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Declaration and Payment of Dividend under Companies Act 2013, has been enacted for distribution of profit among shareholders of the company. It is defined under section 2(35) of the Companies Act 2013.
It is related to the return on investment, made in equity shares or preference shares. It includes interim dividend. It is paid out of the profits which are not retained by the business. The dividend is distributed among the shareholders in proportion to the shares held by them. Shareholders are entitled to get a dividend as they are the owners of the company.
Table of Contents
Under Section 205 of the Companies Act, 2013 contains the regulations for the declaration and distribution of dividend. According to law, it is mandatory for every company having share capital that makes a profit to declare and distribute a dividend to its shareholders. The dividend which includes interim dividend can be paid out of the current profits or from accumulated profits. Before the declaration of the dividend, it must be assured that depreciation for the whole year has to be provided and for this purpose, it is required for the board to approve unaudited financial statements and the amount is needed to be transferred to reserves.
To declare a dividend, a separate bank account is required to be opened where the amount of the dividend is to be transferred within 30 days of the declaration.
Following are the steps involved in the payment of dividend:
Firstly depreciation shall be computed according to the rate specified in Schedule XIV or on any other basis decided by the Central Government.
Before the declaration of the dividend, part of the profits has to be transferred to the reserves of the company. The Higher amount of earnings can be transferred to reserves voluntarily subject to the conditions.
Another important step is to pass board resolution in the board meeting of the directors of the company otherwise it cannot be declared at the annual general meeting.
An ordinary resolution is required to be passed at the general meeting of the members. The notice of the meeting will mention the declaration of the dividend which will be sent to both members as well as creditors of the company.
For declaration of the dividend, it is required to open a separate bank account. The declared amount of dividend shall be transferred to the account. Within 30 days of the annual general meeting, a dividend warrant is required to be sent to the shareholders.
Amount remaining unclaimed is required to be transferred to unpaid dividend account within 7 days from the expiry of 30 days of dividend declaration. The unpaid or unclaimed dividend for 7 years is transferred to Investor Education Protection Fund within 30 days.
The dividend declared by the company out of current or accumulated profits is charged with an additional tax rate of 15%. This tax is required to be paid within 14 days of the declaration of the dividend.
Provisions related to Listed Company
All listed companies have to give prior information regarding the board meeting of the company to the stock exchange where the securities of the company are listed.
In case where a company fails to pay dividend within 30 days period from the date of its declaration to the shareholders then the company shall be penalized with interest at 18% per annum for the period of default and every director shall be imprisoned for a term which may extend to two years maximum and fine may also be levied of 1000 rupees for the day during which the default continues.
It may be noted that there are some exceptions to this law and no offence shall be deemed to have committed on occurrence of such exception. You may refer to the above mentioned heading “Circumstances under which dividend is not required to be paid” for exceptions.
It is noteworthy to mention here that no dividend shall be paid except through cash, where payment of dividend payable through cash can also be paid by way of cheque, warrant or electronic mode, to the shareholder who is entitled to dividend.
Read our article:
How to Create an Effective Shareholder’s Agreement?
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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