Introduction
The value of unclaimed dividends in Nigeria is extremely high and was estimated at c.₦150bn, in the middle of 2020, and rising. This represents trapped wealth which, instead of being reinvested to earn compound returns and ultimately increase net worth, is currently being held in the bank accounts of the companies that issued the dividends or their registrars. This post is a primer on dividends, explains why there is an issue with unclaimed ones and also tells you what to do to see if you have dividends that you need to claim and have them paid to you.
What are dividends?
Dividends are the distribution of profits to the shareholders of a company in line with the company’s dividend policy. Dividends are not guaranteed and are paid out at the discretion of the company’s Board of Directors. If they are paid out, its usually done once or more in the year. Key dates to remember in the payment of dividends:
- Declared date. The date at which the Board of Directors announce the next dividend to be paid.
- Register closure / Record date. The last date at which you need to be holding a share (fully settled) in order for it to be eligible for payment of the dividend.
- Payment date. This is the date at which the dividend will be paid.
The dates are important for investors, particularly those looking to buy a stock as the price you pay and the eligibility for any dividend depend on when your trade settles. Dividends are taxable income and should be included in your personal income tax return.
What is an unclaimed dividend and why are there so many of them?
Historically, both shares and dividends were documented in paper form as share certificates and dividend warrants respectively. If you have been an investor for a number of years you will have received dividend warrants in physical form through the post. Warrants are basically dividend cheques that can be paid into the Shareholder’s bank account in order to receive value. The diagram below shows a very simplified process for “Company X”.
An unclaimed dividend is simply a dividend that has not been paid to the Shareholder. The historical process is simple on the surface but is partly to blame for the current high level of unclaimed dividends for the following reasons:
- Bad market practices. Prior to the global financial crisis (GFC) there were some bad market practices that took place, a common example being where Shareholders used multiple (including fake) names to apply for stocks in IPOs to increase the likelihood of being allocated shares. This was quite short sighted as the dividend warrants could not be paid into a bank account.
- Investor name does not match the bank account. You have seen examples where a cheque cannot be paid into your account and as a result you have to go back to the issuer to get a new cheque. This is the same for dividend warrants. They must be paid into an account with the exact same name as the Shareholder otherwise your Bank will reject them, and you have to get the warrant re-issued.
- Lack of follow up. The average listed company may have 10s of 1000’s of investors and once dividend warrants are sent, there is usually no validation that the cheques have been received or paid into the Shareholder’s account, neither is there a follow up with the Shareholder’s to ensure that they have received value.
- Stale dividend warrants. I have personally received dividend warrants through the post which arrived more than 6 months after they were issued. If cheques are not paid out in time the Investor has the highly manual and cumbersome task of letting the registrar know and then getting the warrant re-issued. Sometimes this process requires the Investor to get an indemnity from their stockbroker and/or bank to protect the registrar from fraud. Many may not have the stomach or the time to do this.
- Non-receipt of cheques. Cheques and other items can go missing in the mail and again if you don’t know what to expect then you are not going to go looking for it.
Additionally, Investors may not realise or forget that they have dividends due to them. The scale of the problem has been growing in recent times and is magnified year on year as new dividends are declared. There was, until recently, a big incentive for the Registrars to hang onto the money – they earn interest as the money sits in their own bank accounts.
What is being done about this?
SEC has been aware of this issue for many years and has made attempts to correct it during that time through some major initiatives including the dematerialisation of share registrars, the return of dividends to paying companies and now the introduction of e-dividends.
The first 2 initiatives were key in paving the way for the introduction of e-dividend which SEC believes is critical ‘to the complete elimination of the phenomenon of unclaimed dividend’.
Timeline
- 2015. Circular for registrars to return unclaimed dividends of 15 months and above to paying companies.
- 2015 / 2016. SEC carries out work in the industry resulting in a harmonised e-dividend registration form for Registrars. Investors are given a deadline to enrol for e-dividends as the plan is once the registration period lapses, dividend warrants will no longer be issued.
- 2016. Dividend warrants can be deposited into savings accounts.
- 2017. E-dividend registration enrolment extended.
- 2018. Extension of free e-dividend registration.
- 2019, 2020 and 2021. Further extension of enrolment period.
Why you must act now.
Given the economic times that we are in the Federal government has been looking for creative ways to bridge the projected 2021 budget deficit which is estimated to be around ₦5 trillion naira. Unclaimed dividends older than 6 years, c. ₦200 billion naira, will be targeted and the plan is for this money to be transferred into a fund managed by the DMO (Debt management office) which the Government can then borrow from. The finer details of how the fund will be managed and administered have not been finalised and reassurance has been given that any Investor will be able to reclaim their dividends at any time regardless of whether they fall into the 6+ years category or not.
My advice is do it now! It’s already pretty painful to claim your dividends now talk less of when the funds are then further removed, and I can imagine that additional hurdles will be in place to claim your funds later.
How to claim your dividends
The SEC website has a useful 4 step process which is laid out on its website (https://sec.gov.ng/non-mandated/ ) and in the below illustration from the SEC website.
This should be good news but unfortunately investors have to complete one form, with about 14 fields each, for each registrar (of which they are 18). Say you hold UBA shares as well as Lafarge Africa, to register for e-dividend you will need to complete the forms for Africa Prudential and Cardinal Stone registrars! This could be more burdensome dependent on how many shares you hold.
In summary
Go claim your dividends and keep them in your possession so that they can be re-invested or spent in the manner of your choosing.
Thanks for listening!