The move is aimed at helping investors get a clearer picture on returns from the investments made by them
Capital market regulator Securities and Exchange Board of India, on Thursday, cleared a proposal directing top 500 listed companies to put in place a 'dividend distribution policy', amid concerns that firms were reluctant to share extra profits with investors.
The move is aimed at helping investors get a clearer picture on returns from the investments made by them in listed companies as well as help them identify stocks that match their investment objectives.
The proposal -- which would require the top 500 listed companies to formulate and disclose their dividend distribution policies in their annual reports as well as on their websites -- was cleared by the Sebi board on Thursday.
The top 500 would be based on market capitalisation.
According to the watchdog, the policy could include circumstances under which their shareholders can or cannot expect dividends, financial parameters that would be considered in deciding the dividends, among others.
Besides, the company can take into account the internal and external factors that would be considered for declaring dividend as well as the policy as to how the retained earnings would be utilised.
Companies would also have to provision with respect to various classes of shares.
"When the company proposes to declare dividend on the basis of parameters other than what is mentioned in such policy or proposes to change its dividend distribution policy, the same along with the rationale shall be disclosed," Sebi said in a release.
The regulator noted that such a step would help investors in taking well informed investment decisions.
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.
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.
There have been complaints from various investor groups that companies were not distributing their extra profits among the shareholders.
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.
