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S. Murlidharan

S. Murlidharan on the haze surrounding interim dividend

THE Supreme Court, in J. Dalmia vs CIT (1964 2 Comp LJ 69), observed that "a mere resolution of the directors resolving to pay a certain amount as interim dividend, does not create a debt enforceable against the company, for it is always open to the directors to rescind the resolution before payment of the dividend." Many unscrupulous company managements have been taking undue advantage of this rather lenient regime obtaining for interim dividend — announcing interim dividend only to rescind it in due course once their ulterior objective was achieved. Interim dividend is announced by such managements to jack up the company's share price in the bourses and to unload their holdings when the prices have thus been ramped up.

The Companies (Amendment) Act, 2000, instead of spelling out holistically the entire minutiae of dividend, has for curious reasons chosen to harp only on certain facets of interim dividend. Even this lopsided adumbration is shoddy as, instead of making things clear as to the position of interim dividend vis-à-vis the dividend declared at an annual general meeting (AGM), the amendment has left things vague, thereby prolonging the debate on the revocability of interim dividend.

The definition of dividend — "dividend includes any interim dividend" — introduced by the Amendment Act practically makes interim dividend at par with the dividend declared at the AGM. It follows a fortiori, therefore, that interim dividend shall be governed by the same rules and regulations that govern the one declared at an AGM. Trite though this position is, Section 205 (1C) ushered in by the Amendment Act, for good measure, perhaps by way of abundant caution, reiterates this when it says that "the provisions contained in Sections 205, 205A, 205C, 206, 206A and 207 shall, as far as may be, also apply to any interim dividend."

Yet, in the absence of a specific assurance to this effect, one is not reassured as to the irrevocability of interim dividend. That the board of directors can always resile from its decision as to interim dividend, a view propounded in the Dalmia case (supra), has added to the disquiet in this regard. The implication of the Supreme Court view is that till its endorsement at the AGM, an interim dividend is not final. The author begs to differ. Here is why.

It is significant to note that Section 205(1A) does not require the approval of shareholders for interim dividend, thus reinforcing the view that there is nothing temporary about interim dividend. While Section 205 (1A) is a new development, there never was anything in the company law that required shareholders' say-so in order to make dividend final and binding. All that Section 173 said and says is that declaration of dividend would be an ordinary item of business.

And under the plenary powers under Section 291, it is the privilege of the board to declare dividend, including interim dividend, because Section 293 has not reserved that privilege for shareholders. This being so, how can one say that the board's decision as to interim dividend does not bind the company till the same is approved by the shareholders? The Supreme Court may, therefore, be pleased to review its stand on the revocable nature of interim dividend.

One may say that the assurance as to finality and binding nature of interim dividend is impliedly contained in Section 205(1B) ushered in by the Amendment Act when it says "the amount of dividend including interim dividend so deposited...shall be used for payment of interim dividend" though the language of the section leaves a lot to be desired, inelegant and inappropriate as it is.

The truth, however, is that under the new regime, interim dividend can possibly be revoked within the initial five days following its declaration unless it is swept into an earmarked bank account earlier. But once it is so earmarked it cannot be used for any purpose save payment of interim dividend. And if it, or part of it, remains unpaid even after 30 days of declaration, the same has to be transferred to an unpaid dividend account as mandated by Section 205A.

In other words, if the interim dividend proposal survives the first five crucial days, it cannot be sabotaged or torpedoed thereafter. Even this limited loophole should not be countenanced.

The best course, therefore, would be to say in so many words that interim dividend declared in terms of Section 205 (1A) is irrevocable and that the consequences of over enthusiasm in this regard will have to be faced by the directors.

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