FAQ’s for Understanding Declaration of Dividend

Narendra Kumar

31 Mar, 2023

In this article, we will discuss the FAQ for a declaration of dividend under companies act 2013.

1. Whether the Company can declare a dividend in EGM instead of AGM?

As per regulations of 2013, Act, “The Company in General Meeting may declare dividend”. As per the Regulation of Article of association, it is not compulsory to declare a dividend in AGM, in case dividend is not declared in AGM then the company can declare a dividend in subsequent EGM.

In case dividend is declared in (AGM) Annual general meeting, it can’t be increased further in subsequent EGM.

2. Whether shares issued during the year are entitled to dividend for the full year?

If new shares issued during the year, offer any document might provide that dividend is payable on pro-rata basis from the date of allotment or the date specified in the offer document. Hence, Old shares would be entitled to receiving a dividend for the full year, although new shares will be entitled to dividend only from date of allotment on the pro-rata basis.

It is usually provided that shares issued during the year shall be entitled to dividend on pro-rata basis i.e. only for the part of a year for which such new shares were held.

3. Whether dividend will be payable on call money paid in advance?

The dividend (Declaration of dividend) will not be payable on call money paid in advance.

4. TDS is not required for the dividend

No deduction of tax would be made by an Indian company on the dividend paid by it to resident shareholders who are individuals or Indian companies.

5. Authority to keep the unpaid/unclaimed dividend amount in a fixed deposit account with a bank?

The Reserve Bank of India (RBI) has allowed banks for opening of fixed deposit accounts for purpose of preserving the unpaid/unclaimed dividend amount of the company & to pay interest thereon.

The above-said arrangements might be made by the company to earn interest on the amount of unpaid dividend.

It may be necessary that fixed deposit account should be made for the different amount for different maturity tenure & an appropriate amount of unpaid dividend should be kept in form of current account so that entirely the revalidated or duplicate dividend warrants may be encashed by the bank on presentation.

The fixed deposit account shall be opened under the style as “Fixed Deposit Account ABC Limited Unpaid Dividend Account-2014” as well as the amount of deposit & interest earned on such amount shall not be credited to company’s other business account.

However, it should be known that any interest earned on unpaid dividend account during the term of 7 years, has to be transmitted to the Investors Education and Protection Fund of the Central Government.

6.How to decide the shareholders to whom dividend will be given?

Unlisted Companies (it consist unlisted Public and Private Limited Company):

• It is not necessary to close register.
• There are few transfers in these Companies.
• General Meeting can decide ‘Cut off’ date or could be the date of General Meeting.

In case of an annual dividend, the persons who are the members as on the date of the annual general meeting will be qualified to receive the dividend as the dividend is permitted by the members on the day when annual general meeting(AGM) is held.

Listed companies that are required to inform the Stock Exchange [at least 7 working days] in advance of closing the Register of members for payment of the dividend declared at the annual general meeting (AGM) for determining the names of shareholders those are entitled to the dividend.

7. In case of a joint shareholder who will be entitled to receive the dividend?

In case of Joint Holdings, the dividend shall be paid to the people whose name is registered first in books. It may be noted that person whose name appears first in the application for shares is entered first in Register of members. There will be no objection to sending dividend to any other joint holder, in case a request is made to company signed by every single joint holder.

In other words:

• In case of Joint shareholders, the cheque or warrant of dividend should be sent to the holders who are first named in the register of members.
• If the joint holders direct in writing the cheque or dividend that can be sent to another person as directed by the joint shareholders.

8. In case of shares held in electronic mode, who will be entitled to receive the dividend?

If the shares that are held by shareholders are held in electronic mode, then the dividend will be paid to beneficiaries whose names will be provided by the CDSL/NSDL to the Company or its registrar on record date or the date of book closure as the case may be.

9. Whether it is a compulsory requirement of making provision for depreciation before payment of dividend?

In terms of the provisions of section 123 of the Act, no company can pay dividends in any year without charging depreciation in the profit and loss account for current year & that there is no balance of unprovided depreciation of any earlier years.

Depreciation shall be provided according to the provisions of Schedule II to the Companies Act, 2013.

10. Whether it is obligatory for the Company to transfer some amount in reserve before the declaration of dividend?

No, it isn’t compulsory to transfer the amount.

11. Companies are free to transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves. {First Proviso to Section 123(1) of the Companies Act, 2013}.

The reserve shall, at the discretion of the Board, be applicable for any purpose to which profits of the company may be properly applied, together with provision for meeting contingencies or for equalizing dividends.

Also Read: Meaning, Process of Declaration of Dividend