CIC Association recommends changes to dividend cap

CIC Association recommends changes to dividend cap
Civil Society, by Vibeka Mair

The CIC Association has recommended that the individual 20 per cent dividend cap be set against the profit a community interest company makes, rather than pegged to the value of an investor’s initial stake.

But it has also recommended keeping the 35 per cent maximum aggregate cap, so that all the investors in a community interest company (CIC) cannot take out returns of more than 35 per cent a year between them.

Altering the individual dividend cap, says the Association, would “correctly place the cap on distribution of profit, not investment”.  This would increase liquidity for CICs’ shares, provide for a fairer return for the entrepreneur and dramatically improve the ability of employees to participation in the enterprise.

The Association quizzed 135 CICs on the CIC share structure as part of a wider review and found that most felt the current individual share cap was grossly unfair to entrepreneurs.

The existing aggregate cap means that all the investors together could not take returns exceeding 35 per cent.
Commenting on the recommendation, managing director of the CIC Association John Mulkerrin (pictured) said: “The caps are meant to control the amount of profit distributed, not to stifle the amount invested.

There have been calls to scrap the 20 per cent cap altogether, most recently from Bates Wells & Braithwaite senior partner and architect of the CIC Stephen Lloyd.

However, Mulkerrin said: “We feel our recommendations do everything that removing the cap completely would do to improve the technical function of the CIC share, and have the support from the majority.”

The main reason for removing the cap is to encourage more investment into the CIC sector.  According to Mulkerrin, while the take-up of the CIC legal form among new social enterprises has far exceeded expectations, “the success of CICs in securing equity or quasi-equity is not so rosy”.

The Association also recommends increasing the performance loan interest from 10 to 20 per cent. Lloyd suggests that an increase in the performance cap to 20 per cent could herald a revolution in CIC debt finance.

Elsewhere, the survey found that grant funding was the most popular form of funding for CICs. Some 16 per cent of respondents saw attracting equity investment as a threat, 49 per cent as an opportunity, with 33 per cent wanting further debate.

The CIC Association presented the report to the CIC Regulator at a technical panel in Cardiff this week.