Home / Market / Stock-market-news /  Sebi may ask profitable firms to pay dividend to shareholders

Mumbai: The Securities and Exchange Board of India (Sebi) is likely to ask listed firms with adequate cash on their balance sheets to adopt a dividend distribution policy for their non-promoter shareholders, Sebi chairman U.K. Sinha said on Friday.

“There are a number of companies that have enough cash. They should formulate a policy to distribute a share of this cash among shareholders," Sinha said speaking at a two day corporate governance summit, “gatekeepers of governance," organized by Excellence Enablers.

Although Indian regulations do not make it necessary for companies to declare a dividend policy, in emerging economies such as Brazil, regulations require that the bye-laws of a company mention a minimum percentage of dividends from its net income that would be distributed to shareholders every year.

In India, companies typically declare dividends for shareholders at the end of financial year in March only if they record profits on expected lines or they accumulate enough cash. Once the market regulator makes dividend payout policy compulsory, minority shareholders will receive a regular income from performing firms as long as they stay invested.

Companies such as Coal India Ltd had 52,389.53 crore in cash, Reliance Industries Ltd had 37,984 crore, Tata Motors Ltd 29,711.79 crore, Infosys Ltd 25,950 crore and Oil and Natural Gas Corp. Ltd had 24,480.13 crore, according to annual reports of the firms at the year ended 31 March.

The proposal received lukewarm response from some companies.

“We already are giving very high dividend. Last year, we gave a dividend of 21,000 crore to the government— 18,000 crore as dividend and 3,000 crore as dividend tax," the executive said on condition of anonymity.

“If Sebi wants more dividend payouts, what else can it be but the government seeking to make more money?" asked another official at a state-run cash-rich firm who spoke on condition that neither he nor his firm be named.

However, although some companies have been declaring dividends almost every year, the amount of dividend has not been in fair proportion of their year-on-year growth in cash and bank balances, shareholder activists say.

The market as a whole has the ability to pay higher dividends, according to a 2014 report by proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS).

“IiAS’s study of the S&P BSE 500 conservatively identifies 77 companies that can pay more," the report said. “The incremental dividend from these companies alone could aggregate almost 36,000 crore...almost twice the amount these companies actually paid out in FY13."

Companies that pay dividends are perceived to be confident in their ability to generate growing earnings and that its earnings are real. However, Indian firms have been conservative about dividend payments so far, while their royalty payments have often been disproportionately high compared with the profit made by them in a given year, according to the report.

Companies such as Whirlpool India, Jubilant FoodWorks Ltd, Gujarat Pipavav Port Ltd, Oracle Financial Services Software Ltd and Just Dial Ltd paid no dividends in the year ended March 2013, despite being profitable.

The IiAS report highlighted that Whirlpool skipped dividends since 2008-09, while it paid 160 crore as royalty and technical know-how fee to Whirlpool Corporation of the US in the five-year period.

Similarly, auto maker Maruti Suzuki India Ltd’s dividend payout at 12% was low in comparison with the benchmark Sensex’s median payout at 27%. It paid 2,82.8 crore as dividend, of which 56% went to its foreign promoter, Suzuki Motor Corp. of Japan.

All companies should articulate a dividend policy as well as a retention approval as part of their charter documents, said Amit Tandon, managing director of IiAS.

“Under this, companies should disclose how much cash they intend to retain and the rationale for doing so and pay-out the balance to shareholders as dividends as this cash belongs to all shareholders and is not for company managements to keep," Tandon said.

Meanwhile, while addressing the conference, Sinha said the market regulator will soon put out a consultation paper on electronic initial public offerings, or e-IPOs, as well. In order to reduce the listing timeline for companies and ensure that investors’ money in an IPO does not remain locked for long, Sebi has been talking about bringing in a mechanism to float IPOs in an electronic form. This will enable investors to subscribe to IPO shares in a fashion similar to online trading. Sinha, however, did not specify a timeframe to bring in the new regulations on this.

Sinha also clarified on Friday that the regulator’s recent move on offshore derivative instruments, which predominantly involves participatory notes (P-notes), may not hurt markets and may only mean some minor adjustments in foreign portfolios in India. “But it will enhance clarity and transparency in their transactions," Sinha added.

At 2.66 trillion in October, the value of P-notes in India recorded its highest level in almost seven years. Sebi has recently clarified that all investments by a foreign portfolio investor (FPI) either directly or indirectly through offshore derivative instruments, or ODIs, will be clubbed and classified as investments made by a single FPI, whose overall investment is capped at 10% under the extant regulations.

Sebi’s clarification had raised a concern that it may lead to sell-offs by foreign investors in India and may hurt the markets.

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