified. “However, there are occasions when firms do not move their undistributed profits to reserves and, instead, keep them in the profit and loss account. They can use this undistributed profit to pay higher dividend."

As of March, Micro Inks had Rs925.25 crore in reserves and surplus, NDTV had Rs177.04 crore, Rain Commodities Rs58.43 crore, Industrial Investment Trust Rs45.43 crore and BSL Rs39.35 crore. Prime Textiles had a reserve of Rs19.29 crore and New India Sugar Rs9.39 crore.

Micro Inks, for example, “has a good track record of paying regular dividends", says a person close to the company, but who didn’t want to be named.

“There was absolutely no need to stop paying dividend as last year’s loss was due to some acquisition-related charges. It was a book loss and not operation-related loss," the person added.

A person familiar with the thinking at television content provider NDTV says: “The loss of the company was not on an operational basis. It was due to the charges related to the employee stock option scheme introduced by the company. So, despite showing a loss on book, the company is strong and has the ability to pay dividend."