SHORT SUMMARY
Dividend, once declared, constitutes a debt owed by the company to its shareholders and becomes a legally enforceable right in the hands of such shareholders. However, such a right, being of a private and personal nature, is waivable at the discretion of the beneficiary. The Companies Act, 2013 ("the Act") does not explicitly codify the mechanism for waiver of dividend, thereby rendering its permissibility and procedure a subject of judicial interpretation and corporate practice.
This article provides a comprehensive legal overview of the concept of dividend waiver, its treatment under Indian corporate jurisprudence, procedural mechanism, implications, and judicial precedents, including a relevant example from Sun Pharmaceuticals Industries Limited.
Legal Provisions
Under the Companies Act, 2013, the provisions governing declaration and payment of dividend are primarily contained in:
- Section 123 - Declaration of Dividend
- Section 124 - Unpaid Dividend
- Section 10 - Binding effect of Memorandum and Articles of Association
However, there is no express provision either permitting or prohibiting the waiver of declared dividend by shareholders. Therefore, the permissibility of such a waiver emanates from the general principles of contract law and equity, particularly Section 63 of the Indian Contract Act, 1872, which permits the promisee to dispense with or remit the performance of the obligation owed to him.
"Every shareholder has a right to dividend, but not an obligation to accept it."
Thus, a shareholder, in exercise of personal discretion, may voluntarily waive the right to receive dividend, either fully or partially, provided such waiver is bona fide, unambiguous, and does not prejudice the rights of other shareholders or contravene the company's constitutional documents.
As per Geeta Saar_59 of ICSI "Waiver of right to receive dividend Receipt of dividend is a right of shareholder and not an obligation. There is no provision under the Act to deal with the waiver of dividend. Hence, such provisions may be contained in the articles of the company. Further, such waiver can either be full or partial."
Illustration: Waiver of Dividend - Sun Pharmaceuticals Case
In FY 2021-22, Sun Pharmaceuticals Industries Limited, a listed entity, reported that a significant portion of its shareholding was held by promoter group entities, including foreign and domestic arms of the group. In the said year, a dividend was declared by the company, and certain promoter group entities voluntarily waived their right to receive dividend, citing internal group structuring and capital management strategies.
Key Observations
- The waiver was communicated in writing and placed before the Board.
- The company's financial statements included appropriate disclosures to this effect.
- It was clarified that no amount was transferred to the Unpaid Dividend Account in respect of waived dividends.
Conditions and Procedure for Valid Waiver
a. Enabling Provision in AOA
It is advisable that the company's Articles of Association contain an express provision permitting the shareholders to waive their entitlement to dividend.
b. Written Waiver Letter
The shareholder intending to waive dividend must submit a written and signed waiver addressed to the Board of Directors prior to the due date of payment. The waiver should clearly specify the quantum of dividend waived and the shares in respect of which such waiver is effected.
c. Board Consideration and Resolution
The Board of Directors must pass a resolution noting the waiver, verifying the authority of the person executing the waiver, and ensuring that the waiver is not discriminatory or detrimental to any class of shareholders.
d. Accounting Treatment
- The waived dividend shall not be treated as unpaid or transferred to the Unpaid Dividend Account under Section 124.
- It shall not be reflected as a liability in the books once validly waived.
- If material, the waiver may be disclosed under 'Other Notes' to the financial statements.
Key Legal Considerations
- The waiver must be voluntary, specific, and supported by documentary evidence.
- The waiver should not result in enhancement of dividend payable to other shareholders, unless permitted by law or AOA.
- The waiver should not be part of any clandestine arrangement to defeat the provisions of taxation or SEBI regulations (in case of listed companies).
Conclusion
In light of judicial precedents and prevailing corporate practices, it is legally permissible for a shareholder to waive the right to receive dividend, either wholly or in part, subject to the condition that the waiver is voluntary, non-discriminatory, and duly recorded. In view of the absence of statutory prohibition, the procedure must be backed by sound documentation, board approval, and disclosures, especially in companies with significant public or institutional shareholding.
The example of Sun Pharmaceuticals further establishes the practical applicability of dividend waiver in a corporate group structure, with adequate safeguards and governance measures.
Sun Pharmaceutical Industries Limited (Sun Pharma) has a history of implementing dividend waivers within its corporate group structure, demonstrating the practical application of this financial strategy.
Dividend Waiver Instances:
- Financial Year 2009-2010: Sun Pharma provided a "Form of Waiver forgoing the Right to receive the dividend" dated September 1, 2010.
- Financial Year 2010-2011: A similar waiver form was issued on September 19, 2011.
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