This year’s Fortune India Next 500 list is unusual for multiple reasons. First off, there is a 65% fall in the combined profit of the 500 companies from the year-ago period. This is the highest fall in profit since the launch of the list in 2015.

The reason for this dismal performance would seem to be the implementation of the goods and services tax in July 2017 and the aftermath of the demonetisation announced in November 2016. After all, the list has been made using the firms’ financial data for the fiscal ended 2018. A closer look will reveal the true reason: over leverage, where the debt of a company exceeds its equity. The debt of Tata Teleservices (Maharashtra), which saw its losses widen to ₹9,841 crore from ₹2,356 crore in FY17, stands at ₹15,314.2 crore. The debt of Aban Offshore, the next most over-leveraged company, is ₹13,740.1 crore. Six companies, including these two, account for 60% of the combined loss this year. You get a true sense of the situation when you learn that the combined profit of 435 companies on the list is ₹38,320 crore and the combined loss of the remaining 65 is ₹32,700 crore.

The difference is only ₹5,620 crore. Of the 65 loss-makers, 48 posted losses last year, too. But what is staggering is the rise in their cumulative losses from ₹11,671 crore to ₹29,315 crore. The remaining 17, whose losses stand at ₹3,385 crore, had profits of ₹478 crore in FY17. The year saw 26 profit-makers clocking cumulative profits of ₹1,653 crore; last year, their losses stood at ₹1,767 crore. This year’s list saw a larger churn compared to last year—163 companies came into the list this year compared with last year’s 118. A decline in revenue cost 24 companies their spot on the Fortune India 500 list, 2017, and these figure in this year’s Next 500 list.

As this year’s Next 500 list comes a quarter early, the churn was expected as many unlisted midsize companies are yet to file their financials to the Registrars of Companies. But what remains unchanged is the fact that the list is quite diversified compared to the Fortune India 500 list of 2018. Indian Oil, the numero uno company on the 500 list, recorded revenues of ₹4,24,321 crore in FY18. This works out to 76.3% of the total revenue of the Fortune India Next 500 list of 2019. Similarly, Indian Oil’s profit of ₹22,189 crore is 3.95 times more than the total profit of the Next 500 companies put together. A good example of how size matters. This big difference points to the challenges these midsize companies face, such as pricing power and advantage of scale.

The manufacturing sector with 365 companies accounted for an eye-popping 73.2% of the total revenue of the Fortune India Next 500, while services (96), and diversified and construction companies (39) accounted for 18.5% and 8.4%, respectively. It may seem the services sector is gaining ground with a relatively higher revenue share of 18.5% this year compared to 16% last year, but what needs to be seen is the number of companies. Last year, 383 companies represented the manufacturing sector, while the services sector had 80 companies.

The total dividend outgo fell 32.3% from ₹2,626 crore to ₹1,779 crore. It may be argued matters are better this year, because last year’s decline was 62.8%. But it must not be overlooked that this time only 69 firms have rewarded its shareholders compared to 111 in 2018 and 283 in 2017.

Ind-AS—the new accounting standard—is partly to blame for the fall. Instead of accounting for dividend in the year it was proposed, the new rules call for doing it in the year it is paid. For instance, this is how equity dividend is treated in the annual report of Reliance Industries, one of the top dividend payers in the country.

In the annual report for FY18, information pertaining to equity dividend is noted under ‘events after the reporting period’: “The Board of Directors have recommended dividend of ₹6.00 per fully paid up equity share of ₹10/- each, aggregating ₹4,281 crore, including ₹728 crore dividend distribution tax for the financial year 2017-18, which is based on relevant share capital as on 31st March, 2018.”

The next sentence almost reads like a disclaimer: “The actual dividend amount will be dependent on the relevant share capital outstanding as on the record date/book closure.”

While the new rules emphasise actual payment and not just accrual, the issue is that equity dividend for the previous fiscal year paid in the subsequent one is merely an accounting entry now—a pointer to the company’s performance in the previous year.

For the complete Fortune India Next 500 list, click here.

This was originally published in the March 15 - June 14, 2019 special issue of the magazine.

Follow us on Facebook, Twitter & YouTube to never miss an update from Fortune India. To buy a copy, visit Amazon.