Amid shareholder complaints about many companies refusing to pay dividend despite having extra cash, markets regulator Sebi has made it mandatory for the top 500 listed firms to have a 'dividend distribution policy'. The new norms will not force companies to pay dividend but will help investors get a clearer picture on returns from their investments in such listed firms and also identify stocks matching their investment objectives.
Notifying the new norms, which were earlier approved by Sebi's board, the regulator said the companies will have to list out the circumstances under which the shareholders may or may not expect dividend. Besides, the policy will need to spell out the financial parameters as also various internal and external factors to be considered for declaring dividend.
Under this policy, the companies will have to inform the shareholders about how they aim to utilise extra profits and the parameters to be adopted with regard to various classes of shares. The policy will need to be disclosed by the companies in their annual reports and on their websites. To start with, top 500 companies in terms of market capitalisation (as on March 31 of every financial year) will need to frame the dividend distribution policy while the same may apply to other companies at a later date.
"Listed entities other than top 500 ones based on market capitalisation may disclose their dividend distribution policies on a voluntary basis in their annual reports and on their websites", Sebi said. .
While dividend payment has been in vogue for many decades, the move is expected to help investors identify and understand the potential of returns on investments made in a company. The decision follows complaints from various investor groups that the companies were not distributing their extra profits among shareholders.
Countries such as Brazil, Chile, Venezuela, Columbia and Greece are said to have made it mandatory to pay dividend to shareholders, depending on the size of profits. On the one hand, mandatory dividend payout protects the cash flow rights of minority shareholders, but at the same time they can distort investment plans of the companies.
The current regulations in India require the companies to disclose their dividend policy as also the rate of dividend, if any, for the past five financial years. However, it was not mandatory as of now to have a dividend policy although some listed companies have formulated such policies on their own.