Despite incurring losses in FY24, several firms have proposed paying dividends, pending shareholder approval. Interestingly, promoters hold stakes ranging from 20% to 75% in these firms, making them significant beneficiaries of the dividend payouts in certain cases.
Some of the loss-making companies that plan to pay dividends include Gujarat Alkalies and Chemicals Ltd, Kolte Patil Developers, Mahindra Lifespace Developers, RHI Magnesita India, Shreyas Shipping & Logistics, Hinduja Global Solutions, Bajaj Healthcare, and Arvind Fashions among others.
loss-making companies can indeed pay dividends as long as they have profits on a standalone basis, experts explain. Under the Companies Act, there are no specific restrictions on dividend payments in the presence of standalone profits. However, for the top 1000 listed companies, dividend distribution is governed by a Dividend Distribution Policy.
Moreover, dividends can also be funded from free reserves even if the company is facing losses. A recent example is Gujarat Alkalies and Chemicals, which reported a loss of Rs 132.24 crore in FY24. Despite this, the company declared a dividend of Rs 13.85 per share. Promoters, holding approximately 46% stake, received Rs 47 crore out of the total dividend payout of Rs 101.71 crore.
Similarly, Kolte Patil Developers reported an annual loss of Rs 71.26 crore but announced a dividend of Rs 4 per share. Promoters hold about 69.45 percent stake in the company. The total dividend distributed was Rs 30.21 crore, with promoters receiving Rs 21.11 crore.
Mahindra Lifespace Developers distributed a dividend of Rs 41 crore, of which promoters' shares amounted to Rs 21.08 crore. Hinduja Global Solutions distributed a dividend of Rs 32.56 crore, with promoters receiving Rs 22.05 crore.
Makarand Joshi, Founder of MMJC and Associates, said on the legal front, loss-making companies need to ensure compliance with all applicable laws before declaring dividends.
Apart from the legal framework, companies (both profit and loss-making) need to consider aspects such as expansion plans, market price, and geopolitical situations leading to escalations in the cost of managing the business, before recommending dividends, say market participants.
Companies also have the flexibility to pay dividends using profits from previous years without any limit on the amount.
However, when dividends are paid from general reserves, there are specific restrictions on both the amount and the rate of dividends. In either scenario, provisions for depreciation must be accounted for, and any losses incurred in the current or previous years must be adjusted before dividends can be distributed.
Also, approval from shareholders is mandatory if dividends are declared from general reserves. In contrast, dividends funded from profits of previous years can be declared as interim dividends by the board without needing prior shareholder approval, said Joshi.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before making any investment decisions.
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