CIC Regulator raises dividend and interest
caps on shares and debt finance
The
Community Interest Company (CIC) Regulator has published its response to a consultation
on the dividend and interest caps carried out last year.
The existing caps are as follows:
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5% above Bank of England base rate for the dividend per share cap |
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4% above Bank of England base rate for the debt interest cap (usually performance
related) |
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An overall aggregate cap of 35% of total distributable profits (with this cap operating
concurrently with the above dividend cap) |
The consultation last year was launched amid concerns that the caps were too low
and unduly restricting the incentive to invest in CICs. The results were mixed.
Most respondents thought the aggregate 35% cap on total distributable profits did
not unduly limit incentives for equity investment and that it struck the right balance
in protecting the social objectives of CICs against the need to attract appropriate
investment.
However, there was support for the view, both among investors, financiers and non-CIC
social enterprises, that the caps were too restrictive to attract investors and
played a factor in those opting for other models of social enterprise.
In responding to the feedback, the Regulator decided not to amend the aggregate
35% total distributable profit cap but has raised the dividend per share and debt
interest caps as follows:
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20% dividend cap on the paid up value of the share (therefore also dropping the
link to the Bank of England base rate) |
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10% interest cap on the average amount of the CIC’s debt or any debenture instrument
(calculated over the 12 month period immediately before the date on which the interest
becomes due) |
Both changes will come into force on 6 April 2010, but the new caps will not apply
to shares that were issued or debt agreements entered before this date for which
the current rates will still apply (in particular the link to the Bank of England
base rate to the existing 5% dividend per share cap. Of course, these are only maximum
caps and CICs are free to set lower caps if they wish.
The Regulator will also continue to closely monitor the effect of these changes
and will conduct another review within the next two to three years.
Potential impact of the changes
The raising of the caps should allow CICs to attract more investment, something
which has been a problem since the original rates were set, whilst still maintaining
a strong social ethos within their companies. It is also likely that investors will
now consider CICs as reasonable sources to invest in social and ethical causes,
whilst maintaining the prospect of a reasonable return.
Many found the interaction between this cap and the aggregate 35% cap too complex,
but the removal of the Bank of England base rate will make the caps easier to understand.
The proportion of CICs limited by shares may also rise following the introduction
of the increased caps - currently only 26% of CICs are limited by shares, whereas
74% are limited by guarantee.
The Regulator’s full response to the consultation
can be obtained at:
http://www.cicregulator.gov.uk/consultationresponse.shtml
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For More Information Contact:
Ifti Ahmad
TPP Law Limited
53 Great Suffolk Street
London SE1 0DB
t 020 7620 0888
f 020 7620 0778
e info@tpplaw.co.uk
Email:
Ifti
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