Karachi: Out of 562 listed companies, 246 paid dividends to their shareholders while as many as 114 did not despite earning profit, according to Karachi Stock Exchange (KSE) Annual Report 2014.
Whether the corporates earning profit should be forced to pay dividend or the decision between payout and retention should be left to the company boards has remained a subject of intense debate.
Since the government holds more than half the total stock holdings in the market and the dividends received from high return yielding stocks is the major source of revenue for the state, non-payment of dividend is a big drag on its receipts.
For the year 2014-15, the government set a target of Rs82 billion as receipts from dividend on its investments; the sum was revised upwards from 2013-14 dividend receipts at Rs76bn.
Back in 1999-2000, the government through the Finance Bill made it mandatory for all listed companies with free reserves of more than 40pc of the
paid-up capital to distribute at least 50pc of the company’s taxed profit in cash dividend to shareholders.
Many heads of corporates suspect that the government had introduced ‘compulsory dividend payout regulation’, less for the love of general investors and more to protect its own revenue receipts. But whatever the reason, the trick worked for a time.
In most board rooms of profit earning companies, it was thought wiser to reward the shareholders (when majority stake was vested in directors themselves). But heads at many major corporates dismissed the idea of arm twisting companies by the government and interfere in what they said was clearly the prerogative of the board of directors.
A major group with several profitable listed companies in textiles, cement and energy sectors, threatened to buy-back small shareholders’ equity and seek de-listing.
The group’s contention was that the law had become a bottleneck for the company’s expansion plans that required sums in billions of rupees. The thought of high valued dividend-yielding companies, seeking to step out, proved unnerving for the corporate monitors.
Under the provisions of the law, the regulators could not block the company’s exit from the bourses, but the fear was that if one ‘blue chip’ was allowed to go, many others would follow. It forced the government to quietly scrap the compulsory dividend payout regulation.
The KSE has, nonetheless, continued to demand the restoration of compulsory payout regulation in its budget proposals; it has repeated the plea in its proposals for the budget 2015-16, saying that the “measure had proved very effective as it resulted in the payment of additional cash dividend and “nullified oppressive practice of controlling shareholders.”
But the controversy rages.
A corporate lawyer said that he believed that the dividend payout should best be left to the company directors. Yet, he said that where companies fatten their reserves at the cost of investors, they ought to be made to share the fortunes with the shareholders.
Tariq Iqbal Khan, the former chairman of NIT — the largest mutual fund in the country — argues: “In a corporate democracy, the board is empowered to take decisions on company matters since the onus is upon the directors to protect the company assets, right of shareholders, employees and creditors.”
