Most of us invest to increase our net worth. So when I invested in 1994 in Hdfc bank or in Hdfc in 1980, I was only hoping to increase my net-worth. However given Indian promoters -even evolved ones like Mr. Parekh did not use the money just for growth. We were happily paid a lot of dividend, and we enjoyed the cash flow -WHICH we actually did not need! How ironic.

Now there is a strong disincentive to pay dividends or even to do a buy-back. Govt of India is more and more Left oriented – so any money that changes hands has to be taxed. This is of course in line with Namo’s “will what i do put a smile on the poorest man in the country”.

If I were a promoter running a company which was giving an ROE more than 12% p.a. I should not be declaring any dividend. Just let the share grow in value. Let us say a person has invested Rs. 100,000 today…and it grows at 18% p.a. for over 25 years…with NO DIVIDEND…imagine the amount would be worth Rs. 65L IN 2044. Not bad at all.

However in India small companies do not have a very trustworthy balance sheet – so most investors prefer cash – dividend. However for those who remember Modigliani – Miller theory, we should understand that the price of the share should not matter. MM say that we should be indifferent to the cash pay out. I fully agree.

Why should I not be happy buying shares with the dividends I receive? well it is tax inefficient for sure. Dividends attract 20% tax..and if my personal dividend income is more than Rs. 1 million, I will need to pay 10% more tax. It is cruel, but true. Instead say the company decides to keep the cash with itself..what will happen? Nothing. The companies’ cost of borrowing will go down. This is because its net worth retained in the business will be higher. I would be happy if say Hdfc bank did not pay any dividend for the next say 15 years. I would have other cash dividends – which I would prefer taking. Similarly if Apollo Hospital, Indigo, etc. slashed the dividends it would do a world of good to their cash flow. They will be able to retire a big part of their borrowing. However not all promoters have taken big loans, so the company will have a huge surplus – and all this will surely get impaced on the price of the share…..