Deemed dividend madness

When a government announces a budget proposal that leads in the longer term to the slow death of private enterprise, business leaders generally tear apart the few hairs left on the balding scalp. But when such proposals are initiated by the private sector leaders in positions of high esteem, for their individual gain or ego, the only option is Hari kiri?

The proposal announced in the last budget, that any company with a dividend payout of less than 25% of the distributable profits be subject to income tax, at the rate of 15%, on the difference between 1/3rd of the distributable profits and the amount of dividend distributed, is one such proposal. The above specific proposal is despite the existing tax legislation empowering tax assessors, to deem at their discretion, the payment of dividends where a reasonable part of the distributable profits are not distributed by a company. It is commonly believed the distributable profits will be determined by adding to book profits the depreciation charge and deducting there from only the capital expenditure incurred.

These business leaders, having delivered the kidney punch to the private sector, are now strutting like peacocks, as if it’s their moment of crowning glory by having assured good governance through the blade of the knife they have put in to the hands of the tax officials. To justify their action and wash their sins, articles and interviews are published in the newspapers showing the benefits of their action, especially the benefits to powerless minority shareholders who are poor pensioners. To make matters worse, they freely cite names of business leaders who have upheld and practiced the principles advocated, in enterprises under their control.

They argue that shareholders have a right to receive a reasonable return on their investments defined as “at least 50 percent of distributable profits paid as annual dividends and rewards in the form of regular bonus issues and rights issues priced at a significant discount to market.” When asked how business expansion, financing of inflation related fund needs for working capital and replacement of assets and new investments are to be secured, they point the directors in the direction of development and commercial banks and shareholder capital infusions.

They are not so ignorant, not to understand that there is a big difference between profits and cash! However, in their study days and heyday in leadership, whether they were exposed to the theory of free cash flow and its importance as the most significant corporate performance indicator, is in doubt. Do they not realize that free cash flow is determined after, not only the adjustment for depreciation and capital expenditure incurred, but also after providing for future capital expenditure, working capital increases for the future normal business expansion, inflationary effects and replacement of business assets?

Their argument that directors are using profits to give loans and invest in useless share transactions is an attempt to undermine the responsibility and accountability vesting in directors and a sheer disregard for the covenants of Articles and Memorandum that bind directors in their role as “trustees” of shareholders and case law provisions that directors have the sole right to declare interim dividends and also recommend the final dividends.

They have many choices if they are unhappy with the role and responsibility of directors (ie. vote them out at general meetings, sell their shares and invest in safe regular return yielding investments, or realize the shares in parts to get their desired annual return). These leaders who held high positions in CSE and the SEC have forgotten the real drivers of value in stock markets and how developed markets encourage value growth.

Are they blind in one eye not to recognize the costs of their own arguments that act as a detriment to corporate growth (relatively high cost of borrowings, impact of debt equity, risk management in capital structuring, costs of new issues, costs of under priced rights issues)? They may even be blind in both eyes for they have ignored the implications of the Companies Act on going concern status, directors’ liability for failed entities, solvency rules and the directives of the Central Bank and other regulators on prudency. Have they looked at the new accounting standards with flexible options under fair value valuation methodology, biological asset valuations and investment property valuations that yield in large credits which are unrepresented by cash.. For example, a listed company has released over a billion rupees to the profit and loss account leveraging the investment property standard, with certainly no cash to pay a 25% thereof as dividends.

It is sad that these leaders having failed to resolve their private disputes with companies they hold minority shares in and having written of their point of view and grievance on the issue to every possible person in the corporate and governance arena, have now used their tea party ego trip of being recognized as gold card holders of Inland Revenue to hand over a petition to the highest in the land and in the process put a knife with a sharp blade in the hands of a “monkey” to cut the windpipe off the private sector.

These leaders who once even petitioned chambers to use the codes of conduct and ethics to expel the company with whom they had their personal differences, must now be dealt with by the same rules, for violating the principle of not placing the private sector before ones self. The entire private sector must hang their heads in shame for the plight of a few placing the sectors future in jeopardy.