> DIVIDEND DECLARED OUT OF RESERVES In a year in which the profits are inadequate or there are no profits, the company may declare and pay dividend out of past year profit earned and transferred to reserves subject to the provision of the Companies (Declaration And Payment of dividend) Rules, 2014.Notes: 1. For the purpose of declaration of dividend out of reserves,Company shall have to fulfils following Conditions: (i) The rate of dividend shall not exceed the average of 3 years immediately preceding that year. Note: Above condition shall not apply to the company which has not declared any dividend in each of the 3 years immediately preceding that year. (ii) The total amount to be drawn from such accumulated profit shall not exceed 1/10th of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement. (iii) The amount so withdrawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is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. (iv) The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as appearing in the latest audited financial statement. (v) No company shall declare dividend unless previous losses and depreciation not provided in previous year or years are set off against profit of the company of the current year.
A company which wishes to declare dividend out of reserves in any year must fulfill the following conditions in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975: (a) The rate of dividend to be declared must not be more than the average of the rates at which dividend was declared in the five years immediately preceding the year in which the company proposes to declare dividend out of reserves or 10% of the paid-up share capital, whichever is less [Rule 2(i)]; (b) The amount to be drawn from the reserves must not be more than an amount equal to 10% of the aggregate of paid-up share capital and free reserves [Rule 2(ii)]; (c) If in the year for which the company proposes to declare dividend out of the reserves, it has incurred a loss, the amount drawn from the reserves must first be utilised to set off the loss before any dividend is declared for that year on equity shares or preference shares [Rule 2(ii)]; (d) The amount of residual reserves, i.e. the reserves remaining in balance after the amount sufficient to set off the loss and declaration of dividend, must be at least 15% of the paid-up share capital of the company [Rule 2(iii)]. The procedure is as follows: (1) Give notice as per Section 286 to all the directors of the company for holding a Board meeting. In the meeting, take decision to declare dividend out of company’s reserves because of inadequacy or absence of profits and also fix the date, time and place of the Annual General Meeting. Authorise the Company Secretary or any competent person if company does not have a company secretary to issue the notice of the AGM on behalf of the Board of directors of the company to all the members, directors and auditors of the company and other persons entitled to receive the same. (2) Ensure that the Companies (Declaration of Dividend out of Reserves) Rules, 1975 are complied with. (Given at Annexure VI) (3) While calculating the profits of the previous years, take only the net profit after tax. (4) Ensure that while computing the amount of profits, the amount transferred from the Development Rebate Reserve is included and all items of capital reserves including reserves created by revaluation of assets are excluded. Thanks