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THEIR FAILINGS, OUR LEARNINGS

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PROMISE AND PERFORMANCE

Context:

A large listed entity in the mining space treated its published Dividend Distribution Policy as involving discretionary decision-making when it came to passing on dividends. Policies that are carefully crafted with clear intentions should not be ignored casually.

  • A large listed entity ‘A’ has 64.92% shareholding in another listed entity, also its subsidiary, ‘B’.
  • As per the Dividend Distribution Policy (DDP) of ‘A’, all dividend, other than special dividend, that is received from ‘B’, will be passed on to its shareholders in its entirety (net of taxes).
  • On May 11, 2020, ‘B’ announced a normal dividend of INR 16.50 per share for FY 2019-20. INR 4,526 crores were paid to ‘A’ by ‘B’ on May 19, 2020. This amounts to INR 12.18 per share payable to every shareholder of ‘A’.
  • However, ‘A’, for the first time in 5 years, did not distribute this amount to its shareholders. This was against its DDP. In the past, it had almost immediately passed on the amount to its shareholders. As per its DDP, it does not appear to have any discretionary powers in this matter.
  • As per SEBI LODR Regulations, in case a listed entity proposes to change its DDP, it needs to disclose such changes, along with its rationale, in its annual report/website. ‘A’ did not do so.
  • On May 18, 2020, the Board of ‘A’ gave their approval for delisting the Company.
  • This was approved by its shareholders, via postal ballot, on June 25, 2020, with 93.34% majority votes.
  • In its annual report for FY 2019-20, ‘A’ stated that “Given the current market dislocation and uncertainties caused by the coronavirus pandemic, it is important to maximize financial flexibility across the group. Your Board will decide on the size and timing of any future dividend payments once there is greater clarity on the outlook for the economy and commodity markets. Your Company believe this is the correct decision for all the stakeholders as we navigate through an unprecedented period of volatility for the global economy and our business. The Directors do not recommend final dividend for the financial year ended March 31, 2020.”
  • However, in the annual report for the same FY, the Company had painted an exceptionally healthy picture of its financial strength.
  • Proxy Advisory firms raised questions on both the dividend not being passed on to the shareholders, as also whether this could result in a reduction in the Company’s delisting price, and addition to the amount that the promoter will receive.

 

Points to ponder

  • Does the unequivocal assurance given in a policy document become enforceable?
  • What purpose does publishing a policy document serve if the contents are not to be honoured?
  • Should the Independent Directors, as custodians inter alia of the interests of minority shareholders, not have ensured that the majority shareholder does not get to keep the entire dividend received from a group Company?