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Indian blue chips turn to debt to pay dividends

57 of 500 biggest companies listed on BSE borrowed $3.5 bn in 2013 to to fund dividend payments.

By: Reuters | Singapore | Published:June 9, 2014 3:08 pm
In recent years, India has progressively loosened capital controls. (Reuters) In recent years, India has progressively loosened capital controls. (Reuters)

Top Indian companies are taking on more debt to pay dividends to their shareholders, analysts have warned, highlighting a trend that is weakening corporate balance sheets at a challenging time for the country’s economy.

During the fiscal year to March 31 2013, 57 of the 500 biggest companies listed on the Bombay Stock Exchange borrowed a total of Rs 191.7 bn (US$ 3.5 bn) to fund dividend payments, according to a study that India Ratings and Research published on May 23. India Ratings is the local arm of Fitch Ratings.

Another Rs 180 bn-Rs 200 bn of debt is likely to have been channelled to shareholders in fiscal 2014, far higher than the Rs 40 bn-Rs 70 bn in the previous four financial years, the study has found.

The dividend payments show that Indian companies remain determined to look after their shareholders even as a slowing economy puts pressure on free cash flows. However, taking on additional debt to pay shareholders becomes potentially dangerous when a company is already highly leveraged, analysts said.

Of the 57 companies that borrowed in the past fiscal year to pay dividends, 14 have net debt equal to more than 5x their earnings before interest, tax, depreciation and amortisation, according to India Ratings. A ratio of over 5x typically indicates a highly leveraged company.

India Ratings did not name the companies. However, an analysis of public filings reveals that property developer DLF kept its dividend flat at Rs2 per share in fiscal 2013, despite an over 40% fall in profit after tax and negative cash flow from operations. DLF’s leverage ratio also increased to 5.8x Ebitda, up from 5.2x at the end of fiscal 2012, according to analysts.

Larsen & Toubro paid a higher dividend in fiscal 2013, even though analysts said the company’s net debt to Ebitda increased to 5.1x from 4.5x. Its cash flow was also negative.

Aluminium producer Hindalco shrank its total dividend payout, but returned 18.5% of profits to shareholders, up from 15.4% the previous year and its highest payout rate since at least 2006, according to company data.

Hindalco’s leverage increased to 5.9x at the end of fiscal 2013 from 4.2x 12 months earlier, analysts said.

Alphonso Richard Das, president – finance at Hindalco, said that the company borrows only against project financing, hence, he argued, the idea of increasing leverage to pay dividends does not apply to the company.

“A simple analysis of the dividend to the profit after tax and cash accruals of the company for the last seven years will show that the dividend payout as a percentage of profit after taxes and cash accruals is only 10 to 15%,” he said in an email response to IFR.

DLF and L&T did not respond to requests for comment.


Companies can pay dividends from either current profits or retained earnings. If their cash flows are negative, companies typically either tap into their reserves or take on additional debt to fund the payouts.

While equity investors expect to earn dividends on their investment, creditors are typically reluctant to fund payouts to shareholders, since it adds more debt to the company’s balance sheet. The slowdown in the Indian economy over the last two years has also added to credit risks for lenders, which face rising non-performing loans.

Analysts argue that lending to fund dividend payments also adds to the inefficiencies in India’s financial system, pointing out that the Rs191.7bn borrowed for such purposes could have been used, instead, to fund small and medium-sized companies, which have been struggling for capital lately.

Smaller companies have been among the worst hit as they face liquidity issues as banks became more cautious in lending and reduce their credit growth. Due to relationship issues, banks also generally prefer to lend to the top names.

“Bankers typically look at the debt-to-equity ratio, net worth or leverage to lend money to companies. They should actually be looking at the gearing and free cash flows as a better credit gauge,” said a Mumbai-based analyst.

The inefficient allocation of capital has long been a problem for India, where banks have been slow to stop lending to struggling companies, especially when the controlling shareholder is well known.

“The rule of thumb in India to lend to a company is the promoter’s profile rather than any key financial ratios,” said one loans specialist.

The India Ratings study analysed 419 of the top 500 companies listed on the BSE (excluding banks and non-banking finance companies). Of these 419 companies, 339 paid dividends in fiscal 2013.

In fiscal 2014, around Rs 180 bn-Rs 200 bn debt is likely to be borrowed to support dividend payments, the rating agency estimates.

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