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Saturday, Mar 09, 2002

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Can board revoke payout decisions?

BL Research Bureau

THE Finance Ministry may not be on such a safe wicket with regard to the contention that a board decision on interim dividend does not put a seal of finality to the company's obligation to its shareholders.

The Supreme Court's decision in the Indian Express case has been cited in this context. But the above case dealt with the law on the subject as it stood in the 1960s.

The amendment to the Companies Act effected in the year 2000 puts paid to the interpretation of the Finance Ministry, according to Mr N. Ramanathan, an official with Ponni Sugars, a leading sugar manufacturer in the South.

He said that the provisions of Section 205 (1C) of the Companies Act as amended in the year 2000 equate interim dividend with final dividend.

The decision of the board approving the payment of interim dividend can only be revoked by the shareholders - the treatment applicable all along to payment of final dividend. In the light of the amended law, interim dividend announcements too acquire the character of an obligation that can be extinguished only by the shareholders themselves by passing a resolution to that effect.

Also, the appropriation of dividends to a separate bank account prior to March 31, 2002 will amount to payment of dividend and be taxed in the light of existing provisions of the I-T Act, he said.

Mr Ramanathan also said that the phenomenon of boards cancelling dividends after having approved it earlier - as some have already done, with a few others contemplating to do so - is potentially violative of the relevant provisions of Company Law.

Revocation, whether of final dividends or interim dividends, is the preserve of shareholders and thus the board would seem to have acted ultra vires.

Companies such as Reliance Industries, Dabur India, Cipla and Dr Reddy's have declared and later cancelled the interim dividend.

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Can board revoke payout decisions?

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