Top 500 firms raise Rs 20K-cr debt for dividend payouts

Aggressive dividend payouts by top 500 companies has seen 419 of them together borrowing around Rs 20,000 crore, while paying around Rs 1.2 trillion (Rs 1.2 lakh crore) in fiscal 2014, according to India Ratings.

"Several BSE 500 corporates, excluding banks and financial services companies, adopted an aggressive dividend payment strategy in fiscal 2014, despite a reduction in their net profit. "We expect 419 of these corporates to have paid an aggregate dividend of Rs 1-1.2 trillion in the fiscal and availed aggregate debt of Rs 18,000-20,000 crore for the same," as per the data collated by the rating agency.

The agency estimates 419 corporates availed Rs 19,180 crore of debt in fiscal 2014 to fund the aggregate dividend payment of Rs 1,04,900 crore. The trend of dividend payment behaviour over fiscal 2009-fiscal 2013 suggests that in most instances cash flow from operations was adequate and instances of debt requirement declined steadily from fiscal 2011-fiscal 2013.

"However, the total quantum of debt needed rose sharply in fiscal 2013 (after declining in fiscal 2012) due to an increase in dividend payments and a reduction in net profit. As many as 37 public sector units among the 419 corporates paid aggregate dividend of Rs 45,060 crore in fiscal  2013, and of these, eight of them had to borrow Rs 12,890 crore to make the payments.

However, considering the sovereign linkage of these companies, their credit profiles are unlikely to be impacted, it added. But more worrisome may be the case of 12 private corporates with high leverage (above 5 times) which could have borrowed an estimated Rs 2,770 crore to pay dividends.

Lenders have to watch out for corporates whose cash flow from operations (CFO) is negative or have CFO below the amount of divided paid, while PAT may be positive. In some of these cases, dividend payments could be financed by debt, even when financial leverage is high.

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