Small shareholders welcome dividend proposal

The dividend pay out announced in the budget last week has drawn harsh criticism and praise from differing parties. "The Treasury secretary, Dr. P.B. Jayasundera, was absolutely correct in his views on the dividend pay out," said KC Vignarajah, a former chairman of the Ceylon National Chamber of Industries and a crusader who fights for the rights of shareholders. "It is a very welcome indication of the implementation of an existing law because many decent, learned shareholders have made futile representations to many Boards of directors at numerous Annual General Meetings (AGMs)."

M. Mohamed Mohideen, a management consultant and supporter of rights of minority shareholders rights feels this is a welcome relief for minority shareholders in the budget proposals. "This should be distributed to us because we have invested our hard earned money," he said.

However, NR Gajendran, a tax specialist is strongly opposed to these new measures. "The rationale was capital market development and the shareholders should get adequate dividend and alike. Basically, share markets operate on its own and there should be no intervention by the government because shareholders of companies appoint directors and directors run the business," he said. "Shareholders have the right to change the directors who are answerable to the shareholders. These proposals were brought in to encourage companies to distribute dividends but it will not be successful."

The proposals announced in parliament state that if a company does not pay 25% of its divisible profits, then one third ( 33.3%) of the divisible profits less the amount that was paid out will be taxed 15%. If companies pay up to 25%, they will not encounter any problems. If the 25% is not paid, then the 15% will come into play on one third of the distributable profit less the dividends that were paid out. "Companies can choose to pay the 15% tax and save the difference. This proposal erodes the existing law in the statute on section 66," Gajendran said. "Implementation is complicated. It will not achieve its purpose. You cannot disempower a company and interfere on how it carries on business."

Vignarajah is espousing the opposite claims. "The Boards of Directors have ignored all codes of ethics and good conduct. They did not take any interest of the investing community and were interested only in expanding their personal control of companies and perks," he said. "Non disclosure and dodging transparency is their forte." He refers to the argument that development and expansion will be negatively affected as spurious and that an honest Board of Directors conscious of adhering to good corporate governance and values would firstly pay out good dividends and the judicious issue of bonus shares. "If the shareholders and the public perceive the directors to be honest and fair, they would receive a tremendous response."

“It is not surprising that some of the auditors have jumped in the fray, enthusiastically taking the side of the directors, again exhibiting the characteristics of being lapdogs of the directors instead of being the watchdogs of the members and of the public interest," Vignarajah continued. "The leading icons of the private sector, former Chairman of John Keells Holdings (JKH) set a very high standard with great dividend payouts and frequent bonus issues. Charitha De Silva and Ratna Sivaratnam, successive Chairmen of Aitken Spence, brothers Mahendra and Hemaka Amarasuriya, Chairman at Commercial Bank and Singer respectively and brothers Ajith and Tilak de Zoysa at AMW group have all set a very good standard in this respect." According to Vignarajah, these companies have led development with equity and fairness to employees and shareholders, fundamental for a company's growth.

"This proposed high dividend pay out will be a wonderful opportunity, particularly for minority shareholders," Mohideen told The Sunday Times FT. "They can utilize it to invest in more equity and buy more stocks. Under the new rules, companies have to pay us 33.3% of the profits available for distribution. If they don't pay, shareholders can get together and take these directors out." Investing this additional amount in equity in stocks will result in strengthening existing portfolios and reinvestment will lead to capital market development. Mohideen added that this will also encourage new investors to enter the stock market and invest. "Shareholders know they can get a better return instead of putting their money in fixed deposits."

Gajendran pointed out that it is unclear if these proposals are intended for all companies or just publicly quoted companies. "It hasn't been clearly stated but shouldn't apply to private companies," he said. Gajendran explained that in the past, dividends were taxed as normal rate where there was no imputation credit for private companies. There used to a system of economic double taxation where companies would pay taxes on profits and shareholders would again pay taxes on the dividends. To overcome this, the imputation credit system was implemented where corporate taxes paid wound up in the hands of the shareholders.

"In the past, companies would avoid paying taxes on dividends by not declaring dividends. They would draw money through their current accounts," Gajendran explained. "They would draw money through their current account. This was considered a minimal offense. To overcome this, dividends taxes were brought in." It is unnecessary to regulate dividend pay outs in the case of small businesses which are privately owned companies. "There is no need to protect shareholders when there is no outside interest. In public companies, the shareholders can sell their shares and move onto another company."

According to Vignarajah, there are serious flaws in the system which has to be corrected. Inflation in Sri Lanka is particularly high, ranging anywhere from 12% to 17% when compared with the dividend yields of developed countries where inflation ranges between 0.75% and 2.5%. He explained it is unfortunate that many directors attempt to corner shares by creating shareholders' fatigue. "The regulators in Sri Lanka have a history of failure to do their jobs. The Central Bank (CB) in the case of Pramuka Bank and the CB and Colombo Stock Exchange (CSE) in the matter of Commercial Bank failed to act properly and in time."

Vignarajah added that the Securities and Exchange Commission (SEC), the CSE and the Institute of Chartered Accountants must wake up and take meaningful steps to avoid gross manipulation and wrongdoing by errant directors and auditors. "It is all the more important now, as there is a strong drive to open CSE branches in outstations where middle and lower income groups are becoming inveigled into buying shares citing spectacular growth stories. The poor, the weak and the innocent particularly must be protected as a matter of urgency." (NG)