Meaning, Process of Declaration of Dividend

Narendra Kumar

06 Sep, 2022

Dividend

1. It is defined as anything including any interim dividend.
2. The dividend is principally the share of profit distributed among the shareholders.
3. The dividend is entitled to be paid on Equity or preference shares both.
4. The word “Dividend” has origin from the Latin word “Dividend”. It means a thing to be divided.

Types of Dividend:

There are following types of dividend:—

1. Interim dividend; and
2. Final dividend
3. Preference share Dividend

Source for payment of Dividend:

Dividend can be paid out of Followings mentioned below: Section- 123 (1)(a)

1. Profit of the current year after providing of the depreciation; or
2. Profit of the earlier financial year after providing for the depreciation for previous years; or
3. Out of the money provided by Central or State Government for payment of the dividend in fulfillment of guarantee given by that, if any.

Declaration of Dividend:

Notice of Dividend:

A per the companies act 2013 the Notice of dividend declared shall be given to the persons entitled to share in it.

Process for a Declaration of Dividend:

{As per the Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act}

• The company in its Board Meeting might decide such amount of dividend which they want to recommend at the General Meeting.
• A company will mention the resolution for Dividend in the Notice of General Meeting.
• The company will hold General Meeting:

1. Declaration of Dividend is an Ordinary Business.
2. Ordinary Resolution for a declaration of a dividend will be passed in General Meeting.

• Once the dividend is declared, it must be paid within 30 days.

Note:

1. The Dividend declared in General Meeting can not surpass the dividend recommended by the Board of a director.
2. Dividend declared in General Meeting by a member can be less than dividend recommended by the Board of a director.
3. Dividend paid in General Meeting is Final Dividend.

Mode of Payment of Dividend:

The following are the Modes of Payment of Dividend:

1. Cash
2. Cheque
3. Dividend Warrant
4. In any electronic Manner.

Note:

1. The dividend shall be paid by cheque or warrant sent through post to the registered address of the shareholder.
2. The dividend cannot be paid in ‘KIND’ e.g. in form of Gifts, Goods or Bonus Shares.
3. Payment of dividend to another person as per order of shareholder is permissible. This is also provided in {Regulation 85(ii) of Model Articles Table- F as per the 2013 Act.}

Prohibition on Dividend:

A company which is in default related to deposit & repayment of deposit or interest thereon might not declare a dividend.

A company can’t declare a dividend if the company fails to comply with the acceptance of deposits & repayment of deposits accepted earlier to the commencement of this Act.

Punishment for Failure to Distribute Dividend:

Where a dividend has to be declared by the company but hasn’t been paid or the warrant in respect thereof has not been posted within the period of 30 days from the date of declaration to any shareholders entitled to payment of the dividend, each director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to 2 years & with fine which shall not be less than 1000 rupees for every day during which such default continues & the company shall be liable to pay simple interest at the rate of 18% per annum during the term for which such default continues.

No offense under this section shall be assumed to have been committed:—

• Where dividend could not be paid by reason of the operation of any law;
• Where a shareholder has given directions to company regarding the payment of the dividend & those directions can’t be complied with & the same has been communicated to him;
• Where there arises a dispute with regards to right to receive dividend;
• Where the dividend has been lawfully adjusted by company against any sum due to it from the shareholder; or
• Where, for any other reason, failure to pay the dividend or to post such warrant within the said period under this section wasn’t due to any default on the part of the company.

Some Important Points to be kept in Mind:

1. Declaration of dividend and amount to be transferred to reserve is the responsibility of the Board.
2. Bona fide decision of Board in respect of dividend can’t be challenged.
3. The dividend should be declared unconditional and must be paid within 30 days.
4. The dividend on the equity shares can be distributed only after the dividend on preference shares is declared.
5. The amount of such dividend, comprising interim dividend, shall be deposited in the schedule bank in a separate account within 5 days from the date of declaration of such a dividend.

The condition common to Both Final Dividend and Interim Dividend:

1. Deposit of Amount of declared dividend in separate Bank Account.
2. Payment of dividend within 30 days of declaration.
3. Transfer of unpaid dividend in a special account.
4. Interest for late payment
5. Transfer to the Investor protection Fund after 7 years.
6. The penalty for nonpayment etc.

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