The Need for a Dividend Disclosure Policy

[The
following guest post is contributed by Soham
Roy
& Akhil Nene, who are 5th
year 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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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