Declaration and Payment of Dividends
Literal meaning of ‘Dividend’ means shareholders’ share of profits payable from the profits of the company. However, there can be two types of dividend, one that is paid in relation to going concern based activities i.e. normal business activities and the other one at the time of liquidation of the company in relation to shareholders’ share in the company.
Declaration of Dividend
Section 123. Declaration of Dividend of the Companies Act, 2013 deals with declaration of dividends. Accordingly,
II. Transfer to Reserves – In absence of any rules regarding criteria to transfer reserves, a company can transfer any percentage of its profits for that Financial Year as it may consider appropriate to the reserves of the company. Such transfer isn’t mandatory but at discretion of the company.
III. Declaration of Dividend out of Accumulated Profits – A company in case of owing inadequacy or absence of profits in any FY, can propose to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves. Such declaration of dividend shall be made only in accordance with prescribed rules.
This Proviso shall not apply to Government Company in which the entire paid up share capital is held by Central Government, or by any State Government or by them together. [Inserted vide Notification dated 5th June, 2015]
IV. Such dividend shall be declared or paid by a company only from its free reserves. No other reserve can be utilized for this purpose of declaring dividend.
V. Declaration of dividend by set off of previous losses and depreciation against the profit of the company for the current year – According to the Companies (Declaration and Payment of Dividend) Second Amendment Rules, 2015, no company shall declare dividend unless carried over the previous losses and depreciation not provided in Previous year or years are set off against profit of the company for the current year.
For declaration of dividend out of accumulated profits, MCA has provided Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014. A company can declare dividend in case of inadequacy of profits in current year, from the previous year funds, provided
a. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the 3 years immediately preceding that year
However, this rules will not apply if a company has not declared any dividend in each of the three preceding financial year.
b. The total amount that can be drawn from accumulated profits ≤ 1/10th of (Paid up share capital + Free Reserves)
c. The amount so drawn shall first be utilized to set off the losses incurred in the FY in which dividend is declared before any dividend in respect of equity shares is declared.
d. 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.
Note – No Company shall declare dividends unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company of the current year, inserted by the Companies (Declaration and Payment of Dividend) Amendment Rules, 2014, has been deleted vide Notification no. GSR 441(E) dated 29th May 2015
VI. Depositing of amount of Dividend – As per section 123(4), the amount of the dividend including interim dividend, shall be deposited in a scheduled bank in a separate account within 5 days from the date of declaration of such dividend.
This sub-section shall not apply to a Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or in combination by both. – inserted vide Notification dated 5th June, 2015.
VII. Payment of Dividend – According to Section 123(5)
a. Dividends are payable in cash. Dividends that are payable to the shareholder in cash may be paid by cheque or warrant or in any electronic mode.
b. Dividend shall be payable only to the registered shareholder of the share or to his order or to his banker.
c. Nothing in sub-section 5 of section 123, shall 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.
Vide Notification no. 465(E) dated 5th June 2015, this sub-section shall apply to the Nidhis company, subject to that any dividend payable in cash may be paid by crediting the same to the account of the member, if the dividend is not claimed within 30 days from the date of declaration of the dividend.
VIII. Prohibition on declaration of dividend – The Act by virtue of Section 123 (6) specifically provides that a company which fails to comply with the provisions of section 73. Prohibition on acceptance of deposits from public and section 74. Repayment of deposits, etc., accepted before commencement of this Act shall not, so long as such failure continues, declare any dividend on its equity shares.
According to Section 2(35), Dividend includes any interim dividend. According to section 123(3), 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 interim dividend is sought to be declared.
However, in case the company has incurred loss during 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 3 FYs.
The BOD may declare interim dividend and the amount of dividend including interim dividend shall be deposited in a separate bank account within 5 days from the date of declaration of such dividend.
Section 126. Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares – of the Companies Act, 2013
Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company, the company shall –
a. Transfer the dividend in relation to such shares to the Unpaid Dividend Account referred to in section 124. Unpaid Dividend Account unless the company is authorized by the registered holder of such share in writing to pay such dividend to the transferee specified in such instrument of transfer; and
b. Keep in abeyance in relation to such shares any offer of rights shares under clause (a) of sub-section (1) of section 62. Further issue of share capital and any issue of fully paid-up bonus shares in pursuance of first proviso to sub-section (5) of section 123.