Response to CIC Regulator’s consultation on dividend
and interest caps reveals concerns about incentives for investment
The Community Interest Company (CIC) Regulator has published responses to its recent
consultation on varying the level of the existing dividend and interest caps. The
consultation was launched amid concerns that the caps were too low and unduly limiting
the incentive to invest in such companies.
The consultation sought the views of different groups of stakeholders including
from financiers and investors, non-CIC social enterprises and existing community
interest companies on the impact of the caps on debt and equity finance.
The current 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 performance-related interest cap |
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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 responses were mixed but the level of the dividend per share cap caused the
most concern, with 92% of financiers and investors believing it to be too low for
equity investment. 50% of non-CIC social enterprises thought the 5% cap was too
restrictive to attract investors and was a factor in their decision in selecting
not to use the CIC model. 33% of non-CICs thought it made no difference.
The views on the aggregate 35% cap varied as well, with 75% of financiers and investors
who thought the cap did not unduly limit incentives for equity investment and was
reasonable, though non-CIC social enterprises were split on this, with half indicating
it would not affect their decision.
On the question of the impact of the two dividend caps on equity finance, 69% of
financiers and investors thought the caps provided adequate protection of community
assets, though 66% thought the interrelationship between the two caps unduly limited
incentives to those considering making an equity investment. Half of all CICs and
non-CIC social enterprises thought the combined effect of the two caps unduly restricted
their ability to raise adequate finance owing to the poor rate of return and 42%
of non-CIC social enterprises thought the two caps were factors in deciding whether
or not to form as a CIC, as the combination of both caps was too restrictive to
attract investors.
On the impact of the cap on debt (performance-related interest cap),
there was also
a mixed response. 68% of all respondents thought the 4% cap provided adequate protection
of community assets, while an increase in the cap could dilute the social benefits
delivered.
The CIC Regulator has indicated that they will announce any proposed changes to
the caps in January, with any change taking effect from April 2010.
The full version of the consultation and the response to it are available from the
CIC Regulator’s website:
http://www.cicregulator.gov.uk/consultation.shtml.
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For More Information Contact:
Ifti Ahmad
TPP Law Limited
53 Great Suffolk Street
London SE1 ODB
t 020 7620 0888
f 020 7620 0778
e info@tpplaw.co.uk
Email:
Ifti
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