An enterprise’s ability to pay interest on shares will depend to a great extent on the nature of the business and other factors such as loan overheads and the need to reinvest profits during the business’s early years; all these factors need to be covered in the business plan. (Community-owned village shops, for example, have rarely offered interest on their shares as the margins are very tight in that particular trade).
However, if the enterprise can offer regular interest payments to shareholders, especially in an era of unprecedented low interest rates, then its shares become a more attractive long-term investment opportunity, as well as offering social return.
Most societies adopt rules that set a maximum rate of interest. This provides members with a clear statement about the financial return they can expect. The actual interest rate payable should only be determined after the financial year end, when the profit for the period is known and the management committee (or board) is in a position to make recommendations at the AGM to members about the application of profits. These recommendations should include other uses of profit, such as reinvesting in the society, supporting other initiatives of benefit to the community, or in the case of co-operative societies, paying a dividend to members.
The FCA says that interest rates “should be no more than is necessary to obtain and retain enough capital to run the business”. Underlying this policy is the principle that the purpose of the enterprise should always be a more important source of motivation for investors than the financial return on investment.
Please note: In the case of charitable community benefit societies, interest on share capital is subject to separate guidance produced by the Charity Commission.
For more information see http://communityshares.org.uk/resources/handbook/interest-share-capital