Covid-19 And Dividends In India: To Distribute Or Not To?
It is likely that RBI’s restriction on dividend so far will only affect the private sector banks, writes NIPFP’s Suranjali Tandon.
Profits of a company, including banks, can be deployed for the creation of reserves that can be used for expansion and as a buffer against a crisis. Under the present circumstance, it may be wise to use profits from 2019 to create reserves that may be deployed to cushion the fall in demand expected in the coming months. The Reserve Bank of India’s decision to temporarily curtail dividends may be sound since the banks are under strain from lockdown and the three-month moratorium that has been implemented on loan payments. However, this raises important questions on what is the size of the dividends and whether a similar policy will provide companies with the necessary reserve capital to tide over the strain ensuing this financial year.
Over the last decade, the dividend payout ratio (which is the dividend paid or proposed as a percentage of profit after tax) has increased for BSE-listed companies, from 30 percent to 49.7 percent while banks paid out a much lower dividend of around 22.5 percent during the same period. The opposing trends between banking and other sectors are seen in the chart below. Further, in 2016, an amendment of the SEBI (LODR) Regulation 2015, required that 500 listed entities to distribute profits otherwise explain special circumstances under which such distribution is not being carried out, may have had an impact on the increased distribution observed in 2017. It is expected, therefore, if reinvested profits, that would have otherwise been distributed, could prove an important source of funds.
Dividends are paid out to public and group companies that may have invested in the company. Therefore dividends can be incomes for companies as well. Any reduction in dividends can, therefore, have a countering impact on constraining liquidity. Interestingly, dividend incomes of companies within the same sample varies between those paid by banks as well as other listed companies.
During the period of analysis, listed companies and private banks witnessed a decline in the share of income from dividend and nearly 90 percent of this income was received from group companies, as seen in the chart below. The important question is what size of dividend that circulates between corporates and that which is paid out to shareholders other than corporates. I estimate that 72 percent of the dividends are paid out to shareholders other than group companies. Based on the estimates, voluntarily constraining dividend payout in the case of companies could limit the incomes of listed companies more than for banks, that receive less than a percent of income from dividends.
Minimal impact on bank earnings is also expected since the dividend paid out by public sector banks has been on a decline since 2016, with many banks not paying any dividend. Financial years 2017 and 2018 were troubled for the banking sector, leading to a decline in dividends or no dividends declared by PSU banks. In my estimate, based on the information available, even in 2019 dividends paid and proposed declined significantly. For 37 banks, public and private, it was to the tune of only Rs 7,367 crore. Looking at the financials for 2019, as per RBI, 73 of the 87 banks reported net profit. However, the losses were concentrated in public sector banks, which incurred a total net loss of Rs 66,608 crore, far in excess of the combined gains of the private sector and foreign banks of Rs 42,218 crore.
Therefore, it is likely that the restriction on dividend so far will only affect the private sector banks.
In sum, the current slowdown may compel many companies to rethink their distribution policy. Only 510 companies have declared interim or final dividend Between Jan 1, 2020, and April 17, 2020. If companies do consider a reduction in dividend payments, which was also expected due to the change in taxation of dividends, then it could provide an alternative source of funding for companies. However, for banks as is now mandated by RBI to not distribute until September, the impact will be minimal for public sector banks whereas for private banks this could mean more than 20 percent of profits, for those that had distributed profits in the previous year. This, in turn, will have limited liquidity impact on banks since intra-group dividends are negligible. However, funds will be the most adversely affected by such a policy.
Suranjali Tandon is Assistant Professor at the National Institute of Public Finance and Policy, and specialises in taxation. This article was first published on her blog.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.