Sebi's plan to mandate dividend policy disclosure may not be right

No law or regulator should mandate anything which at the best of times runs the risk of non-compliance due to sheer impossibility or sheer wishy-washy nature of the disclosure. The Securities and Exchange Board of India (the Sebi) is seriously mulling a proposal to mandate disclosure in prospectus in the run up to an IPO of the company’s dividend policy—at what profit or reserve levels it would declare dividend and how much i.e. the payout ratio.[caption id=“attachment_2447836” align=“alignleft” width=“380”]  New norms? Image courtesy ibnlive.com[/caption] The market regulator has been propelled into action following the company owning IndiGo Airlines hefty dividend of 80 percent just prior to the ongoing IPO, leaving the company devoid of reserves, in fact nursing a bruised or negative reserves. The Sebi is concerned that this will leave nothing on the plate for the subscribers i.e. the newcomers becoming members of the company through the IPO process. That the Sebi’s concern is completely misplaced is clear from the fact that the anchor investors will be paying a whopping Rs 765 or so per Rs 10 share. To be sure, institutional investors have deep pockets but that does not mean they are not interested in returns on their investments. What it means is they being shrewd investors do not look for dividend as the main source of return on their investments but instead look to capital gains in the bourses sooner or later. Though it might sound a little cruel when investors are asked to collect their rewards from the market, the grim reality is dividend has long ceased to be the main motivation for equity investments. Be that as it may. In any case, it is difficult to make a commitment on this score what with financial results always being in the realm of uncertainty. A company may be in a position to pay a 100 percent dividend but it may need to plough back its profits if opportunities are knocking at its doors. In that event, it might settle for a bonus issue in order to conserve cash. Companies also see merit in buying back their own shares if it has no immediate use for its burgeoning bank balance. The short point is unlike debenture holders, shareholders are compensated or rewarded in diverse ways, and it would be difficult to straight jacket the issue. At any rate, investor unfriendly companies’ shareholders vote with their feet, and therefore companies no longer take shareholders for granted. Proxy advisory firms and mutual funds are at last digging themselves in. This is a happy augury. They keep an eagle eye on listed companies especially the self-aggrandizing activities of the promoters and foreign collaborators. Listed companies dare not give a short shrift to small investors especially if mutual funds have invested heavily in them. Proxy advisory firms do the good job of alerting the public while mutual funds threaten to vote with their feet. Incidentally, it is common for promoters to help themselves to a hefty financial reward in the run upto IPO. In fact such a hefty reward presages an upcoming IPO. Colgate Palmolive made its IPO in 1977 in India. This was preceded by a 132:1 bonus issue as the American parent company did not want the newcomers to enjoy at their expense. In addition, the parent company, which practically was the sole shareholder in the closely held company before it got listed, also helped itself to a hefty cash dividend. In fact such lavish self-reward, so to speak, is the international norm and India is no exception. So much so, textbooks teach students how existing shareholders should guard their turf before newcomers if not Johnny-come-latelies lay claim to the results of hard work done by them in the past. What Indigo promoters have done therefore is entirely par for the course. Yes what the Sebi must do is to address the festering problem of premium. The Chinese government at one point imposed a ceiling of 23 times the earnings as the ceiling for offer price. Be that as it may, in India ever since free pricing through 100 percent book building became the norm, small investors willy-nilly have had to follow anchor investors or Qualified Institutional Buyers (QIBs) pied piper like and cough up mind boggling premiums. More than 80 percent of IPOs have not lived upto their promise in that the share market has not shared the optimism of the QIBs. That has hurt the small investors more. Sebi should address this issue rather than seeking to do the impossible – companies may like good boys disclose their dividend policies but what if they fail to live upto them either wantonly or due to genuine reasons.