Dividend Distribution Policy Disclosure A Status Check Corporate Governance Research Private and confidential Proxy Advisory Services For limited circulation only Corporate Governance Scores Stakeholders Empowerment Services 2012 – Stakeholders’ Education 2013 | All Rights Reserved Dividend Distribution Policy Disclosure A Status Check 2018 EXECUTIVE SUMMARY • Like many other regulations compliance status of Regulation relating to disclosure of Dividend Distribution Policy (DDP) has been good if not excellent. • Data analyzed by SES, once again reveals a sad story that while compliance level is good, its usefulness is limited as compliance is on technical level but not in the spirit of the law. • Such disdain for law makes regulators job rather difficult as it not only requires monitoring but also enforcement. • SES is of the opinion that regulator SEBI needs to pull up few companies to ensure that compliance is in spirit of law. • It seems that India Inc is unwilling to give up its love for Rule based regulation and go for principle-based regulation. SES would urge all those proponents of principle-based regulations regime to urge India Inc to learn to follow regulations in spirit rather than in letter, else failures would never allow us to reach to principle based regulation regime. SES itself is a votary of principle based regulations, but feels that India Inc lets us down and defeats their own case and harm all stakeholders. INTRODUCTION Distribution of dividend is entirely the prerogative of the Board of Directors of a company. While law requires final dividend to be approved by the shareholders at AGM, there is no legal requirement to have interim dividend approved by the shareholders. Therefore, it can be said that effectively, shareholders do not have any say in the distribution of dividend. What is the amount of dividend that a company pays, or shareholders can expect, is one of the important factor amongst host of other factors for investment decision. Can shareholder rely on past dividend distribution to guide them for future dividend? Will it be a reliable parameter? In the opinion of SES, future dividend payment cannot be based on past payment alone. Even if the same is done, it will vary according to assumption or expectation of individual investor based on personal opinion. Should such an important factor, which impacts valuation of listed shares be allowed to be based on individuals hope and expectations? Answer is; certainly not in an advanced capital market. There must be a link between performance of company, its investment plans and dividend distribution. There is no one better than the Board of a company to have a full view and decide payment of dividend. However, the Board cannot function in vacuum with whim and fancy, their decisions need to be governed by and must be in line with declared policy. While in other developed economies Dividend Policy has been in vogue for long, in India it was almost unknown till recently, barring few exceptions. To fill the gap and bring Indian disclosures at par with international best practices, Securities and Exchange Board of India (SEBI) amended, SEBI (Listing Obligations and Disclosure Requirements) Regulation 2015 by inserting a new Regulation 43A relating to Dividend Distribution Policy (DDP) w.e.f. 8th July, 2016. This mandated dividend distribution policy to be disclosed in the annual report of the company or on the company’s website for dissemination to the investors at large enabling them to take informed investment decisions. Though the parameters mandated by SEBI could still be viewed as wide enough and giving powers to the Board to define the dividend distribution policy widely, it is a step in the right direction to hold the Board accountable in case of any irrational decision / deviations from the policy without any rationale. To begin with, SEBI had mandated only top 500 listed companies to disclose DDP, FY 2016-17 was first such year. This report is a status check on compliance of SEBI mandate. As usual, while the report finds that there is large scale compliance, yet again the compliance is in letter only and not in spirit, as most of the policies do not provide investors any meaningful information 2 Page © 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved Dividend Distribution Policy Disclosure A Status Check 2018 Regulation - 43A Dividend Distribution Policy - Link (1) The top five hundred listed entities based on market capitalization (calculated as on March 31 of every financial year) shall formulate a dividend distribution policy which shall be disclosed in their annual reports and on their websites. (2) The dividend distribution policy shall include the following parameters: (a) the circumstances under which the shareholders of the listed entities may or may not expect dividend; (b) the financial parameters that shall be considered while declaring dividend; (c) internal and external factors that shall be considered for declaration of dividend; (d) policy as to how the retained earnings shall be utilized; and (e) parameters that shall be adopted with regard to various classes of shares: Provided that if the listed entity proposes to declare dividend on the basis of parameters in addition to clauses (a) to (e) or proposes to change such additional parameters or the dividend distribution policy contained in any of the parameters, it shall disclose such changes along with the rationale for the same in its annual report and on its website. (3) The listed entities other than top five hundred listed entities based on market capitalization may disclose their dividend distribution policies on a voluntary basis in their annual reports and on their websites. SES EXPERIENCE During the Proxy Season 2017, SES has come across many cases of simple technical compliance of SEBI Regulations to disclose Dividend Distribution Policy (DDP). SES has feels that the many companies have misinterpreted the provisions of the law related to disclosures and have not provided adequate disclosures in the policy which the regulation has envisaged. This indicates that either the companies feel that their interpretation of law is correct, or it is case that they do not care about the law, for simple reason that there is no strict enforcement in past. SES is of the view that in the current scenario, where the government is acting strongly against violators of various laws, a day is not far off when action might be initiated against companies on this issue as well. BSE 500 COMPANIES - D OES DISCLOSURES BY THESE COMPANIES SERVES THE OBJECTIVE – Answer to the above question is No in majority of cases. Compliance is in letter, not in spirit. This report mainly analyses data on DDP pertaining to BSE 500 companies in detail. In addition a brief analysis of additional 256 companies beyond BSE 500 has been done simply because data was available in house as these 256 companies were covered by SES in Proxy Season 2017, in addition to most of BSE 500 companies. Data collected reveals that while most companies had disclosed their DDP on their website/ Annual Report as per the law, in majority of cases, the policy disclosed by the companies was just in technical compliance with the SEBI directive, without in any way helping the investors. Most of the policies disclosed are generic in nature and state all the available theory and parameters that are used for deciding payment of dividend without ascribing any value to threshold for payment or non- payment of dividend. SES understand that idea of market Regulator SEBI behind mandating Dividend Policy disclosure was to provide a tool in the hands of investors to estimate likely dividend based on available and disclosed financial performance and to question the management in case policy is not followed. In present form of disclosures, in most cases the investor can neither estimate dividend nor can question the Board as any action of Board on dividend will be technically complying with policy. Such technical compliance and resulting disclosures about DDP are examples of investors being failed by Board of a Company despite Regulator’s best intention. Note: Throughout this Report Rank is based on market cap as on 31st March’ 2017. 3 Page © 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved Dividend Distribution Policy Disclosure A Status Check 2018 TABLE # 1 COMPLIANCE STATUS OF BSE 500 COMPANIES % of Total (₹ in crore) Numbers Market Cap Out of 494 companies (ignoring merged or Market Cap delisted companies), only 445 companies, TOTAL 500 1,29,66,907 - reflecting 96.64% of total market cap of BSE Merged or delisted - Annex. 1 6 98,787* 0.76 500 companies have disclosed DDP, DDP Not disclosed – Annex. 2 49 3,36,506 2.60 however, out of this 445, only 129 Disclosed 445 1,25,31,615 96.64 companies’ which constitute 30% of total Disclosures in spirit of the Law market cap of BSE 500, are in compliance 129 38,79,030 29.91 Annex. 3 with spirit of law. Disclosures in technical compliance with the Law 316 86,52,585 66.73 Total 316 companies (66.73% of Market Cap Annex. 4 of BSE500) have disclosed DDP which *As per last available data explains all the theory about DDP but do no help investors in any manner to predict or calculate expected dividend based on performance and financial position of the Company. While close to 30% have given DDP in spirit of law, about 49 companies, which form about 10% of the sample by number, have not disclosed DDP, hence non-compliant with the law. While these companies by number are 10%, in terms of market cap they represent only 2.6% of market cap indicating most of these companies must be part of bottom half of the sample.