The Council of the Institute of Company Secretaries of India has issued the above Standard and the same has become operational effective from January,1, 2018. At the outset, it is clarified that the Standard is voluntary in the application and does not carry any mandatory force unlike its predecessors SS-1 and S-2 respectively on Board and Committee Meetings and General Meetings of members.
The Standard substantially replicates the provisions of the legislation on the subject. Whether it is at all necessary to reproduce the existing facets of the law in the Standard is a matter of debate, given the fact that the Board of a company has to be steadfastly compliant with the law while proceeding with the subject of declaration of dividend. Be that as it may, in this exposition we shall focus on some of the fine print in the Standard and also deal with those aspects of the Standard which are not consistent with the provisions of the Act, notwithstanding the averment in the Standard that the principles enunciated therein are in conformity with the provisions of the Companies Act, 2013 (herein after 'The Act').
'Dividend' defined: As the definition provided by Section 2(35) in the Act is inclusive and states that dividend includes interim dividend , it does not throw any insights on the concept. The Standard lends a definition to the Expression and refers to it 'as a distribution of any sums to members out of profits and wherever permitted out of free reserves available for the purpose'.
From the above, it follows that:
a) Dividend represents distribution of any sums which are derived out of profits of the company which are available for distribution.
b) That the distribution can be out of profits for the year or out of undistributed profits of yesteryears forming part of the Company' s free reserves. Where it comes to distribution out of past profits , it is necessary that the amount utilized for distribution merits consideration for treatment as 'Free Reserves' as defined by Section 2(43). Hence considering the exclusions in the said definition, amounts representing unrealized gains ,notional gains on valuation of assets ,changes in carrying cost of an asset or liability, any surplus in the profit and loss Account arising on measurement of the asset or liability shall not be eligible for utilization for payment of dividend.
Final Dividend and Interim Dividend defined
Although under the Statute, interim dividend is included within the term 'Dividend', the Standard provides a definition for the above two terms primarily for the purpose of distinguishing the manner in which these are declared. Whereas Final dividend has been defined to mean dividend which is recommended by the Board and declared by the members at an Annual General Meeting (AGM),Interim Dividend has been referred to as dividend declared by the Board of directors. Admittedly under the present law, there is no distinction between interim and final dividend in that both constitute a debt on the company, it is pertinent to note that declaration of dividend is the ultimate prerogative of the shareholders and hence in deference to the provisions contained in Section 102(2)of the Act, interim dividend declared by the Board shall still be subject to confirmation by the shareholders. As Section 102(2)(a)(ii) provides for declaration of dividend as part of the 'ordinary business' to be transacted at the AGM without distinction as between interim and final dividend ,confirmation of the interim dividend declared by the Board by the shareholders at the AGM would still be required , notwithstanding that this may only be an idle formality ,given that interim dividend once declared represents a debt on the Company.
It is pertinent to note that under the predecessor 1956 Act , the amendment to the definition of the term 'Dividend' in Section 2(14A)to make it inclusive to cover interim dividend was made with effect from 13.12.2000 by the Companies(Amendment)Act,2000.Prior to the above amendment, a shareholder did not get any vested right under directors' resolution for payment of interim dividend. The interim dividend was revocable and the vested right to dividend to the shareholders could arise only on declaration of dividend at the general meeting of the shareholders as held in CIT v Express Newspapers Ltd.(230 ITR477(SC).Reference may also be made to the ratio in Lagunas Nitrate Co.Ltd v Schroeder & Co.Schmidt (All ER Rep.Ext.1349).
In the wake of the above discussion, the view that emerges is that the interim dividend declared by the Board will yet have to be subjected to confirmation by the shareholders .We are therefore respectfully in disagreement with the view taken in the Standard that approval of members is not required for declaration of interim dividend at the AGM.
Pre-conditions to declaration of Dividend(Paragraph 1.1.2)
This paragraph debars a company from declaring any dividend , if it has defaulted in-
a) Redemption of debentures or
payment of interest thereon or creation of debenture redemption reserve
b) Redemption of preference shares or creation of capital redemption reserve
c) Payment of dividend declared in the current or previous financial year(s),or
d) Repayment of any term loan to a bank or financial institution or interest thereon till such time the default is subsisting.
No dividend shall be declared by the company during the extended time, if any, granted by the Tribunal/Court for repayment of above liabilities.
It is pertinent to note that none of the fetters of the genre as stated above have not been stipulated by the Act. However, the caveats imposed though not in line with the Act are justified in practice , as an advocacy for financial discipline , given that dividend should be declared by the company only after meeting its obligations towards repayment of debts etc.
Interim Dividend can be declared during the period from closure of the financial year till the date of the AGM(Para 1.1.4)
Section 123 of the Act as it stands today does not clarify whether it would be in order for the Board to declare interim dividend after the close of the financial year.
The Companies (Amendment)Act, 2017 through an amendment to subsection(3)to Section 123 has made it possible for the Board to declare an interim dividend after the conclusion of the financial year but before the date of the company' s AGM.
The above Para in SS-3 is in line with the amendment to the Act which is however, yet to be notified.
Interim dividend shall not be declared out of Free Reserves(Para 1.2.2)
This para postulates that in the case of inadequacy of profits or loss during a financial year, interim dividend shall not be declared out of Free Reserves. It is submitted that this para runs in contradiction to para 1.1.4 of the Standard which , inter alia, provides that where losses have been incurred during the current financial year, interim dividend shall not be declared at a rate which is higher than the average dividend declared in the immediately preceding three years.
We would state that the proviso under the amended Section 123(3) of the Act which has not yet been notified, also clarifies the position that, where a company has incurred loss during the current financial year, up to the end of the quarter immediately preceding the date of declaration, such interim dividend shall not be declared at a rate higher than the average dividends declared in the immediately preceding three years.
Interim Dividend shall be declared at a Meeting of the Board (Para 2.4)
This Para, inter alia, contemplates that while final dividend is recommended by the Board and declared by the members, approval of members is not required for declaration of interim dividend. In the earlier part of our discussion we have stated that for the reasons explained , it would still be necessary to seek the confirmation of the members at the AGM for the interim dividend declared by the Board.
The above Para in SS-3 further provides that where the company has an Audit Committee, the committee shall consider the financial results which shall thereafter be submitted to the Board for its consideration and declaration of interim dividend.
In our view, the presumption that the company should, as a prelude to the declaration of interim dividend draw up its interim financial statements which shall be subjected to a review by the Audit Committee is misplaced.. Considering the fact that the Board has to only satisfy itself that the decision to declare an interim dividend is justified by the availability of profits during the current financial year, there is nothing sacrosanct about drawing up the interim financial statements preparatory to the announcement of interim dividend. While an interim financial statement would be a barometer or pointer to the existence of profits, the rigmarole of drawing up a financial statement before declaring interim dividend is not an absolute imperative.
In our discussion, we have pointed out to certain facets in the Standard which are not in consonance with the Act. We have also pointed out to the need to seek the confirmation of the members at the AGM against the interim dividend declared, considering the requirements of Section 102(2) of the Act. The/standard in our view could have focused on the qualitative aspects associated with the declaration of dividend as opposed to repeating the substantive law on the subject. Notwithstanding that it does not have a mandatory force, the Standard could have been in sync with the provisions of the Act as the contradictions therein with the Act make it somewhat jarring.
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