Community interest companies must scrap the 20 per cent cap on dividend pay-outs if they are to thrive, Bates Wells & Braithwaite senior partner Stephen Lloyd said on Friday.
Lloyd, who co-founded the original idea of community interest companies (CIC), was addressing a room of CIC stakeholders and social enterprise professionals meeting to discuss the cap and other issues surrounding CICs.
Currently 20 per cent is the cap for dividend pay-outs from the initial investment. A consultation launched last month, which is still ongoing, asks, among other things, if this should be increased to 49 per cent.
Dividend cap is 'mad'
Lloyd made it clear that he sees the 20 per cent cap as an obstacle:
"I think it's mad, I really do," he said. “At the moment, because of the cap, community interest company shares are pretty unattractive to investors.
“If you want to support a CIC, whether it’s limited by guarantee or by shares, the investment return profile basically means that what you pay in interest is the same as what you gain in capital growth. Fundamentally the capital growth is there for the social purpose, rather than the investor.
“This is a changing financial era, when the government doesn’t have very much money, and we’re under huge need to bring more capital to invest into social purpose organisations. Change must be made to help CICs thrive.”
Lloyd said that ‘profit’ should not be treated as a dirty word when associated with social enterprises, pointing out that no organisation can afford to be set up for a loss.
“We do need a proper profit motive put into CICs, and we do need to give people who provide capital a reasonable return, if we want to be able to build sustainable businesses,” he said.
Lloyd also advised tax reliefs for people who invest in social enterprises and recommended a proportional regime to regulate crown funding.
Stumbling block for attracting risk capital
John Mulkerrin, of umbrella body CIC Association which hosted Friday’s event, told civilsociety.co.uk that since the consultation is still ongoing the data will not be collated into a report until next year – but from the comments he has received, it is generally agreed that the cap is a stumbling block for attracting risk capital into CICs.
The stakeholder survey can be found here.
CICs were introduced in 2005 by the then Labour government as social enterprises which are also limited companies.
There are now 7,300 CICs, 23 per cent of which are limited by shares. The CIC Association says that the CIC regulator receives over 125 new registrations each month.
The dividend cap was raised to 20 per cent from 5 per cent in January 2010, following consultation in the previous year. There is also an aggregate cap of 35 per cent on all distributable profit.