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Companies In Crises, Promoters In Riches

| 8/9/2012 9:00 PM Thursday

Recently, many companies declared dividends for stakeholders despite reporting losses for the fi scal. Is this an isolated set of events or indicative of a larger trend of promoters furthering personal gains at the shareholders’ expense? More importantly, is such a practice sustainable for the companies in the longer run and advisable as such? Saikat Mitra tells us more.

Key Points:

  • One of the most important reasons for managements/promoters to dole out hefty dividends is to maintain the consistency of dividend payment. Another is to get paid by way of dividends and utilise the same amounts to release their pledged shares from the clutches of lenders, which is detrimental to other shareholders.
  • Out of the 607 companies to have paid out a total of Rs 168 crore in dividends for FY12, 16 have posted a total cumulative loss of Rs 883 crore for the fiscal, which means that the financials of the company will be further depleted to that extent.
  • At times when the markets turn volatile, we see a demand by lenders to either deposit additional margins or risk sale of the shares to make good their position on the money lent. This has, at times, sent stock prices tumbling down, thereby hurting

The dividends paid out by companies are a very important factor that investors consider while deciding on whether to invest in their stocks or not. For it is a fact that dividends play a very significant role in wealth creation, especially over a longer period of time. Regular readers of Dalal Street Investment Journal would recall our earlier story (Dividends Can Make You Rich, DSIJ, Vol. 27, Issue No. 10, dated 6th May, 2012), wherein we had exemplified the importance of dividends in wealth creation. But even as we propound the importance of dividends in wealth creation, we realise that many companies and their promoters have been using this very important tool for personal wealth creation rather than for the benefit of stakeholders at large.

Why do we say so? Well, dividends are technically supposed to be the distribution of the profits earned by an enterprise among its stakeholders. So, how does it make sense that a loss-making company goes all out to pay dividends? This is exactly what some companies have done during FY12, paying out hefty dividends despite having reported losses in their business. This prompts us to ask a very basic question. Why would you want to distribute money when you haven’t earned enough yourself?

The Dividend Imperative

A total of 16 companies out of the 607 that have declared a dividend for FY12 (data source: Dion Insight) have done so despite making loss. These 16 companies have posted a total cumulative loss of Rs 883 crore for FY12, but will be paying out a total of Rs 168 crore in dividends for that year, which means that the financials of the company will be further depleted to that extent. The payment of dividends will, however, be subject to three conditions, which are

(a) the rate of dividend declared is not more than the average of the rates at which dividend was paid during the preceding five years, or 10 per cent of the paid-up capital, whichever is less,

(b) the total amount drawn from the accumulated profits does not exceed one-tenth of the net worth of the company for the financial year to which the dividend pertains, and

(c) the reserve balance after using a part of it for paying dividends should not fall below 15 per cent of the paid-up capital of the company. There can be various reasons that instigate managements/promoters to dole out hefty dividends. One of the most important among them is to maintain the consistency of dividend payment that managements seek. This has a definite positive side. It adds to the confidence that shareholders repose in the management/promoters who reward them despite having faced tough times on the business front. However, another reason why managements/ promoters declare dividends is to get paid by way of dividends and utilise the same amounts to release their pledged shares from the clutches of lenders. While this is good for promoters, it is detrimental to other shareholders, particularly the minority lot, who see the accumulated reserves of the company depleting only to benefit the promoters. Dipping into accumulated profits to distribute dividends is not a good sign, though this is allowed by the Companies (Declaration of Dividend Out of Reserves) Rules, 1975.

Company name

Face value

Operating Income-12

Reported PAT-12

Dividend Percent

Promoter Holding

Pledged by Promoters (%)

Kesoram Industries

10

5,918.20

-379.74

10

27.12

0

Aban Offshore

2

638.53

-120.73

180

55.11

32.45

Blue Star

2

2,700.28

-89.15

50

40.1

1.66

Jubilant Life Sciences

1

2,641.07

-80.92

300

49.04

4.32

Aurobindo Pharma

1

4,284.63

-42.61

100

54.76

22.28

West Coast Paper Mills

2

1,304.14

-33.56

10

54.77

0

Prism Cement

10

4,503.11

-30.01

5

74.87

0

Manugraph India

2

375.65

-23.8

125

57.06

0

Binani Industries

10

139.29

-22.59

30

52.28

0

Alkali Metals

10

59.25

-16.35

10

69.74

0

DCM Shriram Consolidated

2

4,942.56

-14.26

20

61.82

10.84

Everest Kanto Cylinder

2

310.95

-12.22

12.5

59.58

6.36

Gillanders Arbuthnot & Company

10

673.18

-9.27

5

68.74

0

Maharashtra Scooters

10

6.68

-6.49

10

51

0

Emkay Global Financial Services

10

84.82

-0.77

5

73.24

0

Standard Industries

5

12.47

-0.36

15

20.12

0

 

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