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‘Delaying dividends might make shares unattractive’

15 May 2022

  • Central Bank prevents banks from issuing dividends until financials are audited
  • CSE Chairman points out negative short-term effects   
  • Notes move will ensure capital strength of companies
By Tanya Shan The recent direction by the Central Bank of Sri Lanka (CBSL) for Licensed Commercial Banks (LCBs) to delay dividends to their shareholders might cause the attractiveness of these shares to slump, says Colombo Stock Exchange (CSE) Chairman Dumith Fernando.  On 6 May, through a circular, CBSL advised LCBs to defer payment of cash dividends until the financial statements/interim financial statements of the year 2022 were finalised and audited by its external auditor.  Fernando told The Sunday Morning Business that from an investor’s point of view, dividends would get delayed if they waited for financials to be audited by an external auditor.  However, he stated that there was also another side to this decision by the Central Bank.  “The reason they are doing this is to ensure that you have your audited financial numbers before calculating your final dividends. In the short-term, yes, an investor may not get their dividends but I am sure that the Central Bank is doing that to make sure they are comfortable with the capital strength of the companies. In the first quarter and the second quarter, you do well and issue an interim dividend but in the third quarter and fourth quarter, you are losing. Then you cannot get the dividend back because you have already paid and this is probably what they might be thinking,” Fernando opined.  In the same circular, CBSL also directed all LCBs to refrain from buying back their shares in the market until 31 December 2022, with the aim of maintaining appropriate levels of liquidity and capital buffers in the banking sector. According to Fernando, this move was unlikely to have a negative impact on listed companies.  Further, CBSL has asked the banks to defer the repatriation of profits not already declared for the financial years 2021 and 2022 until financial statements for 2022 are finalised and audited by external auditors. “Licensed banks will give due consideration to the requirements of the Banking Act Direction No. 01 of 2016 on Capital Requirements under Basel III for Licensed Banks, expected assets growth, business expansion, and the potential impact of the Covid-19 pandemic and prevailing macroeconomic conditions when deciding on payments of cash dividends and profit repatriations,” the CBSL circular said. Other directions by CBSL to LCBs include refraining from increasing management allowances and payments to directorial boards, refraining from incurring non-essential and/or non-urgent expenditure and having a board-approved policy to rationalise if such expenditure is to be incurred, and exercising extreme due diligence and prudence when incurring capital expenditure if any.  


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