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Thursday, May 16, 2002

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The divide(n)d turf

S. Murlidharan

Equating interim dividend with final dividend has left a nagging doubt in the minds of people, says S. Murlidharan

THE Companies Act, 1956 till recently did not distinguish between interim and final dividend and, in fact, maintained a studied silence on the modalities of declaring dividend — its focus was on ensuring that dividend once declared was made over to the shareholders as quickly as possible. Of course Table A, containing the model set of Articles for a public company, did and does give a dichotomous treatment to dividend by prescribing two different fora for declaration of interim dividends and final dividend. But the Companies (Amendment) Act, 2000 has brought about significant changes to the concept of dividend.

First, it has, vide Section 205(1A), vested in the board of directors the right to declare interim dividend. This statutory power enables the board to declare interim dividends without reference to the power given in Table A assuming a company has either adopted it or acquiesced in it. And if a company has proscribed interim dividends through a clause in its Articles to that effect, well that would be void in terms of Section 9 of the Act.

Secondly, it has taken a specific step to define dividend to include interim dividend as well. In the face of this definition, there was no need to reiterate that the provisions dealing with creation of separate bank account, transfer to investor protection fund, and so on, will apply to interim dividend also. But reiterate it has.

The reason why the Government thought it proper to legislate on interim dividend specifically was to subject it to the same discipline, which the final dividend is subjected to. In the past, there have been instances where unscrupulous managements taking advantage of the leeway available to interim dividends as to their non-enforceability till they got the imprimatur of the shareholders, declared interim dividend with an eye on propping up the share price of the company in the market only to annul it once their dubious mission was accomplished.

The law in India, fashioned after the English model, was that a mere resolution of the directors to pay a certain amount as interim dividend did not create a debt enforceable against the company because it was always open for the directors to rescind their resolution before payment of such dividend (J. Dalmia vs CIT — 1964 2 Comp LJ 69 SC). With due respect, it is submitted that this exposition of the legal position was incorrect because the Act itself did not in terms place any fetters on the powers of the directors to declare dividend.

It is worth pointing out in this context that Section 293 spells out five decisions, which can be taken by the board only with the concurrence of the members. Dividend significantly is not one of them. In the event, it defies comprehension how this view attributing lack of finality to interim dividends came to be held and respected. Section 173 lists declaration of dividend as one of the four ordinary items of business. But it does not say that interim dividend will bind the company only when the members approve it. Yet, somehow this view had taken firm roots so much so that it had become axiomatic that interim dividend was subject to the approval by members at the general meeting whereupon it merged seamlessly with the final dividend.

Against this backdrop, it is good that the Act has equated interim dividend with final dividend for all intents and purposes. But while so doing, it has left a nagging doubt in the minds of people. By vesting the board with the right to declare interim dividend in particular, it has fostered and perpetuated the myth that the right to declare final dividend vests with the shareholders whereas the reality, as recognised by Table A, has always been that it is the board which proposes dividend if any and the shareholders simply acquiesce in it. Would it not have been better for Parliament, too, to recognise this reality? Because, now that the board has the statutory power to declare interim dividends, it will not have to put up with any interference when it comes to dividend.

No board will be so nave as to let the general body derail its dividend plans; if it suspects any such move, it would, as it can, accomplish what it wants to within the framework of the regulations obtaining for interim dividend thus pre-empting the possible shareholder revolt. In any case, it is granted on all hands that dividend is strictly a matter coming under the board jurisdiction and shareholders should not be allowed to sit in judgment over this issue. Indeed, the Act did not and does not call for shareholders' stamp of approval when it comes to dividend. This being so why give the futile impression that while the board decides on interim dividends, it is the shareholders who call the shots when it comes to the final dividend.

The export harvest

A FEW years ago, the Enforcement Directorate sleuths found rags and other wastes inside export containers that were all set to leave for their destination somewhere in the Gulf. That was not the first charade of the kind. Nor was it the last. Fictitious exports account for a sizeable part of our exports. Why do they take place at all? The answer lies in a set of factors. First, to launder one's booty abroad. For obvious reasons, the Government has all along winked at over-invoicing of exports and bristled only at over-invoicing of imports, which mentality in fact is the hangover of the days of foreign exchange crisis. Second, to take advantage of the various export incentives though the progressive whittling down of income-tax sops for exports has come as a body blow to many exporters. And third, to fulfil export obligations under Capital Goods Import Scheme and similar other schemes. If one removes the fictitious exports, the Commerce Minister, Mr. Murasoli Maran's lament that India's share of world trade is not even 1 per cent will not only be more than vindicated but would also set alarm bells ringing all the way.

In the fiercely competitive global marketplace the cutting edge is invariably provided by the ability to penetrate markets. Yes, we need giant trading corporations a la the State Trading Corporation of India if India wants to leapfrog to foreign markets.

Canalising of exports through giant export houses will ensure that our exporters do not flounder on rocks of treacherous markets. Small players not only fight amongst themselves but also in fact easily lend themselves to be browbeaten by their foreign interlocutors. A monolithic trading house, on the other hand, can always secure the best deal possible in the circumstances especially if it spares resources as it should and can to researching the foreign markets. It would also have the wherewithal to follow-up payments and take appropriate actions against those who renege on payments.

Incidentally, fictitious exports will die a natural death in such a regime unless the monolith itself is corrupted. Such export houses need not necessarily be state-owned. Through an appropriate mix of incentives and penalties, private sector participation can also be secured in a big way.

The Government should arrest the trend set in motion by Ajanta Quartz to set shop in China because while eyeing the foreign markets the focus cannot be merely on foreign exchange earnings — developing local industries and providing employment to countrymen are equally important.

Mr Maran has also, through the latest Exim Policy, removed all stops in agricultural exports, which could one day lead our export thrust and be on top of our export pile. But this cannot happen unless concerted efforts are taken speedily. We must encourage food-processing industries because a value-added agricultural commodity earns more than what would be earned by the raw commodity itself. We must usher in major agrarian reforms so that the agrarian landscape morphs from the present largely subsistence farming to cultivation on commercial scales.

Amul has been a splendid success that it is mainly because it has been collecting driblets of milk and flooding the market with and without value additions.

A similar endeavour on the agrarian front is called for to bring about both quantitative and qualitative changes in this extremely cost-sensitive sphere. Agricultural co-operatives perhaps will have sufficient financial sinews to set up cold storage and processing plants as well that will enhance our agricultural productivity and minimise wastes. And yes, we must lobby hard in concert with those in the same boat to bring about pressure on the redoubtable US and European nations to cut back their agricultural subsidies the continuance of which could well frustrate all our dreams.

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