Provisions Relating To Payment Of Dividend

WHAT IS DIVIDEND?

In simple terms dividend is the sum of money that is paid by the company on regular basis out of the profits or the reserves to its shareholders. It might be a reward, cash or otherwise that is given to the shareholders for their investment in the shares of the company.

WHY IS DIVIDEND PAID?

The primary reasons and advantages of payment of dividend are as follows:

  1. It provides a clear picture and certainty about company’s financial stability and well-being.
  2. They attract investors to generate income
  3. Works as a reward for investment by investors and shareholders.
  4. Send powerful message of future prospects and performance of the company.

Definition of dividend provided in the Companies Act:

Dividend is defined under section 2 (35) of the new act which states that it includes interim dividend also.

BRIEF SECTIONS RELATED TO DIVIDEND IN COMPANIES ACT 1956

“SECTION 205”- it provides that the dividend must be paid out of

  1. Current year’s profit;
  2. Or previous year profit;
  3. Or both

After providing for depreciation under section 350.

Additionally, it mandates certain minimum of the profits to be transferred to reserves if more than 10% of the dividends are paid.

SECTION 205A– It limits the number of days to 5 in context of time gap between the date of declaration and payment of dividend, including interim dividend. “In case of unpaid or unclaimed dividend, the time provided is 7 days from the date of expiry of said 30 days for transferring it to a bank account for claim within 7 years from the said account by the shareholders.” (Corresponds to section 124 of CA 2013)

SECTION 206– It provides that the registered shareholders should only be paid the dividend.

SECTION 206A– Provides that in case of non-registration of an instrument of transfer that is delivered the right to dividend shall be kept in abeyance. (Corresponds to section 126 CA2013)

SECTION 207– It imposes penalty in case of non-payment of the declared dividend within 30 days subject to certain exceptions. (Section 127 of CA 2013)

PROVISIONS RELATING TO PAYMENT OF DIVIDEND (SECTION 123)

The dividend is declared at the rate recommended by the board of directors, not exceeding such amount, in the Annual General Meeting.

Once the dividend is declared, it becomes a liability for the company to release the payments otherwise the shareholders can sue in the event of non-payment.

SOURCES OF DIVIDEND

“CONDITIONS REQUIRED FOR DECLARATION OF DIVIDEND”

  1. DEPRECIATION

Before declaring dividend, a company must provide depreciation on all such assets as per the rates and life of the assent in accordance with the schedule II of the CA 2013

  1. TRANSFER OF RESERVES

A company may transfer certain percentage of the profits in the appropriate reserves before declaration of the dividend.

  1. SETTING OFF THE CARRIED FORWARD LOSSES AND DEPRECIATION

A company shall not declare dividend until the previous losses and the deprecation is not provided for, from the current year balances of profits by the company.

  1. FREE RESERVES

A company may only pay dividends out of free reserves and not otherwise.

CONDITIONS FOR DECLARATION OF RESERVES OUT OF SURPLUS RESERVES

“Companies (declaration and payment of dividend) Rules, 2014” provides for conditions for declaration of dividend out of the surplus reserves of the company

  1. RATE OF DIVIDEND

Rate of dividend shall not be more than the average of the immediately preceding three years rates of dividend.

Not applicable in case of company which has not declared it in any of the preceding 3 years.

  1. TOTAL AMOUNT TO BE WITHDRAWN

The amount shall not exceed “one- tenth of the of the paid-up share capital and reserves as appearing in the latest audited financial statements.”

  1. UTILIZATION OF THE WITHDRAWN AMOUNT

The amount withdrawn must be utilized first to set off the losses of the financial year and then the residual amount must be directed towards the declaring and paying the dividend.

  1. BALANCE AMOUNT OF RESERVES

After the withdrawal the balance of such account shall not fall below “15% of the paid-up share capital” as per the latest financial statement.

PAYMENT OF DIVIDEND

As per the provisions of Companies Act 2013, dividend shall only be payable in cash. The dividend payable in cash can also be paid through electronic means of through cheque and related transfers.

INTERIM DIVIDEND

As per section 123(3), the interim dividend may be declared during any financial year by the Board of Directors, out of the current year profits or the previous year undistributed profits.

“(Subject to Companies (Declaration and Payment of Dividend) Rules, 2014)”

UNPAID DIVIDEND (SECTION 124)

In case where the dividend is unpaid or unclaimed within 30 days of its declaration, the following steps are taken by the company-

  1. A special account named “unpaid dividend account” is opened with a scheduled bank
  2. Transfer the amount of dividend in such account within 7 days from the expiry of the 30-day period.
  3. In case of default in transferring the amount timely and properly, the company shall be liable to pay interest of 12% p.a. from the date of default.

PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDEND (SECTION 127)

If the company fails to pay dividend within 30 days from the date of declaration, then it shall attract liabilities and punishments as mentioned below:

Liability ofImprisonmentFine
CompanyNAInterest @ 18% p.a. for the period of default
Each director of the CompanyMay extend to 2 yearsRs. 1000/- for every day, during which such failure continues.

EXCEPTIONS TO SECTION 127

No offence is committed in the following cases:

  1. Non payment due to operation of law
  2. Directions given by the shareholder could not be complied with and the same was informed to them.
  3. Lawful adjustment of the money in the dues of the shareholder.
  4. Where the default was not due to company’s irregularities.

PROCEDURE FOR DECLARATION AND PAYMENT OF DIVIDEND

  1. Minimum 7 days’ notice has to be issued to the BOD in accordance with section 173 of the Companies Act 2013.
  2. In case of listed companies, the stock exchange has to be notified at least 2 working days in advance before the date of meeting.
  3. Hold Board meeting and pass resolutions for following purposes-
  4. “Approving the annual accounts (balance sheet and profit and loss account of the company for the year ended);
  • Recommending the final amount of dividend;
  • Determining the date of book closure;
  • Fixing the Day, Date, Time and Venue of AGM;
  • Approving the notice of AGM;
  • Authorizing the Company Secretary/Director to issue the notice of AGM;”
  1. Close the registered members and share transfer register of the company
  2. Hold BOD meeting for approval of registration of transfer
  3. Hold AGM to pass resolution declaring the payment of dividend
  4. Make arrangements with the bank and in collaboration with other banks if required, for payment of the Dividend Warrants at par.
  5. Unpaid dividend to be transferred to “Investor Education and Protection Fund (IEPF)” after the period of seven years had expired from the date of transfer to special unpaid dividend A/c.

By:

Shrija Sharma

Law Centre-1, University of Delhi

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