NEW DELHI, June 23: Next time you receive your dividend cheque, make sure the company has paid out of the net profit and not by dipping into its reserves. For despite a erosion in earnings, a number of corporates have hiked their dividend payout in order to keep investors in good humour and preserve the stock value in light of the below par performance.

This effectively means that these companies have paid more than what they can afford to. However, little does the shareholder realise that a higher dividend in case of a poor performance means that the company is paying its shareholders out of their own funds, viz., reserves.

By dipping into its reserves, the company is also foregoing cheap funds for a long term. In the case of Century Textiles, the company could achieve only a net profit of Rs 2.67 crore for the year 1996-97 but maintained its dividend ratio at 60 per cent.

More, the company announced a bonus in a 1:1 ratio, thus further depleting its reserves. The company reported a net loss of Rs 31.51 crore in the second half of 1996-97.

With a 10 per cent dividend tax, the total payout on account of dividend will work out to nearly Rs 30.7 crore, which means that the company would have to shell out Rs 28.03 crore from its own pocket. The bonus would further add to the pressure on its reserves. The reserves have fallen from Rs 1036.72 crore in 1995-96 to Rs 999.85 crore in 1996-97 and if the bonus issue is accounted for, reserves would further drop to Rs 925.3 crore.

Interestingly, the list of such companies has a majority of finance firms. Out of 14 companies, five companies are NBFCs, namely Sterling Securities, Jenson & Nicholson Financial Services, Brescon Financial Services and Nucleus Securities. Sterling Securities has reported a net profit only Rs 10 lakh but the dividend payout is higher by 17.8 times at Rs 1.78 crore!

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.