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Dividend
frauds, better policies needed!
Article published as on Sunday, 10th
MAY, 2020 at 11:30 a.m.
These are another kind of frauds
done by promoters and management with bad intention.
What are dividend frauds? How do
companies carry on this?
Dividend frauds are non-payment
of dividend to shareholder holding shares on record dates.
Let’s understand how these are
carried on with a case study
There is a company known as Jain
irrigation
Which declared dividend of rupee
1 and fixed the record date as 13th September 2019.
The resolution of dividend was to
be put forth in the AGM which was to be held on 30th September.
The chairman of Jain irrigation
suggested to adjourn the item no.2 which was related to dividend declaration to
the next AGM which was to be held on 27th December 2019.
Now what was the outcome of that
meeting?
The resolution was not passed as
all the promoters voted their dissent in the voting item- dividend declaration.
So this is basically how
promoters defraud investors by first fixing record date for dividend and then
not declaring it.
And it is not punishable under
Why
and how?
This section states that once
resolution is approved and passed by the majority in voting, the company HAS to pay the dividend and failure to
do so can lead to prosecution under sec.127 , BUT what if resolution is not passed ?
Some fraudulent management and promoters
take advantage of this exact condition!
Well this is the case of one such
company Jain
irrigation.
Such frauds have been done by 8K miles as well.
explanation in short – even
here the management proposed 7 rupees dividend per share on 10th may,
2017 and after some days when their shares were sold in the market they
changed the amount of dividend to rupee 1.
This isn’t just limited to
dividend some companies namely Kwality, P C jeweller and Vakrangee carried on
similar tactics with their buyback plans in the year 2018.
First they announced great and
ambitious plans for buybacks held records dates and few days later cancelled
the buyback plans.
(Here also promoters of P C
jeweller offloaded shares and later settled the case with sebi neither
accepting nor denying their crime.)
Law says
that dividend shall be paid within 30 of declaration and not the proposal.
To understand difference between proposed
dividend and declared dividend lets first understand the difference between final dividend and interim
dividend
Final dividend
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Interim dividend
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Final dividend are those which are declared at
the AGM’s.
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Interim dividends are those declared between the
two AGM’s
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Final dividends are proposed by the board of director
and require shareholder’s approval to be considered declared dividend.
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Here board of director can independently declare an
interim dividend, they don’t requiring shareholder vote.
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Usually record dates are held before outcome of
vote is announced.
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Record dates are usually held only after
confirmation by the board that the dividend is declared.
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Possibility of non-payment and yet no action
could be taken.
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Possibility
of non-payment but actions could be taken under provisions of the laws.
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We may think, well there might be a reason why
record date is held before the dividend is actually considered declared.
Yes! Simply
cost saving by the company.
Company choses same date for deciding the names of
shareholders eligible to vote on the resolution and record date of dividend.
As there is costs to get the list from registrars
and transfer agents (R&TA), as they have to ask the same from depositories CDSL/NSDL.
And now its tradition to hold record date before
dividend is actually declared.
Here is an example:
Infosys
12th
April
Board
meeting, directors proposed a final dividend of Rupees 10.5
Board had
fixed book closure date for the purpose of AGM and record date for dividend
payment as 15th June-2019 (Saturday)
Hence the ex-dividend
date would have been Thursday that was 13th June.
And dividend
would be credited on 25th June.
13th
June
Stock become
ex-dividend.
22nd
June
AGM was held.
24th
June
Voting
results were notified on exchanges.
25th
June
And then the
dividend was credited to shareholders on 25th June.
Now just imagine what if the resolution was opposed and not
passed by majority?
Well it may not happen in Infosys but there is
possibility of such things happening.
And these things are happening with other companies
such as Jain irrigation, 8 k miles, and many more companies which we are not aware of.
To compare this situation I would give an example:
One goes to
supermarket to purchase a packet of wafers.
Case 1:
A Person puts the wafers in basket, ques up in
line, pays and then leaves and enjoys wafers at home. (Everything fine and good,
most practical situation)
Case 2:
A Person picks up the packet and eats the wafer.
Ques up in line and hands over the empty packet......
Two things can happen s/he will pay or s/he will
not pay.
(Unnecessary risk, what if person doesn’t pays)
Our dividend announcement situation is like case 2 we are holding record date even
before dividend is declared, only assuming that it will be declared by the
majority of votes.
Which puts investors at risk.
Conclusions.
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To protect
the shareholder from dividend frauds, we have to urge SEBI and Companies to
change their tradition and hold record date only after the voting results are
declared.
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We haven’t
seen something like bonus frauds BECAUSE
while issuing bonus shares – FIRST
resolution is put to vote and only after the outcome of the vote is known, the
record date is fixed for the bonus shares.
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