JN Gupta, former Executive Director, Securities and Exchanges Board of India, and Co-founder & Managing Director, Stakeholders Empowerment Services (SES), said that it is well within the regulations for the company to declare an interim and special dividend.
Mindtree in its recent BSE filing said the company would consider interim or special dividend for the quarter ended March 31, 2019.
Though the announcement is nothing unusual, it has raises questions as it comes at a time when an open offer from L&T is in the offing.
The construction major L&T acquired majority stake of 20.32 percent in Mindtree in March. The stake belonged to VG Siddhartha and Coffee Day Enterprises he owns. L&T upped its offer to acquire an additional 46 percent through an open offer for 31 percent stakes and 15 percent on-market purchase.
The open offer for L&T commences on May 14. The Committee of Independent Directors set up by Mindtree will give recommendations to stakeholders on whether to sell their stake or not by May 10. Mindtree is announcing its annual and fourth quarter results on April 17, where it would consider interim and special dividend.
According to a source, the company cannot consider ‘Special Dividend’ when there is an open offer as per SEBI regulations. According to Clauses 26(1) & (2) of Substantial Acquisition of Shares and Takeover (SAST) regulations, the business of the target company during the open offer period has to be conducted in the ordinary course. The special dividend announced by the company, the source said, is not considered an ordinary course of action.
However, JN Gupta, former Executive Director, Securities and Exchanges Board of India, and Co-founder & Managing Director, Stakeholders Empowerment Services (SES), said it is well within the regulations for the company to declare an interim and special dividend.
According to SAST rules of SEBI, the business of the target company has to be carried out in an ordinary course as per the past practice. The declaration of dividend is a corporate action and is an ordinary course of business considering that Mindtree has declared a special dividend to mark special occasions previously as well.
Mindtree had declared special dividend on four separate occasions in the last 10 years in the range of Rs 1 to Rs 5 per share. The report by SES pointed out, “Mostly the Board has declared a special dividend on an occasion such as 10th and 15th-year anniversaries, upon completion of 10 years of Company’s IPO and on the company crossing $100 million revenue.”
Considering the company is completing its 20th anniversary in 2019 since its inception in 1999, the Board may consider a special dividend looking at the historical declaration of the special dividend. According to SES, that will be in the 0rdinary course and in line with past practice.
Gupta further explained, “The Board would be within in its power to pay an interim and special dividend and that would be in an ordinary course as long as the amount is in line with the historical practice. That is around Rs 4-5 per share since the maximum interim dividend paid in the past has been Rs 5 per share.”
Even if the company raises the dividend a few notches high, the company will be well within its power. The maximum dividend the company can give is Rs 192 per share.
He explained that though the dividend goes to shareholders, such a hefty sum would mean the company is removing its assets in order to pay the dividends. Also, this would indirectly increase the offer price to Rs 1,172 (open offer of Rs 980+ dividend of Rs 192). L&T might raise a red flag over this.
“But it is unlikely for Mindtree to announce huge dividend. A hefty dividend such as this would raise questions of compliance concerns,” Gupta added.An email sent to Mindtree’s independent Director Apurva Purohit remained unanswered till the time this article was published. The story will be updated based on Purohit’s response.