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Declaration and Payment of Dividend

Declaration and Payment of Dividend

Meaning of Dividend

Dividend is a sum of money paid by a company out of its profits or reserves to its shareholders. Dividend is a share of after-tax profit of a company distributed to its shareholders according to the number and class of shares held by them.

As per Section 2(35) of the Companies Act, 2013 “dividend” includes interim dividend.

Source for payment of Dividend 

Sec 123(1) provides no dividend shall be declared or paid by a company for any financial year except –

  1. Out of profits of the company for that year after providing for depreciation, or
  2. Out of profits of the company for any previous year or years after providing for depreciation and remaining undistributed, or
  3. Out of the money provided by the Central Government or State Government for the payment of dividend with regard to the guarantee provided by that Government.

No dividend shall be declared and paid by a company from its reserves other than free reserves.

Before declaration of dividend, a company may transfer such percentage of its profits for that financial year to the reserves of the company.

Declaration of dividends from Reserves owing to inadequacy or absence of profits

In the event of adequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfillment of the following conditions, namely:-

(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year:

Provided that this sub-rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.

(2) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

(3) The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.

(4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement.

Further, No dividend will be declared by a company unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.

Depreciation shall be provided in accordance with the provisions of Schedule II of the Companies Act, 2013.

Interim Dividend

The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared. In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

Other Important aspects

The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

Section 123(5) states that no dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash.

Nothing in this sub-section shall be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company.

Further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.

A company which fails to comply with the provisions of sections 73 and 74 relating to acceptance of deposits from public, shall not, so long as such failure continues, declare any dividend on its equity shares.

Punishment for failure to distribute dividends

Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend –

(i) Every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and

(ii) The company shall be liable to pay simple interest at the rate of eighteen per cent per annum during the period for which such default continues:

No offence under this section shall be deemed to have been committed:—

(a)  where the dividend could not be paid by reason of the operation of any law;

(b)  where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;

(c)  where there is a dispute regarding the right to receive the dividend;

(d)  where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or

(e)  where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

Declaration and Payment of Dividend

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