Dividend Distribution Rules: Legal Basis, Mechanism, and How to Calculate Them
As a stock investor, you would certainly consider the existence of dividends an attractive matter worthy of attention. Indeed, dividends are part of a company’s profits that can be distributed to shareholders in accordance with the company’s decision and applicable regulations.
However, a company cannot simply distribute all of its profits to shareholders. There are a number of dividend distribution rules that need to be observed, ranging from the obligation to set aside reserves, the decision of the General Meeting of Shareholders (RUPS), to provisions regarding interim dividends.
So, what are the actual rules for dividend distribution in Indonesia? How much dividend can be distributed to shareholders and how is it calculated? Read the explanation below.
Dividend Distribution Rules in Indonesia
- Law Number 40 of 2007 concerning Limited Liability Companies
One of the main legal bases governing dividend distribution is Law Number 40 of 2007 concerning Limited Liability Companies (UUPT). This Law also regulates provisions regarding the use of company profits, including dividend distribution as set out in Articles 70 to 73 concerning the Use of Profits.
- POJK Number 15/POJK.04/2020
For public companies, the RUPS mechanism is also related to the provisions of the Financial Services Authority (OJK), one of which is through POJK Number 15/POJK.04/2020 concerning the Plan and Conduct of the General Meeting of Shareholders of Public Companies.
This Regulation governs many matters, from the holding of the annual RUPS, RUPS procedures, to the decisions and number of RUPS participants.
Thus, dividend distribution rules essentially concern not only what percentage of profit is distributed, but also the company’s condition and its decision-making mechanism.
Here are matters you need to pay attention to regarding the rules for share dividend distribution.
- Companies Are Obliged to Set Aside Profits for Reserves
Based on Article 70 of the UUPT, which states: “The Company is obliged to set aside a certain amount of net profit each financial year for reserves.”
This obligation applies if the company has a positive profit balance. The setting aside is carried out until the reserves reach at least 20% of the issued and paid-up capital.
This means that before all net profit is used for various purposes, the company must pay attention to the obligation to establish reserves. These reserves serve as a form of protection for the company’s financial condition should it suffer losses in the future.
- Dividend Distribution Is Decided Through the RUPS
Based on Article 71 of the UUPT, which states: “The use of net profit, including the determination of the amount to be set aside for reserves as referred to in Article 70 paragraph (1), shall be decided by the RUPS.”
The RUPS, or General Meeting of Shareholders, is a meeting attended by shareholders to make important decisions. Thus, the decision regarding the distribution of profits to shareholders is not determined solely based on investors’ wishes.
In the RUPS, the company can determine for what purposes net profit will be used, such as:
dividend distribution;
addition to reserves;
expansion needs;
or other uses in accordance with the RUPS decision and applicable regulations.
For public companies, the annual RUPS must be held no later than six months after the end of the financial year. Provisions regarding the holding of the RUPS are regulated in POJK 15/POJK.04/2020.
- Dividends Can Only Be Distributed If Profit Requirements Are Met
One of the important matters in dividend distribution rules is the condition of the company’s profit balance, referring to Article 71 of Law No. 40 of 2007:
The use of net profit, including the determination of the amount to be set aside for reserves as referred to in Article 70 paragraph (1), shall be decided by the RUPS.
All net profit after deducting the amount set aside for reserves as referred to in Article 70 paragraph (1) shall be distributed to shareholders as dividends, unless otherwise determined in the RUPS.
Dividends as referred to in paragraph (2) may only be distributed if the Company has a positive profit balance.
This means that if the current year’s net profit has not covered all accumulated losses from previous years, the company cannot distribute dividends because it still has a negative net profit balance.
Thus, a company that has just recorded a profit is not necessarily automatically able to distribute dividends. The condition of the profit balance and previous accumulated losses must also be considered.
- There Is No Provision That All Profits Must Be Distributed as Dividends
So, is a company obliged to distribute all net profit to shareholders? Not always.
Based on Article 71 of the UUPT, it is stated that “All net profit after deducting the amount set aside for reserves may be distributed to shareholders as dividends, unless otherwise determined in the RUPS.”
This means that a company may decide not to distribute all net profit as dividends.
For example, a company obtains a net profit of Rp1 trillion. After considering expansion needs, cash conditions, company obligations, and reserve requirements, the RUPS may decide that only part of the profit is distributed as dividends and the remainder is retained by the company.
This is what makes the dividend payout ratio of each company different. The dividend payout ratio is a ratio that shows how much of a company’s profit is distributed to shareholders in the form of dividends.
- Companies May Also Distribute Interim Dividends
In addition to dividends decided at the RUPS after the end of the financial year, there are also interim dividends. Interim dividends are temporary dividends declared and paid before the company’s annual profit, usually made quarterly.
This is based on Article 72 of the UUPT, which states that interim dividends may be distributed if the company has a positive profit balance and the distribution is decided by the Board of Directors after obtaining approval from the Board of Commissioners.