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A Right To Forego

Published on Wed, Jul 15,2015 | 23:24, Updated at Fri, Jul 17 at 17:59Source : 

By: Pallavi Puri, Partner & Pranav Gadi, Associate, JSA

Shares in a company (private or public) entitles a shareholder to certain rights, which amongst others, includes the right to receive dividend. As commonly understood, dividend is a return on the investment made by a shareholder in a company, which may either be interim or a final dividend.

Typically the final dividend is payable by a company for a financial year at a general meeting (of the company) out of profits for that year or any previous years after providing for depreciation in accordance with the appropriate standards. The law however, also allows the board of directors of a company to propose and declare an interim dividend during a financial year out of surplus in the profit and loss account for the financial year in which such interim dividend is proposed to be declared.  

Interim dividend is of such nature, which the board of directors of a company can propose and declare at their discretion, where the company’s profits warrant such payments. However, unlike final dividend, a mere resolution declaring an interim dividend does not create any liability on the company and may be rescinded at any time before actual payment to the shareholders of the company is made. Thus, a primary distinction between interim & final dividend is that unlike interim dividend, a final dividend once declared by the company in a general meeting constitutes a debt and creates an enforceable obligation on the company.

Considering that an interim dividend does not create any enforceable obligation on the company and can be rescinded even if it is declared, an important question that arises is whether the shareholders entitled to such dividend can waive their right to receive it. And, where a final dividend is proposed does such a right exist as well.

It may well be argued that while the right to propose and declare dividend is in the hands of the board and/ or the shareholders once all the corporate compliances are met, the right to accept it is with the shareholders.

The concept of proposal, declaration and payment of dividend is a multi-step process. In the case of interim dividend, the board only proposes and declares the dividend, however, when it comes to the final dividend, the dividend per share is at first proposed by the board of directors of the company and then the same is to be approved by the shareholders, and once approved, there is an obligation to pay.

The amount of dividend per share, as proposed by the board of the company, can be declared fully or of a reduced amount, as resolved by the shareholders in their general meeting, keeping in mind the needs and the capacity of the company. If the amount of dividend declared as interim dividend is unclaimed, then there is no additional provision that the company needs to comply with of the Companies Act, 2013, however, if the final dividend remains unclaimed, then the company has to undertake additional compliances in accordance with the Companies Act, 2013.

Thus, the question that arises here is – When does a shareholder have the right to exercise the right to forego or waive the dividend being made available to him?

The right to forgo or waive the dividend, to which a shareholder is entitled, can be exercised at different stages when it comes to the interim dividend or a final dividend. In the case of interim, the right can be exercised once dividend is declared by the board, however, when it comes to a final dividend, the right may be exercised after the dividend is proposed but before its declaration. The reason for such a distinction is, declared unclaimed interim dividend does not create any debt and an enforceable liability on the company, but declared unclaimed final dividend does.

A benefit of such waiver is that, the company, although capable of giving returns to its shareholders at a given time, can utilise the amounts forgone or waived by the shareholders for its day to day business affairs and eventually yield higher returns in the future, which will be made available to the shareholders.

Basis precedents, it appears that as long as the right to waive has been incorporated in the articles of association of the company, such right to forego can be exercised by the shareholders. This concept has not been included in any legislation in India yet, however, has been practically exercised by various companies.

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