1 Dividend Maintenance

This topic provides information on dividend maintenance.

A fund or an AMC normally shares a portion of its profits with the unit holders by declaring a dividend. By way of receiving a dividend, the unit holders receive their share of the profits, as monetary returns or as increased stock in the funds of the AMC.

Typically, an AMC declares dividends at a regular frequency, depending upon the type of fund and its performance. For money market funds, for instance, there may be daily declaration of dividends. For equity funds, dividends may be declared once a year or every quarter.

Unit holders can receive dividends as payment or choose to reinvest the dividend in the same fund or different funds.

A few important terms must be understood clearly about dividends:

Record Date (Freeze Holdings Date)

When a dividend is declared, a record date is also announced. Any unit holders that hold shares of the company as on this announced record date are eligible to receive dividend.

The holdings balance of the unit holder that is considered for eligibility for dividend on the record date could be the entire holdings including provisional units and blocked units, or it could be only the confirmed balance as on the record date, depending upon the specification made for the fund. The non permissible income (NPI) portion of the earnings is identified if NPI is applicable for the fund.

Book Closing Dates

When a dividend is declared, the company also identifies a period during which no transactions will be accepted and the financial books will be closed. During this period, an inventory of the holdings of the unit holders is taken, and those that are eligible to receive dividend based on their holdings on the record date are identified.

Directors Meeting

In an AMC, the decision to declare dividends is made at a meeting of the board of directors of the AMC. The dividend is also ratified at this meeting.

Cash Dividend

In some funds, unit holders receive their dividends as monetary returns, which can then be reinvested (if desired) in any of the funds of the AMC.

Stock Dividend

In some funds, unit holders receive dividend in the form of a proportionate number of units (holdings), rather than monetary returns. Such dividend always results in an increase in the holdings balance of the investor, and is called a stock dividend. It is exempted from tax. The dividend units are always reinvested into the same fund, for the same unit holder.

The dividend is usually declared as a ratio. For instance, if the declared stock dividend is 2:3, then, for every two units eligible for dividend on the freeze holdings date (from a fund), the unit holder receives 3 units as dividend, which will be reinvested (as subscription transactions in units mode) into the same fund for the unit holder.

Regular Dividend

Dividends are declared by the company / AMC at a frequency that is decided by the directors. Such dividends are called regular dividends.

Regular dividends are only generated by the system based on the processing frequency maintained at the fund corporate actions level.

The board of directors may decide to skip a regular dividend, if deemed necessary, when they feel that the profits gained do not justify a dividend declaration.

Interim Dividend

An AMC / company may decide to declare an ad-hoc dividend independent of the regular frequency, for the purpose of distributing the profits gained during a period in which the fund has done exceptionally well. This is called an interim dividend.

Dividend Declaration Frequency and Dividend Payment Frequency

This is the frequency at which the board of directors decides to declare dividend for a fund. The board may not actually decide to process and pay out dividends when they are declared, but may decide on a different frequency for payment. The frequency at which the board of directors decides to process and pay out dividends that have been declared is known as the Dividend Payment Frequency.

Example:

Let us suppose that for the Malcolm Green Income Fund, the board of directors for the fund decides to declare dividend every quarter, and the first declaration is made on 24th January 2002. The board of directors also decides to process and pay out dividend to its shareholders twice each year.

The declaration and payment would occur in the following pattern:

Table 1-1 Dividend Declaration details

Dividend Declaration Dates Dividend Number Dividend Payment Dates Payment Number
24th January 2002 0    
24th April 2002 1    
24th July 2002 2 24th July 2002 0
24th October 2002 3    
24th January 2003 4 24th January 2003 1