India’s dividend-disclosure dilemma: Meaningful reform or tokenism?

While long-term optimism about India’s trajectory persists, dividend-seeking investors are left wondering: Are companies truly creating long-term value by retaining earnings, or are they simply masking inefficiencies with self-serving projects?

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Unlike some global counterparts, India does not mandate a fixed dividend payout ratio. Listed companies often justify withholding dividends by citing growth opportunities, but this raises concerns about corporate governance and the “agency problem,” where managers prioritize interests other than shareholder returns.

According to SAHA, an Istanbul-based corporate governance and credit rating agency, India’s corporate governance reputation is subpar—comparable to countries like Brazil, Chile, and China. Ironically, while these nations enforce mandatory or semi-mandatory dividend policies, India’s more flexible approach has only fuelled investor frustration.

At the 2024 annual general meeting of Godfrey Phillips, shareholders questioned why promoter remuneration had doubled while dividend payouts shrank, highlighting concerns about companies hoarding cash rather than distributing profits.

To address this, India’s markets watchdog, the Securities and Exchange Baord of India (Sebi) introduced a regulation requiring the top 500 firms to disclose the conditions under which they would distribute or withhold dividends. Notably, Sebi did not mandate payouts but instead prioritized transparency, aiming to enhance the information available to investors. In theory, this disclosure-based approach would help shareholders better assess a company’s dividend strategy and make informed decisions.

Initially, the regulation was welcomed for bringing much-needed clarity to an area where companies previously had significant discretion. A study even found that stock prices rose following the announcement, reflecting investor optimism about improved transparency. However, as companies began publishing their policies, enthusiasm waned. Most disclosures were vague and non-committal, offering little beyond legal compliance. As a result, stock prices declined, underscoring a key takeaway: transparency, without meaningful action, is unlikely to meet investor expectations.

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But that is not all. Sebi’s attempt to improve corporate governance had an unexpected outcome—companies significantly increased their dividend payouts following the regulation. This was counterintuitive, as the regulation aimed to enhance transparency, not mandate higher payouts. In practice, instead of providing meaningful disclosures, many firms simply raised dividends while keeping investors in the dark. 

Theorists suggest that corporate behavior is often shaped by “regulatory threats,” meaning companies may have perceived Sebi’s move as a precursor to stricter rules and adjusted accordingly. Yet, the prevalence of hollow disclosures highlights persistent governance concerns.

In countries where a fixed percentage of profits must be distributed as dividends, the system is clear-cut—investors know what to expect. This predictability is particularly attractive in markets where companies tend to hoard cash or prioritize reinvestment over shareholder returns. 

India’s dividend payout issue runs deep, and mere disclosure requirements cannot resolve it. Companies can easily sidestep such rules with superficial compliance. However, imposing a mandatory payout ratio isn’t a perfect solution either—it could hinder firms in capital-intensive sectors that need to reinvest for growth and innovation.

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India’s disclosure-based approach was intended to strike a balance between investor expectations and corporate flexibility. Instead, it resulted in little more than a box-ticking exercise, reinforcing shareholder concerns about potential fund misallocation.

Pratibha Kumari is assistant professor at TAPMI Bengaluru. Nishat Alam Choudhury is a postdoctoral researcher at Aalto University, Finland.