India Inc.’s Cash Hoarders Can Make Investors Richer By $16 Billion
Just 75 Indian companies have the potential to return up to Rs 1.1 lakh crore to shareholders through dividends and buybacks.
If a clutch of Indian companies chose to part with the excess cash they are sitting on, they can make shareholders richer by about $16 billion.
That’s the takeaway from a dividend and buyback study conducted by proxy advisory firm Institutional Investor Advisory Services. The study, which analysed FY18 financial statements of BSE 500 companies, identified 75 firms which can return cash up to Rs 1.1 lakh crore.
“These companies have large cash holdings and can distribute about half of their on-balance sheet cash to shareholders, as dividends or buybacks,” the IiAS report said. “While we recognise that companies need to maintain liquidity for organic and inorganic growth, we question how much is enough.”
The Rs 1.1-lakh-crore figure is based on the profit after tax reported by these 75 companies and is in addition to the Rs 62,100-crore dividend paid out by the BSE 500 constituents in 2017-18. The estimate of excess cash is also nearly triple of IiAS’ last year’s estimate of Rs 34,000 crore.
IiAS highlights “cash hoarding” as an issue that has plagued India for several years. Despite the Securities and Exchange Board of India’s mandate of having a formal dividend policy, several companies have shied away from providing clarity to shareholders on what dividend payout they should expect. “At the very least, SEBI’s requirement of having a dividend policy must be met in spirit and not just in the letter of the law—companies must disclose a targeted dividend payout ratio,” the report said.
“Distributing excess cash to shareholders is a testimony of the strength and reality of earnings,” IiAS said. And there are reasons why returning excess cash to shareholders may be a good idea for companies.
Why Return Cash
The 75 companies had seen their profit increase 8 percent over last year in 2017-18 at a time aggregate profit for the BSE 500 companies fell 1 percent. The cash for the 75 companies increased 7 percent, compared to 2 percent for the BSE 500 firms.
While all the 75 companies have outperformed the index, 37 of them reported a decline in the FY18 return-on-equity compared to the previous year, suggesting that the excess cash on the books may be dragging down return ratios for shareholders.IiAS Report
That’s not it. Having more cash could lead managements to make unsafe business decisions. “Maintaining large cash balances could result in companies’ increased risk appetite (given the available cushion) which could result in risky or unrelated diversifications,” IiAS said.
High liquidity on the books has also triggered concerns in the market. Many promoters have pledged their equity against debt and the worry is that they would use the cash in the books to support promoter debt through complicated financial instruments, the report said.
PSUs Lead The Way
Nineteen companies have announced a buyback in 2018-19 against 12 firms in 2017-18. The largest amount of buybacks has come from public sector companies, IiAS said.
That’s mainly due to regulations that require state-run firms to pay at least 30 percent of their profit as dividends. The median payout ratio of 28 percent for PSUs is the highest among all other ownership groups.