Is not interim dividend a more investor-friendly option?

Coimbatore, Aug. 17 With an increasing tendency among companies to publish audited financial results that pushes back the annual general meetings (AGMs) still further, the payment of annual dividend, if any, is being done at the second/third quarter of the next financial year when the previous financial year's performance is already history and investor attention is focused on how the current financial year would turn out to be!

A question as to whether the companies could not resort to distribution of interim dividends on a quarterly basis to provide periodic cash flow to the investors has arisen because companies are publishing un-audited financial results every quarter and they know about the distributable surplus in a particular quarter.

Of course, companies in some of the sectors such as sugar that have huge seasonal variations in their performance may not be able to adopt this system since their financial performance varies quarter to quarter by a wide margin and they would not be able to generate sufficient surplus every quarter to provide dividend. But in general, a large number of companies that consistently perform quarter on quarter may be able to do so.

The investor appetite for quarterly dividend has been created to a large measure by the practice introduced by some of the IT companies that declare interim dividends. The advantage of announcing quarterly/interim dividends is that they do not require any shareholders' approval every time they are announced unlike the final dividend payment which has to be put before the AGM for shareholders' nod. But even this in most cases is a mere formality since the promoters/their associates hold the majority stake and the percentage of dividend decided by the board will not generally be changed.

Book closure dates

Another practice noticed this year at least in one prominent case is that of book closure for eligibility to receive dividend observed far ahead of the AGM leading to longer wait to receive the dividend. The Punjab National Bank (PNB) that declared an annual dividend of Rs 13/share on May 15 had the book closure from May 31 to June 7, 2008. But the approval for this payment was given at the AGM held on August 4 and the bank said the date of payment of the annual dividend would be September 2. Why the bank declared the BC three months ahead of the payment date is not known.

Contrast this with what HCL Technologies Ltd did. It informed the NSE on August 1 that the board of directors at its meeting held on August 1, 2008 recommended a final dividend of Rs 3 per share (150 per cent on an equity share of face value of Rs 2) for the year ended June 30, 2008 and the board fixed the date of AGM on October 22, 2008. It said that the register of members and share transfer books shall be closed from October 23 to October 24 (both days inclusive) for determining the shareholders who shall be entitled for payment of final dividend to be considered at the said meeting. Though the dividend announcement was made months ahead of the AGM, the company observed the book closure close to the AGM date.

In case of most companies even with very large shareholding, the book closure commences just days before the AGM and closes on the date of AGM for the purpose of determining the eligible shareholders. With the stock markets adopting the compulsory demat format, it is easy for companies to quickly download the list of eligible shareholders from the depositories for making dividend payment.

Generous mood

The issue of dividend payment has come to prominence because of two important developments in recent years. Earlier, dividends were subjected to tax which served as a disincentive to paying huge dividend. But after the dividend received was freed from income tax net, it has become an investor friendly measure and prominent corporates are now very generous with their dividend payouts aided by their robust performance.

Moreover, earlier the companies making annual dividend payment had to incur huge expenses for the demand drafts and on postal charges for sending them. But with the country's banking network coming under the ambit of core banking companies are able to directly credit the dividend to the accounts of the shareholders which is a secure and fast mode at a far lesser cost.

Mr. D. Balasundaram, Chairman, Coimbatore Capital Ltd and a former President of Coimbatore Stock Exchange said while interim dividend payment is within the control of the Board, the final dividend is paid after AGM's approval since it is an 'appropriation out of profits requiring its approval'. He said companies want to avoid a situation of reporting losses subsequent to dividend payment and hence want to limit interim dividend.

But he felt that companies could pay quarterly dividend since Electronic Clearing Service (ECS) is available in most cities. In case of most companies dividend percentage is insignificant compared to the share price.

Mr K. Annamalai, Director, DJS Stock and Shares Ltd and also a former President of Coimbatore Stock Exchange, said there were certain procedural formalities to be gone through like depositing the dividend declared in a separate account within five days from the date of declaration and informing the stock exchanges immediately. When an interim dividend is declared but not paid within 30 days from the date of declaration, it would be considered as a default and the directors could be fined, apart from company paying interest to the shareholders.

'Internal use'

He said many companies were taking shelter under clause 41 of listing agreement that provides them with 3 months time from the end of the financial year/4th quarter if they opt to submit audited results. Hence 'they gain time to finalise the account and also synchronise with the next 1st quarter results. This also enables the companies to 'rotate the funds for its internal use' without violating the rules.

Mr Balasundaram said "usually book closures end on the day of AGM (and) PNB seems an extraordinary case'. He said BC is to identify the names and addresses of shareholders and with electronic shareholding registers "a book closure to identify shareholders is not necessary'. He was of the view that a half yearly dividend payment may be adopted but this could not be legislated. For instance, to companies with seasonal operations like sugar the profits may not accrue uniformly.

Mr Annamalai said Indian companies might very well adopt the policy of giving quarterly dividend so that the shareholders get regular payouts. He conceded there were issues like consistent performance every quarter etc. The issue may need a look at by the regulator SEBI and companies that make money every quarter should go for interim dividend payments rather than an annual dividend which is time consuming.

While the interim dividends could be a small percentage, the companies might reserve a larger share of dividend for the final payment when the full year's results are finalised