Slash dividend & prioritise shoring up balance sheet

Only after business has stabilised and there is visibility ahead should companies look at paying their shareholders

The finance minister while presenting FY2020-21 Union Budget proposed to remove dividend distribution tax on companies: Henceforth the tax is to be collected from recipients, at the applicable rate, which could be as high as 43 per cent. Since then companies have scrambled to declare an interim dividend to make it more tax-efficient for the (controlling) shareholders.

Market data shows that 424 companies have announced interim dividends between February 1 and March 20, 2020, and 181 of these companies have declared an interim dividend in March. And of these, 64 companies have done so after March 10. There have been no announcements since March 20. In contrast, just 181 companies declared an interim dividend between January and March last year.

There has also been a steady stream of buy-back announcements. Three in February, and 12 in March, of which nine have been in the last fortnight, including an NBFC. Clearly, boards failed to foresee the full import of Covid-19.

There is significant uncertainty in the present environment, including among companies that have declared (but not yet paid) dividends prior to the current pandemic crisis. While the full impact of Covid-19 on company cash flows in the fourth quarter and the end of the financial year in the Indian context remains uncertain, it will be prudent for India Inc. to “defer ” all dividend payments and cease buy-backs.

These dividend cutbacks will no doubt have an impact for investors who are looking for some income at a time when interest rates on deposits and fixed interest instruments are at all-time lows and taxation rules have moved against them — particularly the small investors. But at a market dividend yield of around 1.5 per cent, this will not be a significant number. And in any case, it is more important for companies to conserve cash, to face the current crisis and future uncertainties. Suffice to say, payment of dividend is no longer judicious.

While the signs of an impending crunch were there from the beginning of March itself, the last two weeks have been calamitous. There has been a halt in most company’s operations following the 21-day shutdown mandated by the government of India. A sharp and dramatic downward impact on the stock markets has added to this sense of gloom.

There are media reports that Tata

Sons, Bajaj Group and Godrej are among the 277 promoters that have increased their stake in group concerns through market purchases in March. While signalling confidence in the operating companies is welcome, the controlling shareholders clearly missed a beat on this. They should have asked whether money might be needed in the operating companies and injected money directly through fresh issuances. True, the price difference between what is available from the market and that at which additional capital can be injected makes market purchases far more compelling.

Sebi, therefore, needs to review its pricing guidelines, given the market sell-off. It will be a while before companies touch the Sebi determined price, calling for its pricing rules for both preferential allotment and qualified i nstitutional placements (QIPS) to be relaxed. This will enable companies to raise capital to meet their survival and other funding needs. Given the unprecedented situation, Sebi must also allow companies to rescind buy-backs.

As the situation has unfolded, the European Banking Authority has shifted its stance from urging banks to be prudent with regard to dividends and buy-backs to refraining from doing so as it will result in capital flowing out of the banking system. The Reserve Bank of India needs to take a leaf out of this book.

In terms of scale, we are nowhere close to where the US industry is of having spent its dry powder on buy-backs; it is looking to Washington for a bail-out of gargantuan portions. Still, given the economic cost this lockdown is expected to extract, Indian industry will need the government to step in. This is why owners cannot risk appearing self-serving by basing decisions only on how much personal tax they expect to save or by using this crisis to use their money to ratchet-up their shareholding.

Companies must consider the impact of the Covid-19-related risks on their financial position. They must review their financials to ensure that enough cash is available for meeting the business needs to restart business and a sufficiently far-sighted pool of capital is available to meet the company’s needs till the economy stabilises. And they need to take hard calls. Those that still can must review their pay-out decision. And all need to safeguard their cash reserves to help pull through these unexpected times.