Wilful Defaulter Provisions: A Spanner in the Works for M&A Transactions?

[The following post is contributed by Malek Shipchandler, a lawyer at Shardul Amarchand Mangaldas & Co. Views expressed herein are solely that of the author and do not in any way represent the views of his organization]
The Indian securities regulator, the Securities and Exchange Board of India (SEBI) recently notified an amendment to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) which prohibits a person or entity that is declared a “wilful defaulter” from making a public announcement to acquire shares of an Indian listed company (Listco) or enter into any transaction that would attract the obligation to make a public announcement to acquire the shares of a Listco under the Takeover Regulations (Prohibition). The text of this amendment viz. Regulation 6A reads:
“Notwithstanding anything contained in these regulations, no person who is a wilful defaulter shall make a public announcement of an open offer for acquiring shares or enter into any transaction that would attract the obligation to make a public announcement of an open offer for acquiring shares under these regulations.
Provided that this regulation shall not prohibit the wilful defaulter from making a competing offer in accordance with regulation 20 of these regulations upon any other person making an open offer for acquiring shares of the target company.”
The text of Regulation 2(1)(ze) which defines a “wilful defaulter” reads:
““wilful defaulter” means any person who is categorized as a wilful defaulter by any bank or financial institution or consortium thereof, in accordance with the guidelines on wilful defaulters issued by the Reserve Bank of India and includes any person whose director, promoter or partner is categorized as such;”
Under clause 2.1.3 of the master circular on wilful defaulters dated July 1, 2015 (Circular) issued by the Reserve Bank of India (RBI), a “wilful default” is deemed to have occurred where a person or entity (whether incorporated or not) has intentionally, deliberately and calculatingly defaulted in meeting payment obligations to a lender (a) when it has capacity to make the payment; (b)and has not utilized the finance availed of for purposes designated but instead diverted the funds for other purposes; (c)and has siphoned off funds nor are the funds available in the form of assets and (d) and has disposed off or removed the assets given (for securing the loan) without the knowledge of the lender.
Under clause 2.6 of the Circular, a guarantor (be it a group company of the defaulting entity or otherwise) that refuses to comply with a payment demand made by a lender, is also treated as a wilful defaulter.
A few observations and thoughts in connection with the above are set out below:
1.         Indirect open offers: The Prohibition, by using the language “any transaction that would attract the obligation to make a public announcement” (Language), covers indirect open offers as well. Therefore, hypothetically, where by virtue of an underlying transaction which results in a change in control of a Listco, an open offer obligation is triggered; if the acquirer (or even a person acting in concert with the acquirer) has been declared a wilful defaulter (in capacity of a borrower or guarantor) under the Circular, such acquirer and/or person(s) acting in concert cannot make an open offer – which essentially means, the acquirer and/or person(s) acting in concert cannot enter (or agree to enter) into any underlying transactions. Therefore, the Prohibition does not just extend to transactions directly involving a Listco. An intriguing conundrum would be a case of an overseas transaction triggering an indirect open offer in India where the acquirer or person(s) acting in concert have been declared wilful defaulters – this Prohibition would need to be given thought to while, inter alia, structuring global transactions affecting a Listco and which persons/entities to designate as “person(s) acting in concert” for purposes of the open offer.
2.         Creeping acquisition: The Prohibition does not appear to prohibit wilful defaulters from making creeping acquisitions. Essentially, a wilful defaulter already holding a 25% stake in a Listco, can undertake stake building by acquiring up to 5% in any financial year, since open offer obligations are triggered only when an acquisition is made of a more than 5% stake in a financial year. Whether this leeway (intentional or unintentional) afforded by SEBI actually resonates with its intent reflected at clause 17 of a discussion paper floated by it in January 2016, is questionable.
3.         Exemptions: The Takeover Regulations exempt an acquirer from complying with open offer related obligations if certain transactions and/or thresholds are met with. Examples are inter-se promoter transfers, inter-group transfers and schemes of arrangement (directly or indirectly involving the Listco, whether implemented in India or overseas). The exemption provisions can be availed of when an open offer obligation is triggered. Therefore, it can be mooted that the Prohibition extends to exempted transactions under the Takeover Regulations as well, because, if not for the exemptions, the transaction (i.e. an acquisition) would otherwise trigger open offer obligations. To articulate this interpretation differently: the exemptions can be ‘activated’ only if and when an open offer obligation is triggered; thus. Perhaps, by way of insertion of another proviso (instead of a FAQ or an informal guidance), SEBI could consider clarifying its position.
4.         Competing offers: The proviso to the Prohibition allowing wilful defaulters to make a competing open offer looks out of place and begs the question: why? SEBI’s intent behind this proviso can be gauged from clause 19.4 of the discussion paper floated by it in January 2016 which states: “If a hostile bid is made on a listed company which is controlled by a person categorized as a wilful defaulter, restricting such wilful defaulter from making a counter offer may not be legally tenable.” The question of legal tenability in allowing a wilful defaulter to make a competing offer is another discussion altogether. Be that as it may, SEBI, to align the literal construction of the proviso with its intent, could consider crisping the proviso to state: “… this regulation shall not prohibit a person in control of the target company who is a wilful defaulter from making a competing offer…”, since the extant proviso appears to allow any wilful defaulter to make a competing offer.
5.         Consequences: While SEBI’s insertion of this Prohibition is well intended, there is no express provision spelling out the consequence(s) if a wilful defaulter violates the Prohibition. The author has discussed a similar lapse in relation to another amendment by SEBI here. As such, the consequence(s) under the general provisions of the Takeover Regulations and/or SEBI Act, 1992 will not only fall on the wilful defaulter (and person(s) acting in concert), but also on the merchant banker appointed to manage the open offer.

– Malek Shipchandler

The Quest for Liquidity – Recent Measures to Curb Discretionary Restrictions on Redemptions of Mutual Fund Units

[The following guest post is contributed by Arka Saha, who is a 4th Year B.A.LL.B. (Hons) & Executive Student in CS (ICSI) at National Law University Odisha (NLU-O)]
One of the key objectives of mutual fund investments, along with returns and security, is liquidity – the ability to liquidate holdings and withdraw investments in units as per the needs of the holder. Even closed-ended schemes, which refer to schemes having a fixed maturity period as opposed to open ended schemes, are mandated to provide liquidity in investments either through mandatory listing on a stock exchange, or through a repurchase facility as per Regulation 32 of the SEBI (Mutual Funds) Regulations 1996. However, the regulations permit for certain conditions pertaining to redemption via repurchase, without specifying any guidelines as to how these restrictions are to operate and the circumstances under which they can be placed. Through its circular dated May 23, 2008, SEBI posited that such restrictions on redemption were to be placed only with due consent of the board of directors of the Asset Management Company (AMC) and the Trustees of the fund. Recent developments, especially the fiasco pertaining to the JP Morgan Asset Management Company which denuded investor confidence in the mutual fund industry due to liquidity issues, has forced the regulator’s hand in doing away with widespread discretion available to the AMCs as to restrictions on redemptions.
The Trigger
In August last year, two debt funds of the J.P. Morgan AMC, namely the JP Morgan India Short Term Income Fund (JSTI) and JP Morgan India Treasury Fund (JTF), which had combined exposure to debt papers of Amtek Auto to the tune of around Rs. 200 crores representing 10.78% and 5.87% of the funds’ respective total corpus, imposed restrictions on redemptions of units in light of increased redemption pressure due to a sharp fall in the Net Asset Values, via gating of redemptions at 1% of  total outstanding units on any given day. Unit holders were thus stopped from redeeming their investments, and had to wait to liquidate, while the Net Asset Value of the schemes fell further due to continued sell pressure in the debentures and stocks of the company in light of a credit downgrade by Care Ratings, default in interest payments, and weak fundamentals. The restriction imposed was in light of the increasing lack of liquidity in the debt papers, which made it difficult for the schemes to reduce exposure in proportion to redemption pressure. Gating of redemptions had the effect of nurturing a market wide distrust in the mutual fund industry, as it distorted the fundamental feature of liquidity.
Subsequently, the AMC had to resort to ‘side-pocketing’ , a practice previously unheard of in India and thus unregulated, which refers to the segregation of illiquid or toxic assets from the total body of assets and cash holdings of the scheme into separate units, before allowing redemption of those units in the two schemes that had no exposure to debentures of Amtek Auto. The newly created, segregated units that contained exposure to debentures of Amtek Auto exclusively were closed for subscription and redemption until they were disposed of at a loss of around 15% to PE Investors in December 2015, thus finally according some liquidity to unit holders with regard to the monies caught up in these units. This episode brought upon the scrutiny of the regulator, which on 31 May 2016 came out with a circular laying down guidelines pertaining to the placement of restrictions on redemptions.
Recent Measures
The Circular stipulates certain circumstances under which restrictions can be placed on redemptions in extant schemes from 1 July 2016 and in all schemes coming into existence after 31 May 2016. The general tone of the circular establishes that restrictions can now be placed upon systemic risks to the markets resulting in high redemption pressure and not due to bad investment decisions by AMCs resulting in a drop in the Net Asset Value of schemes of funds. The circular states that restrictions can be placed only in case of markets becoming illiquid in general, unexpected occurrences which inter alia are related to political, economic, military, monetary or other emergencies resulting in the closure of stock exchanges, or irregular functioning of the same, and in operational issues arising due to unpredictable circumstances such as force majeure and technical failures – given that they occur in spite of reasonable appropriate diligence of third parties and adequate disaster recovery systems.
Therefore, restrictions cannot be placed on redemptions due to illiquidity or other defaults in specific securities held by a fund. Further, such restrictions can be placed for a maximum of ten working days in a three-month period, with the same having to be sanctioned by the board of directors of the AMCs and the trustees of the fund in question. The circular further imposes a duty to disclose any restriction thus sanctioned to the regulator. In addition, in a move that will most benefit retail investors, no restrictions can be imposed, notwithstanding any reason, for redemption requests amounting to Rs. two lakhs. For redemption requests above the two-lakh rupee mark, only that part exceeding the Rs. 2 lakh threshold is to be subjected to the imposed restrictions.
Conclusion
The conditions mandated by the circular, in the opinion of the author, which are extended towards benefiting small investors by protecting them from draconian restrictions that can at present be placed by AMCs due to failure on their part in picking out fundamentally strong investments, are in tune with  international best practices.[1]  In effect, the guidelines on restrictions will ensure that AMCs do not take unnecessary risks without conducting proper due diligence, instead relying on credit rating agencies which will soon be subject to more stringent regulations themselves to increase transparency and accountability in light of them not providing adequate reasons while suspending ratings. However, these guidelines will only prove to be conducive to the needs of the small retail investors if they are further educated about risks associated to their investments, (the practice of gating or placing absolute restrictions on redemptions is done to prevent large falls in NAVs due to redemption pressure, ensuring that all existing unit holders face the brunt of investments gone bad equally by not allowing anyone to pull out), as more often than not they lack the sophistication to know when to pull out, thus giving rise to risks of falling NAVs due to quicker redemptions in large scale by more educated and experienced investors such as other funds.
– Arka Saha



[1]    The Securities and Exchange Commission, the securities regulator in the United States of America which has a more vibrant mutual fund industry, allows restrictions on redemptions only under exceptional circumstances as the one permitted by SEBI under the current circular.

National Company Law Tribunal Constituted: A Phased Induction

Although the Companies Act, 2013 was enacted nearly three years ago, significant parts of the legislation were not brought into force. These related to the role of the National Company Law Tribunal (NCLT). Although the NCLT was conferred legislative status as early as 2002 (under the Companies Act, 1956), it did not see the light of day as it was mired in litigation. After two judgments of the Supreme Court in Union of India v. R. Gandhi(2010) and Madras Bar Association v. Union of India (2015) paved the way for its constitution, the Government took steps to establish and implement the tribunal system for company law.
Yesterday, the Ministry of Corporate Affairs (MCA) issued a notificationconstituting the NCLT with effect from the same date (1 June 2016). The NCLT would have eleven benches at various locations around the country, with the principal bench being at New Delhi. Several further provisions of the Companies Act, 2013 that relate to the NCLT have been notified. Accordingly, the Company Law Board (CLB) stands dissolved.
A reading of the notification suggests that not all provisions of the Companies Act, 2013 relating to the NCLT have been notified. The NCLT would expand to its full capacity only over a period of time. Several provisions notified include matters relating to oppression, class actions and other miscellaneous roles and functions assigned to the NCLT under the Act. Most of these powers were hitherto being exercised by the CLB. In other words, this exercise largely undertakes the transition from the CLB to the NCLT.
However, absent in the transition are powers that are currently being exercised by the High Courts, on matters such as amalgamations, capital reductions, winding up, etc. These matters under the Companies Act, 2013 Act have not yet been notified and hence would continue to be within the purview of the High Court. It appears that the Government has sought to undertake a phase induction of the NCLT, and it is likely that the NCLT will begin exercising jurisdictions of these matters only after it becomes fully operational.

In any event, the constitution of the NCLT represents the dawning of a new era from the perspective of corporate law practice and enforcement in the Indian context. It is a space to watch out for in the near future.

Interim Dividends – Is the Confusion Clearing?

[The following guest post is contributed by Siddharth Rajaand Neeraj Vyas, who are Founding Partner and Associate respectively of Samvad Partners. Views are personal, and comments are welcome]
The concept of ‘interim dividend’ was only introduced into the Indian companies statute in 2000 — that was legislative recognition of a move that had started to develop and gain acceptance within Indian corporates, especially in the 1990s.  A move that essentially postulated freedom to a Board of Directors (in contrast to the shareholders in general meeting) to declare a dividend in the interregnum between two ‘regular’ (so to speak, although the word is not used in the statute) dividend declarations which typically take place at annual general meetings of shareholders, year-on-year. 
The Companies (Amendment) Act of 2000, amending the Companies Act, 1956 (the “1956 Act“), made it clear that the Board of an Indian company may declare an ‘interim dividend’, which had to then be segregated into a separate bank account for the only purpose of making the payment of such ‘interim dividend’ — importantly, the terms under which such an ‘interim dividend’ could be declared and paid was the same as applicable to dividends itself.  As a result, one of the key conditions governing both ‘interim dividend’ and ‘dividend’ under the 1956 Act was the need to declare and pay the same only out of profits.
The Companies Act, 2013 (the “2013 Act“) had further refined the construct of ‘interim dividend’, but the wording of the provisions has left a lot to be desired — something the Report of the Companies Law Committee of February 2016 notes as ‘disharmony’, while suggesting ameliorative measures that are certainly welcome.  But, some of the suggested changes or comments on clarifications to be made, especially in the Companies (Declaration and Payment of Dividend) Rules, 2014 (the “Dividend Rules“), are yet to see the light of day, currently, whether in draft or final form.
Dividends:    Section 123 of the 2013 Act (earlier — although entirely the same as — Section 205 of the 1956 Act) deals with the declaration of dividends.  Section 123(1) inter alia provides that dividend can only be declared or paid by a company for any financial year out of profits for that year, or out of the profits of any previous financial year(s), arrived at after providing for depreciation.  
Furthermore, no dividend can be declared or paid by a company out of its reserves other than free reserves (emphasis added), but, subject in those cases, to the fulfilment of certain conditions.  In other words, the Further Proviso to Section 123(1) provides that, in cases of losses (or, what the provision calls, ‘absence of profits’) or the inadequacy of profits in any financial year, the company in question may only declare a dividend out of the accumulated profits earned by it in previous year(s) and transferred by it to the reserves, subject to the procedure and conditions laid down in the rules prescribed by the Central Government in this regard (namely, Rule 3 of the Dividend Rules).
Interim Dividends: The concept of ‘interim dividend’, as contrasted with that of a ‘dividend’ dealt with above, is provided for in Section 123(3) of the 2013 Act — the Board of a company may declare an ‘interim dividend’ during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared.  
The only restriction statutorily provided on interim dividends (in the Proviso to this Section 123(3)) is a ceiling on the maximum rate of any such interim dividend in case the company in question has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of such interim dividend — the ceiling in that case, is a rate no higher than the average dividends declared by the company during the immediately preceding three financial years.
Scope of Application ofthe Dividend Rules; whether applicable toSection 123(3):
Based on a combined and harmonious reading of the provisions of the main statute itself and the Dividend Rules properly constructed, the view, we think, is inescapable that Rule 3 of the Dividend Rules does not apply to the concept of an ‘interim dividend’ as in Section 123(3) of the 2013 Act.
The Dividend Rules, by its very terms, have been promulgated in exercise of powers conferred on the Central Government under Section 123(1) of the 2013 Act — its applicability is, therefore, confined to that Section 123(1) relating to ‘dividends’ and, cannot and, indeed, does not extend in its application to Section 123(3) of the 2013 Act dealing with ‘interim dividends’. 
This position is further borne out by the express provisions of the Further Proviso to Section 123(1) of the 2013 Act that clearly references and provides for the Dividend Rules having effect in the case of declarations of ‘dividends’ (as opposed to, and not as regards, ‘interim dividends’), proposed to be paid out of accumulated profits earned in previous years and transferred to reserves, but where there is inadequacy or absence of such profits in the financial year of such proposed dividend (note, not ‘interim dividend’) declaration.  
Moreover, Rule 3 of the Dividend Rules provides for the procedures and conditions to be followed when dividends are to be paid out of the free reserves (emphasis added), whereas Section 123(3) of the 2013 Act (unlike the Dividend Rules, as delegated legislation, which is subject to the principal statute) deals with the declaration of interim dividend (emphasis added) from out of the surplus in the profit and loss account, as well as the profits of the company for that particular financial year in which such interim dividend is sought to be declared.
Circumstances under whichinterim dividendcan be declared and paid:
Now, unfortunately, Section 123(3) of the 2013 Act is not happily worded as regards the use of the word ‘and’ in the phrase ‘….declare interim dividend during any financial year out of the surplus in the profit and loss account AND out of profits of the financial year in which such interim dividend is sought to be declared’.
The Parliamentary Standing Committee on Finance (2009-10; headed by Mr. Yashwant Sinha), in its 21st Report of August 2010 on the then Companies Bill, 2009 suggested the inclusion of what eventually became Section 123(3) of the 2013 Act — with one important drafting clarification relevant for our current purposes, which, unfortunately, was garbled in the 2013 Act itself as brought into force: the two criteria for the declaration of an interim dividend, namely, (i) from out of the surplus in the profit and loss account, and (ii) from out of profits of the financial year in which such interim dividend is sought to be declared, the Standing Committee suggested should be separate, i.e., by the use of the words ‘as well as’, which is not the same as ‘and’ in these circumstances.
Indeed, the Report of the Companies Law Committee of February 2016 appointed to further review and examine and suggest changes to the 2013 Act notes that the use of this word ‘and’ is at “disharmony with the provisions of sub-section 1(a), which provides for the declaration of dividend out of the profits of the company for that financial year, OR [our emphasis] the profits of the company from any previous financial year(s) (subject to deduction of depreciation and other conditions), OR BOTH THE AMOUNTS [our emphasis].”
The Committee’s recommendation in this regard has been accepted in full — such that the 2016 Amendment Bill to the 2013 Act that is currently pending in Parliament, expressly provides an amendment in Sub-section 3 to Section 123 of the 2013 Act as follows (all emphasis supplied):
“The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till the holding of the annual general meeting out of surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend.”
The suggested elimination of the word “AND”, and its substitution by “OR”, is welcome, as is the construct to declare interim dividends out of profits in the ongoing financial year until the quarter preceding the date of declaration of such interim dividend.
The Committee further “…felt that once Rule 3 is aligned with the provisions of the Act, it would be clear that in case a company declares dividend out of surplus i.e. accumulated credit balances of Profit and Loss Account which has not been transferred to reserves, the provisions of the [2013] Act and Rule 3 would not be applicable (our emphasis).  The Committee recommended harmonization of Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 and Section 123 of the [2013] Act to provide clarity on the issue”.
Clarity continues to be elusive on this aspect; but hopefully we may see a change in the Dividend Rules soon.
In effect, therefore and until the 2013 Act and the related Rules are modified as above, the current Section 123(3) (read with its Proviso) is, in our view, to be interpreted as follows:
1)    In order to be able to declare an interim dividend it is not necessary that BOTH criteria for the declaration of such an interim dividend in Section 123(3) of the 2013 Act be present — in other words, a company can validly declare an ‘interim dividend’ in terms of Section 123(3) if it has a surplus in its profit and loss account; it can also (or in the words of the Parliamentary Standing Committee on Finance, “as well as”) declare validly such an ‘interim dividend’ out of the profits of the financial year in which such interim dividend is sought to be declared.
2)    The only stipulation then on the declaration of such an interim dividend is as regards the rate of such interim dividend — that rate cannot be higher than the average dividends declared during the immediately previous three financial years, if the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of such interim dividend.  The Proviso is so drafted as to cover the situation when interim dividends are declared during the financial year in question; the only caveat being that that rate of interim dividend cannot exceed a certain stipulated threshold if there are losses up to the previous quarter, thereby implying the ability of a company to declare such interim dividends during any quarter.
This leads to two probable situations: 
Firstly, situations wherein the company has surplus in its profit and loss account and also has profits in the said financial year.  In such cases, the Proviso does not apply and the board of directors can declare any interim dividend.  The only issue that remains to be touched upon here is the quantum of any such dividend — the statute by the use of the words “out of” or “from” profits or free reserves (as the case may be) clearly prevents any excessive dividends of either type that are not matched by the amounts of such profits or free reserves.
Secondly, situations wherein the company has incurred losses during the current financial year up to the end of the quarter immediately preceding the date of declaration of the interim dividend (or even for the full year), but has had a surplus in the profit and loss account during the quarter in question.  In such cases, as per the Proviso, the rate at which dividend is declared cannot be higher than the average dividends declared by the company during the preceding three financial years.  But, that position does not invalidate the interim dividend declaration. 

Siddharth Raja & Neeraj Vyas

The Need for a Dividend Disclosure Policy

[The following guest post is contributed by Soham Roy & Akhil Nene, who are 5thyear students at the National Law University Odisha]
In a recent Board meeting, SEBI provided an in-principle nod to mandating the top 500 listed companies in India (according to market capitalization) to disclose a dividend disclosure policy. Such a policy may include circumstances under which their shareholders can or cannot expect dividend, financial parameters that will be considered while declaring dividends, internal and external factors that would be considered for declaration of dividend, policy as to how the retained earnings will be utilized, and provisions with regard to various classes of shares.
Lately, this issue has gained a lot of importance because of excessive payments of dividends just before an initial public offering (IPO) of shares. In 2015, as Inter Globe Enterprises was readying for an IPO, it trebled the value of its dividend in 2015 over what it paid in the previous year. Inter Globe Enterprises increased its dividend expenses per share from Rs. 12,299 for year ended 2014 to Rs. 35,169 for the year ended 2015. This decision was taken by Inter Globe Enterprises eleven days before it filed its Draft Red Herring Policy (DHRP) with SEBI.
The larger question here is the importance of dividend payment for investors. Very simply put, there are essentially two ways in which investors obtain returns: dividend and capital gain. The declaration and payment of dividend is one of the most important decisions for a company as the company has to strike a balance between the percentage of earnings it should utilize to finance its operations and the percentage it should use to distribute dividends to shareholders. This decision has ramifications on the business as the payment of large dividends reduces the ability of the company to fund large projects and often under such circumstances the company will be forced to access the capital markets to fund such projects.
Under Indian company law, there is complete discretion in the hands of the board of directors as to whether dividend is to be paid or not, and also as to the amount of dividend to be paid.  Research on dividend policy has also shown that dividend policy per se will have an impact on the price of a company’s stock price independent of earnings.[1] Therefore, announcement of a dividend policy can only be helpful for investors to make investment decisions. Spelling out a clear dividend policy will help investors make a more informed choice. 
However, the proposal to extend it to only top 500 listed companies by market capitalization is not welcome. Mandatory disclosure of dividend policy should also be extended to companies who are in the process of making an IPO. Another concern is that companies might circumvent this policy of mandatory disclosure by using broadly drafted statements, which will leave a lot of discretion in the hands of the Board. 
In November 2015, the Financial Reporting Council’s (hereinafter FRC) Financial Reporting Lab had come out with the report titled “Lab project report: Disclosure of dividends – policy and practice” which relates to the dividend disclosure policies and how it can be made more relevant for the investors. This was undertaken because many of the FTSE 350 companies in their annual reports failed to provide information relating to distributable profits. As Stated in the Lab project report: “Only 23 FTSE Companies disclosed the distributable profits balance (of the parent company) in their 2014 annual report and accounts (annual report)”. This report was made with the contributions from 19 companies and 31 investors. The aim of this report is to investigate into the issues and to look at the best practice.
The report states the methods by which the dividend disclosures can be improved by the companies. The main aim of the report is to facilitate the listed companies to provide relevant information to the investors. The FRC in its report has also identified the issues that relate to determining the profits levels and the profits that the company can legally distribute and also that the kind of disclosure that is made would be dependent on the level of resources a company has compared to its proposed dividends.
It was stated by the investors that they wanted the companies to disclose the circumstances under which the companies would pay special dividends or buy back shares and to show the step taken by them is in the interest of the shareholders.
All investors consider that the disclosure of dividend resources, i.e. cash and the amount of the company’s reserves legally available for distribution under company law (distributable profits), is helpful in circumstances where the ability of the company to pay dividends is, or might be, insufficient relative to the level of dividends indicated by the policy. Some investors believe that distributable profits are always required to be disclosed. The FRC understands that as per the Companies Act 2006 the companies are not required to separately identify the distributable profits on their balance sheet.
We can conclude that the report tries to facilitate the investor’s issues in following ways:
1.         The report provides all the listed companies with some guidance on disclosure of dividends and distributable profits; it is applicable to all the listed companies and does not depend upon their size.
2.         In the report it is noted that when the companies disclose information relating to dividends they usually do so by spreading over the financial statements, shareholder information sections and the strategic report. To avoid that, the companies must link the dividend disclosures to important information which is included in the annual report and also include the risk disclosures as was requested by the investors; this would go on to make the annual report much more concise and clear and would also help avoiding the repeating of information and that would also increase coherence.
SEBI should use this report and prescribe certain guidelines to ensure that companies do not try to circumvent the policy by using broadly drafted policy and generic disclosures. The purpose of this disclosure is not to coerce companies to make dividend payments, but it is to ensure that investors make more informed choices.
– Soham Roy & Akhil Nene




[1]Law and Economics of Dividend Policy-Daniel R. Fischel, Virginia Law Review, Vol. 67, Issue 4 (May 1981), pp. 699