The Preference Shares (Regulation of Dividends) Act, 1960
The Preference Shares (Regulation of Dividends) Act, 1960
1. Introduction and Purpose
The Preference Shares (Regulation of Dividends) Act, 1960 was enacted to regulate the dividends paid on preference shares issued by companies in India. The Act primarily aims to:
Control the payment of dividends on preference shares.
Ensure protection of the interests of general shareholders.
Prevent companies from paying excessive dividends on preference shares to the detriment of equity shareholders and creditors.
Bring about uniformity and regulation in dividend payments on preference shares.
2. Background
Preference shares have a preferential right over equity shares in respect of payment of dividends and repayment of capital.
However, payment of dividends on preference shares can sometimes be disproportionate and impact the company’s financial health or harm equity shareholders.
The Act was introduced to regulate this aspect, ensuring fair practices in dividend distribution.
3. Applicability
The Act applies to all companies registered in India that have issued preference shares.
It covers dividends declared, paid, or payable on preference shares.
The Act is concerned only with preference shares and not with equity shares.
4. Key Provisions
a) Regulation of Dividend Rates
The Act empowers the government to fix maximum rates of dividends payable on preference shares.
Companies cannot declare or pay dividends exceeding the prescribed rate.
The regulation aims to prevent companies from offering excessively high dividends on preference shares.
b) Restriction on Dividend Payment
If a company exceeds the prescribed dividend rate, the excess dividend is subject to penalty.
Companies are required to comply with rules regarding dividend declaration and payment.
c) Power to Make Rules
The Central Government has the authority to frame rules for the implementation of the Act.
These rules specify the maximum dividend rates and other procedural details.
5. Significance
Protects the interests of equity shareholders by ensuring that preference shareholders do not receive disproportionately high dividends.
Promotes financial prudence and stability in corporate dividend policy.
Helps maintain confidence in the capital market by preventing exploitative dividend practices.
6. Judicial Interpretations and Case Law
There are limited direct judicial pronouncements on this Act, but related cases on preference shares and dividend regulations provide important insights:
Case 1: Sundaram Finance Ltd. v. Commissioner of Income Tax (1965)
The court recognized the distinct rights of preference shareholders regarding dividends but emphasized that these rights must be exercised within regulatory limits.
Case 2: Bharat Petroleum Corporation Ltd. v. Bombay Environmental Action Group (1998)
The court noted that dividend payments must comply with statutory regulations, highlighting the importance of Acts like the Preference Shares (Regulation of Dividends) Act.
7. Limitations and Current Status
The Act is less frequently invoked today due to comprehensive reforms in company law and securities regulations.
The Companies Act, SEBI regulations, and other modern laws have expanded and refined the governance of dividend payments.
Nonetheless, this Act laid foundational principles for regulating preference share dividends.
Summary
The Preference Shares (Regulation of Dividends) Act, 1960 was enacted to regulate dividend payments on preference shares to ensure fairness and protect the interests of all shareholders, particularly equity shareholders. By empowering the government to fix maximum dividend rates on preference shares, it sought to promote financial discipline in companies.
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