Dividend distributions play a crucial role in corporate finance, providing a means for businesses to share profits with shareholders. However, unscrupulous actions related to dividend payments can damage investor confidence and undermine the integrity of the market. One unethical practice that is prevalent is dividend manipulation, in which companies artificially inflate or deflate dividend payments in order to deceive investors or manipulate stock prices.

This can occur through strategies such as announcing exaggerated dividends to create short-term spikes in share prices, only to later decrease or eliminate dividends, leaving investors at a disadvantage. Additionally, the selective disclosure of non-public information about dividend payments to certain insiders or privileged investors before public announcements can give them an unfair advantage in trading decisions, perpetuating a lack of transparency and putting regular shareholders at a disadvantage.

Malpractices:

Here are some common examples of such malpractices that companies may engage in:

1. Dividend Manipulation: Companies may manipulate dividend payments in an attempt to artificially boost their stock prices or deceive investors. This could involve announcing larger-than-expected dividends to create a temporary increase in share value, only to later reduce or eliminate dividends altogether.
    
2. Insider Trading: Insiders, such as executives or major shareholders, may engage in insider trading by using confidential information about upcoming dividend announcements to make personal gains by buying or selling shares. This gives them an unfair advantage over ordinary investors.
    
3. Dividend Skimming: Company insiders may manipulate dividend payments to divert funds for their own benefit before distributing dividends to shareholders. This could involve channeling company profits through related-party transactions or other means.
    
4. Dividend Fraud: Companies may engage in dividend fraud by falsely reporting dividend payments or misrepresenting the financial health of the company in order to maintain or increase dividend levels. This deceives investors and can result in financial losses when the true state of the company's finances is revealed.
    
5. Preference Shareholder Discrimination: Some companies may unfairly prioritize certain classes of shareholders, such as preferred shareholders, by paying them dividends while neglecting or reducing dividends for common shareholders. This puts the interests of preferred shareholders above those of common shareholders.
    
6. Dividend Stripping: Investors may partake in the practice of dividend stripping, which involves purchasing shares shortly before the dividend record date to receive the dividend payment, and then selling the shares shortly after. While this is not necessarily illegal, it can distort stock prices and create market inefficiencies.
    
7. Dividend Delay: Companies may deliberately delay dividend payments to shareholders in order to manage their cash flow or manipulate stock prices. This can put investors at a disadvantage, especially those who rely on timely dividend income, and can disrupt market expectations.
    
8. Selective Disclosure: Some companies may selectively disclose information about future dividend payments to certain investors or insiders before making public announcements. This gives these individuals an unfair advantage in their trading decisions.
    
9. Dividend Clawbacks: In certain cases, companies may retract previously declared dividends, citing financial difficulties or accounting errors. This can undermine investor trust and may result in legal action from shareholders who were expecting dividend payments.
    
10. Dividend Irregularities: Companies may engage in irregular dividend practices, such as paying dividends inconsistently or deviating from established dividend policies without proper explanation. This can raise concerns about the company's financial stability and the credibility of its management.
     
11. Dividend Channelling: Some companies may divert funds meant for dividends into other activities, such as executive compensation or investment projects, without seeking shareholder approval. This can deprive shareholders of their rightful share of profits.
     
12. Dividend Gaming: Company executives or major shareholders may engage in dividend gaming, manipulating dividend policies or accounting practices to achieve short-term financial goals or artificially inflate performance metrics. This can ultimately harm the company and its shareholders in the long run.
     
13. Dividend Manipulation Schemes: Companies may engage in deceptive practices such as circular trading or dividend stripping, in collusion with other entities, to manipulate dividend payouts and mislead investors and regulators.
     
14. Dividend Window Dressing: Companies may engage in window dressing by strategically timing dividend payments to coincide with financial reporting periods, in order to present a more favorable financial performance to investors and analysts.
     
15. Dividend Leakage: Dividend leakage can occur when companies divert dividend payments to unauthorized parties or accounts, such as offshore entities or personal accounts of company insiders, without properly distributing them to shareholders.
     
16. Dividend Stagnation: Companies may deliberately maintain stagnant or artificially low dividend levels, despite significant profits or cash reserves, indicating a lack of shareholder-friendly policies or a reluctance to share profits with investors.
     
17. Dividend Suspension without Justification: Companies may suspend dividend payments without providing adequate explanation or justification to shareholders, raising concerns about the company's financial health or management decisions.
     
18. Dividend Preference Manipulation: Companies may manipulate dividend preferences in complex corporate structures or financial instruments, unfairly benefiting certain stakeholders or evading regulatory scrutiny.
     
19. Dividend Misallocation: Companies may improperly allocate dividend payments among different classes of shareholders, favoring insiders or controlling shareholders over minority investors, violating principles of equitable distribution.
     
20. Dividend Secrecy: Excessive secrecy surrounding dividend policies and decision-making processes can limit transparency and accountability to shareholders and regulators, raising suspicions of hidden agendas or unfair practices.

Conclusion:
The integrity of dividend payments and investor trust is compromised when companies engage in unethical practices such as dividend manipulation, selective disclosure, and dividend fraud. These actions not only deceive shareholders, but also create an unfair advantage for insiders and disrupt market dynamics. As a result, confidence in financial markets is eroded, highlighting the importance of strong regulatory oversight and ethical corporate governance to safeguard the fairness and transparency of dividend payments and safeguard the interests of investors.

Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: [email protected], Ph no: 9836576565