Distribution of profits to shareholders

Recently the Board of Infosys has decided to distribute 70% of profits to its shareholders by way of dividends or buy-back.

This is a welcome move in the society, where most of the corporates does not part with the profits earned by them to its shareholders. They just do not want to part with the assets under their control. Many argue that there is need of further infusion of capital for expansion. But in real practice, we see cash spending on acquisition and/or diversification. More often than not, this diversification becomes die-worsification.

Profits earned belong to shareholders and they have the first right on it. There is adequate provision of raising funds by way of Rights to shareholders or even from the public. If there is requirement of funds for expansion, there are no dearth of options.

Further, adequate dividend distribution will lead to better distribution of cash with larger society. This will lead to improve the demand for goods and services. This will also reduce the accumulation of wealth in few hands.

Better distribution of income and wealth will improve the harmony in the society.

Govt. on its part should amend the companies Act to fix a minimum percentage of profits to be distributed to shareholders.

Business must contribute to the society to ensure its profits

A quote from Mahatma Gandhi says:

"While Business must make profits, it must contribute a part of it for the society which makes profit happen."

Though the quote is simple enough and idealistic, but it makes more economic sense in the words"society which makes profit happen". Most of our present day politicians fed by capitalists (one should not confuse it with free market economy, as free market economy ensures perfect competition and not monopoly or oligopoly) controlling the large corporates fail to understand the basic rule of economics i.e. "the marginal propensity to consume." 

This rule suggest that when income of a person changes, there is marginal increase in his spending too.  But his percentage of consumption changes according to his pent-up demand. Pent-up demand is a demand, which remain suppressed due to inadequate income. More the income-level of an individual is low, his pent-up demand is more and hence higher propensity to consume. 

Moreover, if law and order is unstable, income is also unstable. This instability lead to reduced consumption and more propensity to save.

This increased consumption lead to more demand for goods and services, which further leads to more capacity generation and ultimately more job creation. Better job creation also lead to improved law and order.

This is the underlying assertion of the quote, which means business must ensure that adequate money is left with the customers, who will buy goods and services produced by these very businesses.

The Businesses must spend on education of children from poor society, which will increase the skilled workforce required by them and increased income of this section will create the demands for goods and services. One-off feeding will not be able to achieve this.

The Corporate houses should also distribute adequate amount of dividends to its shareholders, as many of them are small shareholders and more cash in their hand by way of dividends will flow back to the market, resulting in increased demand for goods and services.