Shareholders eagerly await dividend payment. Yet, many do not claim it when it is paid. The Securities and Exchange Commission (SEC) puts unclaimed dividends at over N70 billion. Why is unclaimed dividends this high? What should be done with this huge cash? SEC suggests that it be ploughed back into the business. Amid plans to tinker with the rule on handling of unclaimed dividend, Capital Market Editor Taofik Salako examines the implications.
Every year, quoted companies pay billions of Naira as cash dividends. While dividend payment is not statutorily compulsory, its payment, distribution and custodianship are statutorily regulated. In the next few weeks, the new earnings season- the period of the release of corporate earnings and dividends; will start and build up all through the second quarter. Post listing rules at the Nigerian Stock Exchange (NSE) requires all quoted companies to submit their periodic financial statements and reports not later than three months after the expiration of the reporting period. With most companies-including all banks, running the 12-month Gregorian calendar year that ends on December 31, corporate earnings reports and dividends for the 2014 business year are expected to trickle in this month and build up gradually in March and subsequently peak in the second quarter.
Earnings season is the most momentous period for investors. It is simply the harvest season. The twin inseparable objectives of investment are the protection of capital and attainment of appreciable return on investment. Dividend is used in generic sense as well as specific sense to refer to return on investment. In generic sense, dividend refers to all gains that accrue on an investment including cash payouts, scrip or bonus shares and capital gain. But dividend is usually used in relation to cash dividend-the periodic distribution of net profit from the business to shareholders. For most retail and long-term investors, the cash dividend is the regular allure and immediate reward since the capital gain-the premium that comes due to appreciation in value of investment, only comes at the point of sale or exit. Just like a landlord looks forward to expiration of current rent and payment of new rent by a tenant, so an investor looks forward to dividend payment.
Besides the earnings season, new rules and regulations aimed at changing the custodianship and distribution of unclaimed dividends have brought dividend payment into the focus. Three weeks ago, Securities and Exchange Commission (SEC), the apex regulator for the Nigerian capital market, released a draft of new rules and regulations that tend to portend a paradigm shift in the management of unclaimed dividend.
Unclaimed dividends,
unknown billionaires
Unclaimed dividend is a recurring issue in the Nigerian market. Over the years, the market has grappled with mounting piles of returned and unclaimed dividend warrants, and the pool of unregulated “slush” fund runs into billions every year. According to official data from SEC, unclaimed dividends had increased sharply from about N27.8 billion in 2008 to N41.3 billion in 2009, only to hit N41.7 billion in 2010. In 2011 it hit N50.2 but slightly increased further to N50.7 billion as at September 2012. By the end of 2012, SEC put unclaimed dividend at N60 billion. Unclaimed dividend is currently estimated at more than N70 billion, based on its three-year growth average.
This is the honey-pot of interest to all stakeholders. Under the current rules and regulations, the billion-Naira unclaimed dividend portfolio is idling away under the registrars-who receive and distribute dividends and keep the unclaimed dividends for as long as 12 years. The nature, distribution and custodianship of the unclaimed dividend have been at the centre of the controversy, accusations and counter-accusations that roundly animate all stakeholders whenever the unclaimed dividend takes the stage. From whichever perspective, there is always a bit of argument in support of every angle to the debate.
Naturally, a good understanding of the nature of dividend, the rights of shareholders with respect to dividend declaration and payment, the dividend payment process and institutional responsibilities and necessary rules and regulations guiding dividend payment would enhance dividend payment and reduce unclaimed dividends.
The board of the company recommends possible cash payout, closure date for register of members and payment date to shareholders who usually approve these recommendations at a general meeting and thereafter the gross value of the dividend is deposited with the registrar for onward distribution to shareholders. The “cheque-like” nature of dividend itself presents a challenge to several shareholders.
Being a “cheque,” the requirement of a “current account” to convert dividend warrant into raw cash has been a major hurdle to most small investors who operate mostly “saving deposit account.” Another cause of the huge unclaimed dividend is the seeming intangibility of dividend especially by average and below average companies.
For instance, a dividend per share of 10 kobo would result into a net sum of N90 on 1000 ordinary shares. With the cheque-like nature of dividend warrant and the intangibility of some dividends, many shareholders who received their warrant merely dump them somewhere. Also, events such as change of address, death, and incorrect entry also contribute to the unclaimed dividend problem. Many shareholders hardly bother to communicate these vital changes in their details to the registrars, so the registrars continue to work on the old details and after many returned warrants, may altogether suspend further communication based on the previous details. These poor attitudes on the part of shareholders are major reasons for unclaimed dividends. This is explained by the fact that the largest chunk of unclaimed dividends belongs to individual retail shareholders and are scattered in little amounts.
It could however not be denied that many unclaimed dividends resulted from inefficient public utility and the nature of dividend sometimes. Gone are those days when the post-office officials moved through the nooks and crannies of cities and towns to drop letters. The private couriers are not better and more importantly far too expensive. So, many companies are left with the public postal system which often performs below expectation.
This has been further compounded by the lack of investment and financial education on the part of several retail shareholders. This is illustrated by the fact that several options that should nonetheless work to reduce the unclaimed dividends appear not to be suitably working for the larger segment of retail shareholders. Under the current system, a dividend warrant becomes statute-barred, that is, unclaimed and due for return to the originating company after 12 years. But before this, it only becomes temporarily invalid after six months and this could be solved by simply taking it to the registrars for revalidation and revalidation can be for as many times as possible.
In effect, many shareholders still have ample chance to claim their monies “lying waste in banks’ vaults.” However, revalidation can become difficult in the case of absence and irregularity of signature and valid identity card. There have also been commendable improvements to the payment system. A mandate could be given to the registrars to pay dividends directly into the owner’s account-either current or saving deposit account. Registrars now provide electronic-dividend (e-dividend) mandate form, either separately or attached to company’s annual report. Many banks have also introduced varieties of special deposit account that accepts monetized papers such as cheque and dividend warrant. Rather than the delay and uncertainties around the postal system, a shareholder can also undertake to pick his warrant directly from the registrars. With cooperation of the board, some registrars pay dividends at the venue of general meeting, thus giving shareholders immediate access to their monies.
But companies have been alleged to borrow certain sum to pay dividend with mindset that certain percentage may not be claimed by their owners. This was one of the many reasons put forward by SEC in its initial efforts to establish a highly controversial unclaimed dividend Trust Fund, a move that was shut down by popular outcry from shareholders and companies. Until the Central Bank of Nigeria (CBN) changed the banking regulatory framework through its Scope of Banking Activities and Ancillary Matters No 3, 2010, most banks directly own ed their registrars. The Scope of Banking Activities and Ancillary Matters No 3, 2010 requires banks to fully concentrate on core banking functions. The model requires banks to either sell all non-core banking businesses or form a holding company to hold such non-core banking businesses including activities such as insurance, asset management and capital market operations. The owner-registrar relationship has been at the centre of suspicion of dividend malpractices. While some companies still own their registrars, the divestments that followed the change in banking regulatory regime have significantly altered the structure and ownership of registrars.
The registrars, who by the current nature of custodianship keep custody of unclaimed dividends, have all along been subjects of intense criticisms by many stakeholders. Sometimes poorly staffed and often lacking in efficient internal processes, registrars’ corporate failures and alleged deliberate efforts to create unclaimed dividends have also been contributing factors to unclaimed dividends.
Blocking the loopholes
In the quest to block loopholes and strengthen the institution of dividend payment, SEC had in 2011 strengthened its rules on payment of dividends. SEC Rule 204 stipulates that a separate interest yielding escrow account shall be opened by a company within 24 hours of the approval of dividends at a general meeting in the case of final dividends or a board meeting in the case of interim dividends, and evidence of such opening must be forwarded to SEC and the company within 24 hours of the account being opened. Also, the rule provides that the total dividend declared by the company shall be paid en-bloc into the said escrow account within 24 hours after the opening of the account and evidence of such payment forwarded to SEC and the Registrar within 24 hours. The Registrar, then, shall be responsible for effecting dividend payment either by way of electronic transfer or by issuance and distribution of dividend warrant to the beneficiaries within the time limit prescribed in Rule 204(a)(5).
Besides, the Registrar is expected to forward a monthly statement of account certified by the bank to SEC detailing the outflow and inflow into the accounts and the accrued interests on the dividend. Failure to comply with the rules carries stiff penalties for the registrars and paying companies.
Now, SEC plans to change the custodianship and duration of the unclaimed dividend. The draft of new rules and regulations; released three weeks ago and currently undergoing stakeholders’ review, will allow companies to retrieve unclaimed dividends and invest such money for their benefit. It is a paradigm shift from the current position where companies are not allowed access to unclaimed dividends until after 12 years. Unclaimed dividends, which, under the current regime, are in the custody of registrars until after they become statute-barred after 12 years, will now revert back to the paying company after 12 months.
However, the company is under obligation to make the unclaimed dividend available to the registrars for payment whenever there is request by any shareholder. According to the new rules and regulations, all unclaimed dividends in the custody of the registrars shall be returned to the paying company 12 months after the date of approval of dividends at a general meeting, in the case of final dividends, or a board meeting, in the case of interim dividends. The registrar is expected to provide evidence of such remittance to SEC within 24 hours.
The rules indicated that “where dividends are returned to the company unclaimed, the company may invest the unclaimed dividend for its own benefit in a guaranteed income investment outside the company and no interest shall accrue on the dividends against the company”. However, unclaimed dividend shall not be used by the company for its own business except in accordance with provisions of Companies and Allied Matters Act (CAMA). This obviously is a reference to the 12-year waiting period for companies to plough back unclaimed dividends into their capital.
Also, a company may retain a minimum of five per cent of the unclaimed dividends in cash or near-cash for the purpose of remittance to the Registrars upon request for payment. According to the draft, all accrued interests from the failure of Registrars to remit the unclaimed dividends within the time limit prescribed in these Rules and Regulations shall be remitted along with the unclaimed dividend to the paying company.
In this instance, the accrued interest shall be calculated at a rate not below a premium of five percent above the Central Bank of Nigeria (CBN) treasury bills rate. Failure to remit unclaimed dividends to the paying company by the Registrar as indicated shall attract a penalty of N5 million and an additional sum of N100, 000 for every day such contravention persists.
The rules however retain registrars as the distributors of dividends. The registrars will still bear the responsibility of paying dividends to a shareholder after the dividends have been returned to the company. However, the affected company shall remit the portion of unclaimed dividends claimed by a shareholder to the registrar within 48 hours of receiving a request or claim for payment. Where the company fails to meet the remittance or payment deadline to registrar as indicated above, the company will pay penalty of N1 million in the first instance and N100, 000 for every day such contravention persists. Also, any registrar that connives or fails to comply with the provision of the rules on the 48-hour repayment will pay a penalty of N2 million in the first instance and N500, 000 for every day such contravention persists.
Taking altogether, the existing rules and impending rules and regulations appear to address substantially stakeholders’ concerns on the unclaimed dividends. Companies and shareholders had argued that rather than idling away with registrars, unclaimed dividend should be put to better use by the companies, which indirectly still create values for shareholders. Shareholders have thrown their weight behind the draft.
President, Constance Shareholders Association of Nigeria, Shehu Mikhail, said the main plank of the new rules and regulations is in line with the agitation of shareholders. According to him, shareholders have been clamouring that unclaimed dividends should revert to paying companies rather than staying with registrars as shareholders own both the paying company and unclaimed dividends and can get future values from both.
“This is one of the things shareholders have been clamouring for, it is good to have the unclaimed dividends sent back to the companies,” Mikhail said. He said the new rules and regulations might help to check any unhealthy collaboration between directors of companies and registrars noting that there has always been suspicion that shareholders were being deliberately frustrated from getting their dividends.
Founding member of Nigeria Shareholders Solidarity Association (NSSA) and shareholders’ rights activist, Alhaji Gbadebo Olatokunbo, said the impending new rules will be good for the capital market. Still suspicious of registrars, Olatokunbo said that registrars are still using delay tactics to create unclaimed dividends because the returned monies will come to their custody. “Some companies don’t abide by the payment date stated in the annual report and will not release cash as at when due to the registrars, yet the registrars will keep quiet in order not to lose the clients. Really, the new rules will lead to improvement in dividend payouts, the sanctions will prevent malpractices,” Olatokunbo said.
Chief relationship officer, TFS Securities and Investment Limited, Mr. Charles Fakrogha, also described the new rules as welcome development noting that putting the unclaimed monies in the custody of paying companies will be better. Managing director, Dependable Securities Limited, Mr. Chinenyem Anyanwu added that the new rules will provide the paying-company additional funds to improve its bottom-line for the benefit of the shareholders. He however noted that stringent enforcement should be put in place to ensure that the company remits the money whenever it is required.
However, while shareholders under the aegis of Salemson Shareholders’ Association of Nigeria welcomed the general nature of the new rules, they wanted the rules to be modified. According to the association, the unclaimed funds should be used to buy additional shares of the paying company in the name of the beneficiary. National coordinator, Salemson Shareholders’ Association of Nigeria, Chief Erinfolami Gafar, said such provision will lead to direct benefit to the affected shareholder in the form of increased shareholdings.
Beyond rules and regulations
Most stakeholders agree that stemming the tide of unclaimed dividends requires multi-prong approach that involves commitments of all stakeholders; from paying companies, to regulators, shareholders, registrars, banks and other capital market operators. Mikhail urged SEC to coordinate a compendium of unclaimed dividends with names and addresses of the beneficiaries as part of efforts to push unclaimed dividends out to shareholders. Shareholders said SEC should liaise with the CBN to ensure that dividend warrants can be paid into savings accounts and banks should stop the charges on signing of e-dividend form. Alternatively, with the know-your-customer (KYC) relationship management firmly establish in the capital market, stockbrokers should be able to sign e-dividend form since they are closer to the shareholders than the banks.
Shareholders have also called for increased public enlightenment to educate investors about the processes at the capital market. Some shareholders still want the 12-year statue-limit to be removed completely so that shareholders can claim their money whenever they want. Alongside the new rules, SEC is also addressing the issue of valid identity card. SEC is amending its rules to include voter’s registration card issued by the Independent National Electoral Commission (INEC) as another valid identity for capital market transactions.
This will increase possible personal identity documents for shareholders to seven. The other means of identity include current international passport, residence permit issued by the immigration authorities, current driver’s licence issued by the Federal Road Safety Commission (FRSC), inland revenue tax clearance certificate, birth certificate or sworn declaration of age and national identity card. The new SEC management, under acting director general Mounir Gwarzo, has indicated that it will take investors’ education to the front burner and will create nationwide enlightenment framework. With multi-prong and multi-stakeholders approach, the quantum and growth rate of unclaimed dividends will reduce considerably, to the benefit of all stakeholders.
