Dividends Or Buyback: How Should Companies Share Rs 25,000-Crore Surplus Cash?

Investors are eyeing a Rs 1.9 lakh-crore cash balance with 88 companies in the S&P BSE 500 index for incremental dividends.

The 88 companies can hand out Rs 25,000 crore in incremental dividends, said a report by Institutional Investor Advisory Services (IiAS). Seven of them can alone contribute 50 percent, or Rs 12,500 crore, said the report.

The report said 71 companies have enough cash and cash equivalent to pay up to Rs 50 per share, while 10 companies have the ability to pay between Rs 50 and Rs 100 per share. Seven companies have surplus cash to pay over Rs 100 per share, the report said.

According to the report, public sector enterprises have been consistent in dividend payout for the last two years at 25 percent. Promoter-owned, multinational and institutionally held companies have seen their dividend payout decline in the last two years, the report highlighted.

The government has articulated the dividend policy for all public sector enterprises. It requires all profitable PSUs to pay 30 percent of their profit after tax or 5 percent of their net worth as dividends to shareholders every year.

Buybacks Vs Dividends

Companies are increasingly resorting to buybacks over dividends due its tax efficiency. Since April 1, 2016, dividends are subject to additional 10 percent tax if it exceeds Rs 10 lakh in the hand of the shareholder in a year. This is in addition to 20.9 percent dividend distribution tax.

Buybacks are subject to securities transaction tax of 0.125 percent in the hands of the investor, if done through the stock market route. The pace of buybacks has increased in financial year 2017. And if shareholders clear the Rs 16,000-crore buyback by Tata Consultancy Services, the total payout this fiscal will cross Rs 44,000 crore, the highest ever.

Dividend Policy

In July 2016, market regulator Securities and Exchange Board of India had asked the top 500 listed companies to articulate their dividend policy. The policy should be disclosed in the respective companies’ annual report and on their websites, the regulator had said.

“The market needs to pressurise companies, because... the companies will be a step ahead of the regulator. Whether we like it or not, in the first year, all will fall in line. Subsequently, they will do something differently. So what we like now is that there is a policy,” said Amit Tandon, founder and managing directors at IiAS.