2025 – Page 19 – Vinod Kothari Consultants

Waiver of dividend by shareholder: Whether generosity can become atrocity?

May 30, 2025/0 Comments/in AGM, Companies Act 2013, corporate governance, Corporate Laws, SEBI /by Staff

– Sikha Bansal, Senior Partner and Simrat Singh, Senior Executive | corplaw@vinodkothari.com

Legal basis for dividend entitlement

The right of a shareholder to receive dividends is conferred under Section 123(5) of the Companies Act, 2013 (‘CA, 2013’). The corresponding obligations on the company are elaborated in Chapter VIII of the Act (Sections 123 to 127), read with the Companies (Declaration and Payment of Dividend) Rules, 2014. For listed companies, Regulations 42 and 43 of the Listing Regulations, 2015 further prescribe a few procedural requirements for declaration and payment of dividend.

However, neither the CA, 2013 nor the Listing Regulations, 2015 recognise a shareholder’s unilateral right to waive the dividend declared by the company.

Waiver by a shareholder – whether dependent on other shareholders

Although the statutory framework does not provide for a waiver, the relationship between the company and its shareholders can, to an extent, be governed by a contract, so long as such contract is not ultra vires the CA, 2013. It is a settled position that the Articles of Association (AoA) of a company form a contract between the company and its members and also inter-se among the members (see Naresh Chandra Sanyal v. Calcutta Stock Exchange Association¹).

Subject to the provisions of the Companies Act the Company and the members are bound by the provisions contained in the Articles of Association. The Articles regulate the internal management of the Company and define the powers of its officers. They also establish a contract between the Company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the Company

As per the Indian Contract Act, 1872 (‘Contract Act’), a proposal becomes a promise, only when it is accepted by the counterparty. A promise takes the form of an agreement which, if enforceable under law, becomes a contract. Therefore, there has to be assent from both the parties, in order to constitute a contract. Where one party only proposes, and the other does not accept, there is no question of a promise/agreement/contract.

Further, when a shareholder intends to waive his rights as to dividend – such a dividend foregone can be construed as a gratuitous transfer to the kitty of other shareholders – in essence, a gift. Under the settled principles of common law and as per section 122 of Transfer of Property Act, 1882, a gift is valid only when accepted by the recipient.

122. “Gift” defined.—“Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee

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Therefore, for a waiver to operate as a gift benefiting others, it must be accepted by the general body of shareholders who stand to receive this “gift”. Therefore, without the express consent by other shareholders, a request of waiver of dividend by one shareholder cannot be acceded to.

Binding nature of promises under Contract Law

Section 37 of the Contract Act mandates that parties to a contract must perform or offer to perform their respective promises, unless such performance is excused under the Act or any other applicable law. Where under articles of association, a company agrees to declare and pay the dividend, the shareholders agree to receive the same in accordance with the provisions of the articles. Therefore, once a dividend is declared, the company is under a legal obligation to pay it and the shareholder is obligated to receive it. The shareholder cannot unilaterally waive this right unless such dispensation is as per law.

Here, it might also be relevant to discuss the peripheries of section 63 of the Contract Act, which provides that a promisee may waive or remit performance wholly or in part. But the spirit of this provision is to release the promisor of an obligation, not to impose an additional burden. In Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd.² it was held that a promisee may extend the time for the performance of the promise u/s 63 of the Contract Act. However, the promisor may choose not to accept the extended time if it will hamper the performance of his promise. Therefore, a promisor is not bound to accept any waiver of the promisee, he is allowed to weigh-in his/her own interests.

Therefore, section 63 does not operate without any boundaries.

Implications of unilateral waiver on the company

Dividend declaration is a strategic financial decision taken by the Board after considering multiple factors such as growth strategy, return on equity, share price impact, liquidity needs, and need for reserves. If a company provides this right to one shareholder, it may have to provide the same right to other shareholders. Therefore, a unilateral waiver by a shareholder could distort this delicate balance in several ways, as it may affect the equitable treatment of shareholders and also impact the company’s policy on retained earnings/general reserves.

Rebutting section 127 concerns

One may argue that Section 127 of the CA, 2013 which allows shareholders to give directions regarding the “manner of payment” of dividend, empowers them to waive their dividend. However, this is a misreading of the provision. Section 127 pertains to mode and timeline of payment, not the right to forgo the dividend altogether. Refusing to entertain a waiver does not constitute a violation of this section.

Closing thoughts

Thus, what appears to be an act of generosity might actually prejudice other shareholders and strain the company’s governance framework. Therefore, in our view, a shareholder seeking waiver of dividends may have a generous intent – however, that cannot happen without the approval of the general body of shareholders.

1971 AIR 422, AIR 1971 SC 422 ↩︎
1958 AIR 512 ↩︎

Cash in Hand, But Still a Loss?

May 30, 2025/0 Comments/in Financial Services, NBFCs, RBI /by Staff

RBI mails to NBFCs to disregard DLG in expected loss computation

– Vinod Kothari & Dayita Kanodia (finserv@vinodkothari.com)

Background

RBI has recently been directing NBFCs to compute ECL without factoring in the impact of DLGs obtained¹. This stance appears to stem from the regulator’s perception that fintech-issued guarantees carry inherent risk and may expose NBFCs to potential losses.

As per Ind AS 109, Expected Credit Loss (ECL) model is used for the recognition and measurement of impairment on financial assets. ECL is a forward-looking approach that requires entities to recognize credit losses based on expectations of future defaults.

The Default Loss guarantee Guidelines (‘DLG Guidelines’) allow LSPs, (both regulated and unregulated) to provide DLG to the extent of 5% of the portfolio amount to the lender. The DLG Guidelines specify the forms in which such DLG can be obtained.

In terms of para 22 of the DL Guidelines,

“RE can accept DLG only in one or more of the following forms:

Cash deposited with the RE;
Fixed Deposit maintained with a Scheduled Commercial Bank with a lien marked in favour of the RE;
Bank Guarantee in favour of the RE”

Accordingly, DLGs can only be obtained in fully funded forms thus eliminating any question of incurring credit loss on such guarantee.

RBI Directive to NBFCs

RBI has directed NBFCs to maintain ECL without giving effect to the DLGs obtained in accordance with the DLG Guidelines. In this respect, the following should be taken into consideration:

A regulatory prescription, without a regulatory backing, and in fact, going against the regulation:
- There is a well-laid process for the RBI coming with a regulation, and in fact, now, the RBI has decided to come up with a consultation process, impact assessment etc before coming with a regulation.
- Dictating a certain treatment with respect to ECL is nothing short of a regulation – if this sort of generic requirements keep coming from the supervisors, then the very dividing line between supervision and regulation is lost.
Let accounting standards prevail; auditors and accountants know what ECL to provide:
- Annex II of the SBR Directions provides that NBFCs shall follow applicable accounting standards. The ECL provisioning, known as impairment loss, comes from para 5.5.13 of Ind AS 109. The detailed requirements of how ECL is to be estimated has been laid in that standard.
- Admittedly, whether and how much ECL write down is required, and whether such ECL estimation does or does not give effect to a fully-funded guarantee, is a matter for the accountants and auditors to deal with. We find little reason for the regulator to step into what is clearly an accounting standard domain.
If there is a funded guarantee, how can losses met by such guarantee be disregarded?
- As per DLG guidelines, the guarantee has to be either fully funded, or fully backed by bank guarantee. It is true that even if a credit loss is backed by a guarantee, it is merely shifting of the exposure – from the borrower to the guarantor. But in this case, the guarantee is equivalent to cash. If the lender has a cash collateral to back up the guarantee, there is no reason to not give the benefit of the same in ECL estimation.
- For example, if for a certain loan pool, the ECL estimation is 3.8%, and the lender has a guarantee of 5% backed by fixed deposits lien-marked to the lender, will the lender have any expected loss? The answer is negative. If the ECL estimation was, say, 6.8% and the guarantee is 5%, clearly the lender’s ECL will be 1.8%. Thus, there is no reason to disregard the funded guarantee while estimating ECL.
If a company cannot incur loss to the extent of the guarantee, and it still creates an impairment loss, it is actually creating a reserve and not a provision, and therefore, compromising its true and fair view:
- The RBI expects lenders to disregard the guarantee and create ECL as if the guarantee did not exist. This will be like creating a loss where the losses actually cannot hit the lender. Therefore, the ECL becomes a reserve, and given that the entity is hitting the P/L with a loss that will not hit the lender, the entity is compromising its true and fair view.
The RBI has reasons to have no trust on the fintechs for the guarantee they give, but it is fully funded.

In light of this, the RBI’s emails sent to various lenders are objectionable, and such emails create a precedent of creating a regulation without going through the regulatory process.

Accordingly, in our view, NBFCs should be allowed to follow their applicable accounting standards while computing the ECL provisions.

Our resources:

https://economictimes.indiatimes.com/industry/banking/finance/rbi-tightens-default-loss-guarantee-rule-nbfcs-to-exclude-cover-on-fintech-sourced-loans/articleshow/121420936.cms?from=mdr
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LISTING REGULATIONS ON SECURITISED DEBT INSTRUMENTS AND SECURITY RECEIPTS

May 27, 2025/0 Comments/in Books, Securitisation /by Staff

We are pleased to unveil “Listing Regulations on Securitised Debt Instruments and Security Receipts”, an in-depth commentary on the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations. The book offers practitioners, market participants, and legal professionals a comprehensive understanding of the evolving regulatory landscape for listed securitised products in India.

Incorporating key regulatory updates, including SEBI’s Master Circulars and Exchange-level compliance requirements, this book not only deciphers the law but also contextualises it within the broader evolution of the securitisation market. With a focus on both regulatory interpretation and market practice, it serves as a valuable resource for anyone engaging with the growing ecosystem of securitised instruments in India.