Dividends Deluge

Is India Inc likely to announce a flood of dividends?

The announcement in the Union Budget to tax dividends at 10% in the hands of shareholders has given rise to a new situation in markets. Although, this applies only to shareholders receiving dividends over Rs.10 lakhs per annum, most large shareholders, investors and promoters are likely to be affected. The question is will this lead to a deluge of dividends in the month of March? More so, since the new dividend tax kicks off from April 01st, it gives companies that window to declare tax-free dividends in the month of March itself.

Where are the cash flows?

 For the private companies, this may not be such an easy decision. Take the case of Infosys and TCS; both of whom are fairly cash rich. A hefty dividend payout to escape the tax will not go down well with investors. A high dividend payout is normally equated with saturated businesses with limited growth and expansion opportunities. Neither TCS, nor Infosys will like to be bracketed in that category. Their premium valuations will survive only as long as they are able to sell the growth story to investors. Regarding the other companies, the focus will be more on conserving cash and hence generous dividends just to escape tax may not be a great idea.

PSU companies may actually do it…

Most likely it will be the PSU companies that will make the best of this window. Firstly it allows the government to fill up a part of the funding gap through higher dividends payouts from PSUs. The government may be largely indifferent as both the dividends and the tax will accrue to them. Secondly, high dividend payouts will be a great idea for the government to monetize their holdings without worrying about divesting their stake. Cash rich PSUs like Coal India, HPCL, BPCL, and NMDC; among others may be the candidates to dole out bumper dividends to the government.

The futures discount story…

Normally, the Nifty futures trade at a premium to the spot Nifty to reflect the cost of carry. However, during the month of March the Nifty Futures tend to quote at a discount to the spot price due to dividend payout adjustments. This time the March series is indicating a much higher discount on the Nifty futures indicating that dividend payouts may be slightly more aggressive this time around.

However, we believe that the impact of the 10% tax on dividend policy will be minimal. The DDT hardly made a difference to the dividend paying practices of Indian companies or to the average dividend yield. What may happen is that promoters may look at other options to reward shareholders like through stock dividends or through buy-backs. That will surely open up an interesting aspect of the market! ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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