Opinion | A little more generosity to shareholders please2 min read . Updated: 27 Feb 2020, 10:41 PM IST
India Inc appears to be upping dividend payouts in response to a taxation shift due in 2020-21. Now let’s use higher dividend yields to lure retail investors to equity markets
Indian companies seem to be in a rush to reward their owners with larger chunks of their profits than seen in recent times. Interim dividend payouts are being announced at an impressive pace. These decisions can be traced to the recent budget declaration that the tax burden on dividends will be shifted from companies to shareholders from next fiscal year. The dividend distribution tax paid by firms is to be axed, and shareholders would have to count what they get as part of their income and pay tax on it in accordance with the applicable slab. Currently, the dividend earnings of individuals are exempt from tax up to an annual ₹10 lakh, after which a 10% rate applies. Come April, this personal tax liability will rise significantly for those in higher slabs. Promoters with large holdings, it appears, are keen to rake in the moolah before the new rule kicks in. The number of companies that have declared dividends this month has reportedly more than doubled over the previous year. Corporate motivations, however, are immaterial in the larger scheme of things. What’s important is that higher payouts extend into the years ahead and turn into a trend that serves to attract more and more retail investors to Indian equities.
For that, ideally, there should be no tax on dividends at all. Corporate profits are subject to tax in any case and what shareholders get by way of dividends is just a part of that money. The double taxation that such a system imposes on the money made by a company acts as profit dampener, leading many entrepreneurs to pass off their personal spending as business expenses. In time to come, perhaps the government should consider turning dividends entirely tax free. While it may sound unfair for wealthy owners of companies not to pay any tax on the large sums they earn this way, it is also true that it would encourage Indians of relatively modest means to buy shares for their original purpose: To get some of the money that companies make. As of now, the chief lure that is dangled by stock markets is capital appreciation. People are expected to buy shares in the hope that their market prices will go up and their portfolios will be worth more. The volatility of stock indices, however, tends to put off large numbers. Those who would rather not bear much risk, therefore, opt for “safe" bank deposits and other debt avenues. If the dividend yield, defined as the annual payout as a percentage of a stock’s price, of blue chips were to rival the interest available on deposits and the like, then they would get interested in long-term holdings. Any increase in their value would be a bonus.
That is how it is in many developed economies, where interest rates tend to be low and dividend yields high. In the UK, the US and Australia, investors could get as much as 5% annually on the money they put into equities. Most companies listed in India, in contrast, pay less than ₹2 as dividend for every ₹100 invested. At one time, this low yield was said to be because profits needed to be retained to plough back into businesses for expansion. But corporate investment levels have fallen, and the focus of many firms is on profitability. Logically, dividends should get more generous, too. If payouts attract first-time equity buyers, it would aid the cause of vibrant capital markets in India.