Dividend

Dividend’ is not defined meaningfully by the Companies Act 2013 (the Act), other than to state that it includes an ‘Interim Dividend’. In general parlance, (Final) Dividend is the distribution of a Company’s earnings/profits to its Shareholders, as decided and announced by the concerned Company’s Board of Directors and ratified by the Shareholders at the Annual General Meeting (AGM) or other such Member meeting in the manner prescribed by the Act and Rules thereunder.

The Act allows a Company Limited by Shares to issue Equity Share Capital with differential rights as to Dividend as well as voting, subject to prescribed rules and Articles of the Company concerned. Further, a Company, if so authorised by its Articles of Association, may pay Dividends in proportion to the amount’ paid-up’ on each Share.

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Absence or Inadequacy of Profits and Use of Accumulated Profits

Where due to inadequacy or absence of profits in any financial year, Company proposes to declare Dividend out of the ‘accumulated profits’ earned by it in previous years and transferred to its ‘reserves’**, such declaration cannot be made except in accordance with the Companies (Declaration and Payment of Dividend) Rules 2014 (as amended).

** Free Reserves’ are defined by the Act to mean such reserves which, as per the latest audited balance sheet of a Company, are available for distribution as Dividend.

Provided that the following will not be treated as ‘free reserves’

  • Any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or
  • Any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value.


Final Dividend

Final Dividend’ is recommended by the concerned Company’s Board of Directors and put up for vote as an ‘ordinary business’ at the ‘Annual General Meeting’ (AGM), and subsequently declared where the Shareholder approval thereon is obtained via ‘ordinary resolution’.


Interim Dividend

The Board of Directors of a Company are empowered to declare^^ an ‘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 of a Company that 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 Dividend cannot be declared at a rate higher than the ‘average Dividends’ declared by the Company during the immediately preceding 3 financial years.


Preference Share Dividend and Enlarged Voting Rights

Limited Companies are also empowered to issue “Preference Share Capital“, which carries a preferential right with respect to the payment of Dividend, as a fixed amount or an amount calculated at a fixed rate (free of or subject to Income Tax).

Under section 47 of the Act, where the Dividend in respect of a class of Preference Shares for a relevant Company have not been paid for a period of 2 years or more, such class of Preference Shareholders then gain right to vote on all the resolutions placed before the said Company, which otherwise rests with Equity Shareholders.

 

Declaration of Dividend

Under section 123 of the Act, Dividend can be declared or paid by a Company for any financial year from the following sources and manner

  • Out of the profits of the Company for that year (arrived at after providing for depreciation in the prescribed manner^), or out of the profits for any previous financial year(s) (arrived at after providing for depreciation in the said manner^ and remaining undistributed), or out of both; or
  • Out of money provided by the Central Government or a State Government for the payment of Dividend by the Company in pursuance of a guarantee given by that Government.
  • Company may, before the declaration of any Dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to its ‘reserves’.
  • No Dividend can be declared or paid by a Company from its ‘reserves’ other than ‘Free Reserves’**.
  • No Company can declare Dividend unless carried over previous losses and depreciation not provided in previous year(s) are set off against profit of the Company for the current year.

^Depreciation shall be provided in accordance with the provisions of Schedule II to the Act.

** Free Reserves’ are defined by the Act to mean such reserves which, as per the latest audited balance sheet of a Company, are available for distribution as Dividend.

Provided that the following will not be treated as ‘free reserves’

  • Any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or
  • Any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value.


Payment of Dividend

  • The amount of Dividend (including Interim Dividend) is required to be deposited in a ‘Scheduled Bank’ in a separate account within 5 days from the date of its declaration.
  • No Dividend can be paid by a Company in respect of any Share except to the registered Shareholder of the relevant Share (or to his/her/its order or banker) and shall not be payable except in cash (or by cheque or warrant or in any electronic mode to the Shareholder entitled to the payment of the Dividend).
  • Nothing shall be deemed to prohibit the capitalisation 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.

 

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Where any instrument of transfer of Shares has been delivered to any Company for registration and the said transfer has not been registered by the concerned Company, it is then required to —

  • Transfer the Dividend in relation to such shares to the ‘Unpaid Dividend Account’ as provided under section 124 of the Act (unless Company is authorised by the registered holder of such Shares in writing to pay such Dividend to the transferee specified in such instrument of transfer); and
  • Keep in abeyance in relation to such Shares, any offer of ‘Rights Shares’ and any issue of fully paid-up ‘Bonus Shares’ in pursuance of the relevant provisions of the Act.

 

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Where a Dividend has been declared by a Company but not been paid or claimed within 30 days from the date of the declaration, to any Shareholder entitled thereto, the concerned Company is require within 7 days from the date of expiry of the said period, transfer the total amount of such unpaid or unclaimed Dividend to a ‘special account’ opened by the Company in that behalf in any Scheduled Bank to be called the ‘Unpaid Dividend Account’.

  • Within a period of 90 days of making such transfer, such Company is required to prepare a statement containing the names, their last known addresses and the unpaid Dividend to be paid to each person and place it on the web-site of the said Company (if any) and also on any other web-site approved by the Central Government for such purpose, in such form, manner and other particulars as may be prescribed.
  • For any default in transferring such amount or any part thereof to the ‘Unpaid Dividend Account’, such Company shall pay from the date of such default, interest on so much of the amount as has not been transferred at the rate of 12 percent per annum, and the interest accruing on such amount shall enure to the benefit of the Members of the Company in proportion to the amount remaining unpaid to them.
  • Any person claiming to be entitled to such money transferred may apply to the Company for payment.
  • If a Company fails to comply with any of the requirements of the above said section, such Company shall be punishable with fine which shall not be less than Rs.5 lacs, but which may extend to Rs.25 lacs, and every ‘officer’ of the company who is in default shall be punishable with fine which shall not be less than Rs.1 lakh, but which may extend to Rs.5 lacs.

 

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Under section 127 of the Act, where a dividend has been declared by a Company but the same has not been paid or the Warrant in respect thereof has not been posted within 30 days from the ‘date of declaration’ to any shareholder entitled to the payment of the dividend, every Director of the concerned Company is punishable with imprisonment which may extend to 2 years and with fine which will not be less than Rs.1000 for every day during which such default continues, if such person was knowingly a party to the default, and the Company will be liable to pay simple interest at the rate of 18 percent per annum during the period for which such default continues.

No offence under the above said section will be deemed to have been committed where —

  • Dividend could not be paid by reason of the operation of any law;
  • 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 such Shareholder;
  • Dispute exists regarding the right to receive the Dividend;
  • Dividend has been lawfully adjusted by the Company against any sum due to it from the Shareholder; or
  • For any other reason, the failure to pay the Dividend or to post the Warrant within the period under the section was not due to any default on the part of the Company.


Other Prohibitions and Restrictions

  • Companies are prohibited from issuing ‘Bonus Shares’ in lieu of dividend.
  • A default by a Company, in the payment of Dividend to any Shareholder, may prohibit ‘Buy-Back’ of its own Shares or other Securities.
  • Section 8 Company and Prohibition on distribution of Dividend – As one of the essential conditions for grant and holding a ‘Section 8’ Company licence, such limited Company apart from following prescribed objects and applying its profits (if any) or other income in promoting such objects, is also prohibited from payment of any Dividend to its Members.
  • Disqualifications for appointment of Director – Under section 164 of the Act, a person who is or has been a Director of a Company which has failed to pay any Dividend declared and such failure continues for 1 year or more, shall be ineligible to be re-appointed as a Director of that Company or appointed in other Company for a period of 5 years from the date on which the said Company fails to do so.

 

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