Mandatory 30% Dividend Payout to Government of India by Central Public Sector Units: is it Justified?

Dividends are an important financial measure for signalling the prevailing health of a company to shareholders, investors, lenders and for the market to gauge the conservatism/ aggression and soundness of a company with respect to future growth. The dilemma that decision-makers are perennially confronted with is the quantum of dividend disbursement and the ‘Now or Later’ question, which stems from the classic trade-off between maintaining status quo and growth. From the viewpoint of financial prudence, dividend declaration should be in conformity with the free cash flow (FCF) strength of the company. In recent years, some of the leading central Public Sector Units in India (CPSUs) have been declaring high dividends in response to a directive from the Ministry of Finance mandating profit making companies to declare dividends at minimum 30% of after-tax profits or 30% of original equity capital, whichever is higher. The authors critically examine the prudence of the dividend policy of the Government of India for CPSUs from the organizational perspective using Agency theory, Signalling theory and Outcome
based control mechanisms.
JEL Classification: G30, G32, G35, G38.
Keywords: Central Public Sector Units, Dividends, Signalling, Agency Theory, Outcome based Control

Section 1-Introduction
Until the mid-1980s, Central Public Sector Units (CPSUs) were a drag on the economy and the average return on invested capital was less than 2%. Times Read Full Article