Dividend distribution restriction required in equities.

 

Dividend distribution restriction required in equities.

SEBI should come with some restrictive norm for dividend distribution in Equities.

Dividend policy is laid down by company board and management. Generally mid and small companies do not pay dividend but there is no rigid regulation that they can not pay.

Dividend is taken as marketing tools by some companies as many people think any dividend paying company is a good one. They flock for it which encourages more buying activities for such shares and in turn helps the price rise in secondary market.

SEBI should have two norms: (1) Any company which is highly leveraged i.e., has more debt and high interest pay-out cannot give dividend till it is crosses a minimum level of interest coverage ratio (may be 3 times). This level has to be maintained whenever dividend is decided.  (2) Any company should have enough revenue reserves accumulated in their balance sheet which should be some multiple of the annual interest pay-out (may be 3 times). This level has to be maintained whenever dividend is decided.

These steps will help in ensuring lesser NPAs in the books of banks. Companies will also have enough cushion to tide over bad year if any (like this year). It will also ensure the promoters with mala fide intention will not gain at the cost of lenders. It will also help normal investors to stay away from such companies who are getting investors only because of dividend. They will have safer ,more stable and profitable companies to invest. The price discovery in stock market will be with some logics (at least there will be some improvement).

The biggest risk in India is not business risk or economic risk or market risk but integrity risk of Promoters and Bankers.  Common savers in debt (Bank FD) or common investors in equity needs to be safeguarded from any future causality done intentionally to due to mis adventurism of promoters and bankers.