Sebi's new dividend distribution policy will ensure firms share earnings with investors

Amid concerns over companies refusing to share extra profit with investors, regulator Sebi has readied a new regulation mandating listed firms to put in place a 'dividend distribution policy'.

The new regulatory framework will be applicable to the top 500 listed companies based on their market valuation initially and would be later expanded to others.

A proposal in this regard would be presented before the Sebi's board next month, after which necessary amendments can be made to the Listing Obligations and Disclosure Requirements (LODR) Regulations, a senior official said.

The move is aimed at helping investors get a clearer picture on returns from the investments made by them in listed companies and such a policy would help investors identify stocks that match with their investment objectives.

Through this proposal, which is part of Sebi's Plan of Action for the current financial year, the capital market watchdog would seek to strike a balance between investor interest and not being prescriptive in terms of regulations for dividend payment.

While dividend payment has been in vogue for many decades, having a clearly-defined policy in this regard would help investors identify and understand the potential of returns on investments made in a company.

The policy would require listed firms to state circumstances under which investors can or cannot expect dividend payouts.

At the same time, Sebi would steer clear of any directive being given to companies to pay any particular dividend amount as it wants to focus on disclosures rather than being intrusive into financial decisions of the companies.

The proposal follows complaints from various investor groups that the companies were not distributing their extra profits among the shareholders.

Sebi is of the view that the companies should analyse if they have reinvestment opportunities where they can plough back their profits into their business, or whether they need to distribute dividend among investors.

Some of the 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 the minority shareholders, but at the same time they can also distort investment plans of the companies.

The current regulations in India requires the companies to disclose their dividend policy as also the rate of dividend, if any, for the past five financial years.

However, it is not mandatory as of now to have a dividend policy although some listed companies have formulated such policies on their own.

The proposed policy would need to be disclosed by the companies on their websites and in their annual reports.

The companies would need to state the circumstances under which investors can or cannot expect the dividend, financial parameters to be considered for a dividend, the internal and external factors to be taken into account as also a policy as to how the retained earnings would be utilised.