Dividend or profit retention?
Should corporate entities that earn massive profits be forced to pay dividends to its stockholders? The question has been a subject of debate. While the boards of directors vehemently refuse to bow to such a suggestion, investors, particularly the small shareholders, clamour for a payout.
In numerous annual general meetings (AGMs), small investors are seen to group together and refuse to approve the accounts where companies do not remunerate them. They have to be pacified with "gifts and giveaways" that are as petty as a few kilos of sugar if it's a sugar company or a shalwar-kameez suit in case of a textile company.
It has to be conceded that the widely followed tradition of gift culture almost died down after the apex regulator put a ban on such distribution and clamped heavy penalties on companies that did not comply.
Next Capital Executive Director Zulqarnain Khan said investors put money in equities with two major objectives. One, they seek higher dividend yields. Major participants in such investments are retirement and pension funds. Two, investments are made in high-beta growth stocks where investors look forward more to company growth and less to yearly returns.
He observed that investors expect much higher returns from stocks over fixed income securities. "Take the rate of return at five per cent from banks or 6.5pc from the National Savings Schemes to which is added the capital risk of the equity market at, say, 5pc and risk premium at 3pc. In reality, therefore, investors will be attracted to a stock or market that provides a dividend yield of 13.5pc," he says. About half of the 531 listed companies do not pay dividends to their shareholders
Many companies complain that they are short of cash for working capital needs and are unable to pay dividends. Some companies under those conditions substitute the issue of bonus shares to the shareholders in place of cash. But the question remains: should corporate entities be forced to remunerate stockholders in either cash or bonus shares each year?
A long time back, the government through the finance act had made it compulsory for all listed companies with free reserves of more than 40pc of paid-up capital to distribute at least 50pc of the company's taxed profit in cash dividends to shareholders. But the directors on corporate boards fought back, believing that the rule had been enacted by the government for dividends on its own investments as the government is the single biggest investor in equities.
When the government refused to remove the clause of mandatory dividends, some smaller companies walked out of the market. A major group with several profitable listed companies in textile, energy and cement sectors threatened to buy back small shareholders' equity and seek a delisting. It unnerved the corporate regulators who were the proponents of compulsory dividends.
"Since there is no rule to block a voluntary delisting, regulators convinced the government that if one company was allowed to go, the rest might follow," says a Lahore-based corporate lawyer. It forced the government to back off and remove the compulsory dividend regulation. For years, the exchange in its budget proposals continued to demand the restoration of the compulsory dividend payment regulation, but the efforts were in vain.
A corporate lawyer says: "In a corporate democracy, the board is empowered to take decisions on company matters since the onus is upon the directors to protect the company assets and the rights of shareholders, employees and creditors."