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Norms for dividends sans depreciation under study

Richa Mishra
K.R. Srivats

NEW DELHI, April 7

THE Department of Company Affairs (DCA) is mulling a proposal on framing broad guidelines that would spell out the criteria under which companies could be allowed to declare dividends without providing for depreciation.

Currently, the Companies Act has granted discretionary powers to the Government to grant approval for companies to declare and pay dividends without providing for depreciation. "As the powers vested with the Government are discretionary, it would only be fair for DCA to spell out in the form of guidelines as to what would `public interest' mean under Section 205(1)(c). This would also lead to more transparency as the department gets requests for exemptions on a periodic basis from various companies," official sources told Business Line.

However, the guidelines that may be eventually framed would come with a caveat that the company that is granted an exemption from providing for depreciation in a particular year will have to mandatorily provide for that in the next year.

"While the finer details of the caveat are being worked out, it must be remembered that the legislative intent behind Section 205 (1)(c) exemption is to ensure relief to the manufacturing companies that are emerging out of a bad phase due to economic slowdown and other reasons," sources said.

One such company which has knocked on the doors of DCA for permission to declare dividend from accrued profit in a year without providing for depreciation is Rs 2,000-crore textile major Indo-Rama Synthetics (I) Ltd (IRSL).

Confirming the move to seek exemption, the company sources said: "such case-to-case exemptions help the companies that are on the verge of a turnaround and whose profits and cash flows have sizeably improved in a particular year."

Indo Rama had for the year ended March 31, 2001 provided a sum of Rs 101.45 crore towards depreciation/deferred revenue expenditure written off. As on March 31, 2001 an amount of Rs 235.69 crore stands as deficit that had been carried forward to the balance sheet from the profit and loss account.

Buoyed with a higher price realisation for its finished products during the second-half of the fiscal 2000-01, the IRSL senior management had earlier expressed confidence over achieving a three-digit net profit in terms of rupees.

Meanwhile, corporate law experts pointed out that a company which had incurred losses in any previous financial year or years, would have to set off loss amount or an amount which is equal to the amount provided for depreciation for those years whichever is less, against the profits of the company for which dividend is proposed to be declared or paid.

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