Sino Grandness

[specuvestor]

^^ because it is the standard line used by loss making companies in the past decades to say why they cannot pay dividends and verified by the companies' act. The holdco is the legal entity that pays dividends to public shareholders.

But the mechanics of the definition of "profit" might have changed. Portuser used New Toyo as an interesting example which i dont follow but will find out more. Prima facie it seems that both New Toyo and Sinogrand paid dividends when their holdco turns profitable for that year, non-cumulative. If this is the case then makes one wonder why companies bother to apply to court for capital restructuring to wipe out the losses

New Toyo International Holdings (NTIH) still carried an accumulated loss of $12.9m as at end-2015. 

How did NTIH pay dividends all these years then?

NTIH's subsidiaries turned in profits of $20.6m last year and paid NTIH $9.7m as dividends, which was reported as NTIH's profit. From the profit, NTIH paid $5.3m as dividend to its shareholders.

Dividend payment by Sino Grandness Food Industry Group Limited (SGFI) to its shareholders follows the same process. 

In a nutshell, dividends paid to shareholders by the holding company come from profits of its subsidiaries. 

[CityFarmer]

It is true that a company cannot pay dividends out of an accumulated loss. However the question is whether this accumulated loss is determined on a company level or a group level.

Specuvestor,
I assume that you understand it to be on a company level since only Sino Grandness holding company has an accumulated loss while the group is profitable. Why do you think it should be considered on a company level ?

I am not a lawyer, but the Company Act 403 is meant for all registered Singapore companies, which include the holding company, and all Singapore registered companies within a group.

The question is why the conflict between Company Act 403, and the case study proposed by Portuser? The 403 is real and valid, but the definition of profit, and capital may be the grey. No further detail provided by the Act on both.

I reckon, the "capital" is re-based each FY. Current year profit can be distributed, as long as not credited into reserve account. The dividend can not exceed the (adjusted?) current profit, which means no tapping into the re-based capital of the current FY.

What do you think on the reasoning? Any lawyer or accountant to advice?

[portuser]

Specuvestor

You have said:

".......it is the standard line used by loss making companies in the past decades to say why they cannot pay dividends and verified by the companies' act."

Section 403 (1) of the Companies Act states:

No dividend shall be payable to the share-holders of any company except out of profits.

The confusion has arisen as you might have taken "profits" to be "accumulated profit".

You have mentioned that "the mechanics of the definition of "profit" might have changed."

My recollections are that New Toyo International Holdings has been paying dividends for the past 16 consecutive years despite carrying accumulated loss. You may want to find out when the current section 403 (1) came into being.

Disallowing dividend payment when there is accumulated loss will discourage acquisition. Buyer will have less incentive to take over a company that has raked up huge past losses if he cannot receive a dividend after turning the business around. Why should he be penalised for the ineptness of the previous owner?

In #1676, you suggested that dividend payment for 2015 may not be in order.

Section 403(2) of the Companies Act states that CEO and board directors commit an offence if they illegally sanction dividend payment.

[YWT]

Perhaps this can shed some light ===> Something for Qian Hu shareholders despite losses

"The Companies Act is broad, just telling you that you have to pay dividends out of profits," said PwC Singapore partner Kok Moi Lre.

"The profits can be for the current year, or accumulated or retained profits in previous years." Firms with "lumpy" annual earnings can thus choose to smooth out the dividend payments over several years, so investors can enjoy a steady dividend stream, said Ms Kok.

[piaopiao]

This may provide some clarity.

http://news.asiaone.com/News/AsiaOne+New...08966.html

[CityFarmer]

Disallowing dividend payment when there is accumulated loss will discourage acquisition. Buyer will have less incentive to take over a company that has raked up huge past losses if he cannot receive a dividend after turning the business around. Why should he be penalised for the ineptness of the previous owner?

You have suggested a good case study on the conflict, but we shouldn't deny that companies have spent resources to eliminate the accumulated losses, just to ensure future dividend payout, as stated in their formal doc. One good case, is the recent Global Testing corp action on capital reduction.

Chances, are there are unknowns to us, which cause the confusion. It might also a grey, even to the professionals.

(not vested)

[specuvestor]

Specuvestor

You have said:

".......it is the standard line used by loss making companies in the past decades to say why they cannot pay dividends and verified by the companies' act."

Section 403 (1) of the Companies Act states:

No dividend shall be payable to the share-holders of any company except out of profits.

The confusion has arisen as you might have taken "profits" to be "accumulated profit".

You have mentioned that "the mechanics of the definition of "profit" might have changed."

My recollections are that New Toyo International Holdings has been paying dividends for the past 16 consecutive years despite carrying accumulated loss. You may want to find out when the current section 403 (1) came into being.

Disallowing dividend payment when there is accumulated loss will discourage acquisition. Buyer will have less incentive to take over a company that has raked up huge past losses if he cannot receive a dividend after turning the business around. Why should he be penalised for the ineptness of the previous owner?

In #1676, you suggested that dividend payment for 2015 may not be in order.

Section 403(2) of the Companies Act states that CEO and board directors commit an offence if they illegally sanction dividend payment.

I have posted the entire S403 on post #1671 It doesn't say illegally sanctioning dividend, it says "who wilfully pays or permits to be paid any dividend". You might have posted the wrong section for discussion

There is good reasons why capital and retained profits are separated in accounting even though they are classified "equity". An accumulated loss generally means the business is not viable and may be a cue on the nature of the business if it still gets to pay dividend ie it is hollowing out the company. Singapore abolished but Taiwan still retain the use of Par value which helps retail investor to understand what is the EPS vs the invested par value and hence how sustained losses will trigger a recap as it goes below par. They are there for a reason, the only consideration is whether it fulfills an objective. Buyers that take over a loss making company may not be going for the dividend but rather the assets or tax loss carry or in RTO case a back-door listing, etc. And also they can apply for a capital reduction / restructuring exercise through the courts to wipe out the loss. 

Indeed it might be that technically S403 is interpreted as the holdco just need to turn profitable for the year to pay out dividend. As per my post in #1676 that means company is paying out the dividends through FY20161Q profits of RMB50m and not FY2015, which is inline with what the auditor was vaguely trying to say during AGM.

[portuser]

Specuvestor

You have pointed out the word 'illegally' should not be used when 'wilfully' is used in Section 403 (2). Is this a major point? 

As pointed out in your #1676, during AGM on 25 April shareholders questioned whether SGFI can pay dividend when it has accumulated loss. 

Four days later, SGFI announced the book close date and dividend payment dates, and you stated in #1676 that "in any case next few days we will see their 1Q results and then see if SGX will be interested in our observations.". 

If the announcement were not in order, the directors would have acted illegally in sanctioning it. The offence would be aggravated when shareholders had raised their doubt before. 

As I pointed out in my post # 1695, the confusion arose as 'profit' in Section 403 (1) of the Companies Act was read as 'accumulated profit'. 

Obviously, if section 403 (1) were " No dividend shall be payable to share-holders of any company except out of accumulated profits", then the dividend payment would not be in order.

You have indicated that there might be a change in definition, from "accumulated profit' to "profit". I have suggested finding out when the change came about.

You have stated that "buyers that take over a loss making company may not be going for the dividend but rather the assets or tax loss carry or in RTO case a back-door listing, etc."

You are right but please note what I stated:
"Buyer will have less incentive to take over a company that has raked up huge past losses if he cannot receive a dividend after turning the business around."

I did not say that there will be no incentive at all.

[portuser]

Disallowing dividend payment when there is accumulated loss will discourage acquisition. Buyer will have less incentive to take over a company that has raked up huge past losses if he cannot receive a dividend after turning the business around. Why should he be penalised for the ineptness of the previous owner?

You have suggested a good case study on the conflict, but we shouldn't deny that companies have spent resources to eliminate the accumulated losses, just to ensure future dividend payout, as stated in their formal doc. One good case, is the recent Global Testing corp action on capital reduction.

Chances, are there are unknowns to us, which cause the confusion. It might also a grey, even to the professionals.

(not vested)

--------------------------------------------------------------------------------------------------------------------------------------------------------------------


Capital reduction is a peripheral issue here. 

My understanding is that the capital reduction enables companies to pay cash, in excess of profit, to shareholders.

Petra Foods is going to return US$ 60m to shareholders from the sale of its chocolate ingredient business. As the sale resulted in a pre-tax profit of US$ 46.1m (after-tax profit will be lower), a capital reduction exercise is needed.

Conservative depreciation policy has resulted in Global Testing reporting losses for many years. But the company has cash in excess of requirements, and it is returning the excess to shareholders by way of capital reduction.

[crubs]

Thanks portuser, piaopiao and YWT for the clarification.

Given the examples of New Toyo and Qian Hu, I don't see how is this an issue.

"The Companies Act is broad, just telling you that you have to pay dividends out of profits," said PwC Singapore partner Kok Moi Lre.
"The profits can be for the current year, or accumulated or retained profits in previous years." Firms with "lumpy" annual earnings can thus choose to smooth out the dividend payments over several years, so investors can enjoy a steady dividend stream, said Ms Kok.

And to think that the company would do anything blatantly illegal and get caught by SGX when Garden Fresh is being reviewed by the HK exchange is just absurd.

I don't see anyone making a big deal out of this issue in New Toyo and Qian Hu. Sino Grandness, being an S-chip is unnecessarily targeted.