These Cash-Hoarders Can Make Shareholders Richer By Rs 88,600 Crore, Says IiAS
Also, abolishing dividend distribution tax to result in multi-national companies paying higher dividends.
Sixty companies are sitting on excess cash of around Rs 88,600 crore that they can return to shareholders through dividends and buybacks.
That’s the takeaway from the Dividend and Buy-back Study 2020 done by the proxy advisory Institutional Investor Advisory Services based on FY19 financials of BSE 500 firms. Of the 60, just five—Infosys Ltd., ITC Ltd., Wipro Ltd., Tata Consultancy Services Ltd., and SBI Life Insurance Co. Ltd.—account for more than half of the total distributable cash, it said.
The surplus—nearly equivalent to what the government could earn via Life Insurance Corporation’s divestment—accounts for a third of the cash on their balance sheets as of March 2019, it said. IiAS calculated excess cash by adjusting free cash flow for consolidated debt, half of the contingent liabilities and dividend paid last fiscal, besides some qualitative tweaks.
IiAS also said that though the 60 firms outperformed the index on profitability, almost half of them witnessed a decline in return on equity in the year ended March 2019. “This (decline in RoE) should compel their boards to review capital allocation and return some of the excess cash to shareholders.”
Excess cash on the books has led some companies to make risky acquisitions. In another case, the excess cash was encumbered, which investors did not realize until the company defaulted on debt. Therefore, returning cash to shareholders is a testimony of the quality of a company’s earnings and will result in more efficient use of capital.IiAS report
The number of companies with excess cash in FY19 reduced to 60 from 75 a year ago, while the absolute quantum of excess cash dropped to Rs 88,600 crore from Rs 1.08 lakh crore. The report attributed lower operating cash flows and higher capital expenditure, especially by state-owned firms, as the reasons for the drop in metrics.
DDT Boost For Multinational Firms
Also, the government’s proposal to move the tax on dividends to the hands of recipient instead of companies is likely to result in multi-national companies paying higher dividends from fiscal year ending 2021, the study said.
Also, the abolition of dividend distribution tax “augurs well” for MNCs as the foreign parent entity can claim back credit for the corporate taxes paid on dividends in India in their home jurisdictions, the report said. “On the other hand, family-owned companies may accelerate dividends before the next fiscal, to escape paying dividend taxes in personal capacities.”
Watch | IiAS’ Hetal Dalal on the key takeaway from the study.