Mumbai: The top 100 firms listed on BSE Ltd have become more generous with dividends over the past five years, although part of this was led by a change in the taxation policy on large dividend payouts in the budget this year.
A Mint analysis of BSE 100 companies showed that the dividend payout ratio of these firms has doubled from 0.23 in 2010-11 to 0.50 in 2015-16. The dividend payout ratio is the fraction of net income a firm pays to its shareholders in dividends.
The steepest year-on-year increase in the dividend payout ratio, however, was seen in fiscal 2016 when the ratio hit 0.50 from 0.34 in fiscal 2015. One reason for this was a change in the dividend taxation policy.
Companies rushed to pay dividends to shareholders before the end of 31 March after finance minister Arun Jaitley introduced a 10% additional tax on individuals with dividend income of over ₹ 10 lakh in the budget for the year starting 1 April.
Companies rewarded dividends worth ₹ 65,385.21 crore in the three months ending 31 March, with nearly 70% of that announced within a month after the Union Budget.
Another reason for the increased ratio has been the decline in earnings growth, which pushes up the ratio if the absolute quantum of dividend paid out is not reduced. Aggregate net profit for the BSE 100 companies decreased 7% year on year in fiscal 2016. The dividend payout, however, increased 33%.
While the increased dividend payout is positive, Amit Tandon, founder and managing director, Institutional Investor Advisory Services (IiAS) India Ltd, a proxy advisory firm, says that companies can do more. Tandon has been advocating about higher dividend payouts through his reports since 2013.
“There have been instances where companies hoard cash and end up taking poor decisions on capital allocation; whereas the money should go towards the benefit of public shareholders. A plan or retention policy should be put in place about how much cash the company intends to save for two-three years by outlining where it would be utilizing that cash to give a fair indication to shareholders," Tandon said.
An IiAS report released on 19 January 2016 observed that Indian companies had the potential to pay over ₹ 200 billion in additional dividends. Three years ago, it had said that companies paying higher dividend drew more confidence in its ability to generate growing earnings.
The analysis also shows that the increase in the dividend payout ratio for government owned firms was steeper than the overall increase. This could be linked to pressure on the government’s finances which has led them to push state owned firms to return cash to their largest shareholder.
According to the Mint analysis, the dividend payout ratio for the 21 public sector enterprises in the BSE 100 list increased to 0.81 in fiscal 2016 from 0.35 in the previous year. Five years ago, in fiscal 2011, the dividend payout ratio was lower at 0.25.
In the case of private sector firms, the dividend payout ratio improved to 0.39 in fiscal 2016 from 0.22 in fiscal 2011, the data showed.
The lack of consistency in the dividend payout policies of firms has drawn regulatory attention.
At its board meeting on 19 May, the board of the Securities and Exchange Board of India (Sebi) approved a proposal which asked the top 500 listed companies (by way of market capitalization) to formulate and disclose their dividend distribution policies in the annual reports and on their websites.
Shriram Subramanian, founder and managing director, InGovern Research Services Pvt. Ltd, a proxy advisory firm, however, says a fixed dividend distribution policy is not needed.
“It is immaterial whether company pays higher dividend or not because eventually it results into capital appreciation. One possibility for a higher dividend payment is for revocation of pledged shares or an event of low liquidity. There could be several other reasons," Subramanian said.