Govt needs to amend the Companies Act before arm-twisting state-owned cos for dividend payout


ual itch, as it were, this time around has assumed dangerous proportions with the government toying up with the idea of mandating state-owned enterprises to pay a minimum dividend of 30% on equity or of post-tax profits whichever is higher.

It must squelch the idea forthwith. First, it trivializes incorporation in general and the much-touted navaratnas and mahanavaratnas in particular. Secondly, it reduces companies to the level of partnership firms where partners annually sit down to take stock and share the spoils at the specified rates.

In a company, it is for the board of directors to take a call on dividend on holistic appreciation of future requirement for funds, need to keep the shareholders in good humor etc.

Furthermore, in a listed company, which many of the public enterprises are, the directors reckon, if slightly selfishly if not irrationally, that market in any case rewards the shareholders with capital appreciation. Be that as it may.

Nor is a company the same as a mutual fund. A dividend mutual fund scheme, as opposed to a growth scheme, is obliged to wipe its slate clean and not retain anything because it is after all a collective investment scheme with no other mandate than to invest in the stated investment avenues. But a company is a different kettle of fish with vision beyond the immediate or the annual.

The annual itch to lay claim on state enterprises by way of dividend hides a festering dithering—to disinvest or not. The denouement is postponed during the course of the year a number of times with or without valid reasons so much so that when the year-end comes, the government indulges in helpless handwringing and resorts to arm-twisting to get at least something out of the companies in which it has stakes.

If a garden variety shareholder can cash in at the bourses so can the government as a dominant shareholder though not necessarily at the bourses. As the Economic Times editorial of 11th January 2016 rightly suggests, the government could have offloaded its shares at a discount to their fair value to the employees provident fund organization. It would have served two purposes—take disinvestment forward and goad provident funds which are reluctant to embrace equity albeit gradually.

The minimum dividend formula in addition bristles with many ambiguities. How would the equity be computed? Face value, which is what companies in India pay dividend on, or the book value per share. It would be another matter if the government were to mandate through an express amendment to the Companies Act, 2013 that a minimum dividend must be paid out of profits by every company. And that can be 30% of the post-tax profits.

That would salvage something for shareholders who have had the misfortune of nursing their investments patiently in the hope that either the company would reward them with dividend or generous buyback offer. But to extract something from state enterprises through a questionable of not surreptitious diktat is simply not done. Government having its way in state-owned enterprises through diktats is as reprehensible as dominant shareholders especially in foreign collaborations undermining company law through shareholder agreements.