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Rabindra Nath Sinha

KOLKATA, April 15

IN the light of the experience gained after the fiasco over interim dividend in the first week of March, corporates, which include those that had declared interim dividend but were forced to retrace their steps, seem to be veering round to the view that a shorter notice period for record date is the answer. Otherwise, interim dividend will become a thing of the past.

Moreover, the relatively long notice period for record date, as now prescribed and which if maintained, may have implications for share prices in the event of a board, after due consideration, deciding against payment of interim dividend.

After all, a company's notice to stock exchanges always seeks to convey that the board will consider payment of dividend, "if any", which indeed serves as an escape route. Therefore, the whole issue, in the perception of the affected corporates, requires rethink.

Soon after the Union Budget for 2002-03, which proposed taxation of dividend at the hands of recipients, instead of at the hands of the payer, that is, companies, several corporates declared interim dividend. Those companies also fixed their record date for payment of interim dividend in consultation with respective stock exchanges. Since interim dividend has to be paid within 30 days of declaration at the board meeting, the record date had to be fixed by giving a shorter notice than the time limit prescribed in Clause 16 of the listing agreement.

Clause 16 provides that a notice of 42 days (30 days in case of securities traded compulsorily in demat form) is to be given to stock exchanges for fixing the record date. Apparently, in granting permission for a shorter notice period, stock exchanges had exercised their option available in Clause 16, in which the relevant portion reads: "...or of as many days as the exchange may from time to time reasonably prescribe..."

Just when the companies had started the process of declaring interim dividend and announcing the same to the media, SEBI directed the stock exchanges not to grant record date on notice period shorter than that prescribed in Clause 16.

The companies were, thus, forced to revoke the interim dividend as they found they would not be able to comply with Section 207 of the Companies Act, 1956 which requires that the warrant for dividend must be posted or dividend must be paid within 30 days of declaration.

If a company fails to do so, its directors become liable for punishment under Section 207, the relevant portion of which reads: "...every director of the company shall, if he is knowingly a party to the default, be punishable with simple imprisonment for a term which may extend to three years and shall also be liable to a fine of Rs 1,000 for every day during which such default continues and the company shall be liable to pay simple interest at the rate of 18 per cent per annum during the period for which such default continues ...''

The net effect of SEBI's directive to stock exchanges appears to be that no listed company can now pay interim dividend. This is because as a good corporate practice, the record date for interim dividend should be decided at the board meeting after the board decides to pay interim dividend. The board also can decide not to pay interim dividend.

In such a case, if advance notice is given to stock exchanges about record date well before the date of board meeting, in the interim period, in anticipation of high payout, share prices may see an uptrend, which may drop the moment the board decides not to pay interim dividend, leading to unhealthy manipulation of share prices.

Therefore, the time schedule prescribed in Clause 16 warrants a fresh look. For companies whose shares are traded compulsorily in demat form, the notice period may be reduced to 15 days.

For shares transacted in physical form, it could be reduced to 21 days. In other words, corporates see the need for halving the notice period.

After all, dividend processing can commence only after the record date. This is because only after the record date has passed, the company will be in a position to make a list of shareholders who would be eligible to receive dividend.

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