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Companies rely on funds to manage the affairs of their business successfully. Shareholders in a company play a vital role in raising funds, and in that process, they become its stakeholders. They exercise control over the share of profits in proportion to the money they invest. Dividend is known as the share of profit by shareholders. Shareholders are also considered the owners of the company; therefore, they are entitled to get a dividend. There is not an exact definition of the dividend in the Companies Act, 2013. Under section 2(35), it merely mentions dividends as “any interim dividend.” With a view to distribute the profit among the shareholders of the company, the Declaration and Payment of Dividend under the Companies Act were enacted. In this article, we shall cover various provisions related to the Declaration and Payment of Dividend under the Companies Act, 2013.
As per the provisions contained in the Companies Act, 2013, all companies can declare dividends except for those who are registered under section 8.
Section 123 of the Companies Act, 2013 provides that dividend should be declared by the company on such rate at its annual general meeting as recommended by the board. The amount of dividend approved by the board cannot be exceeded by the company. Once the dividend is declared, it shall be debt that must be paid by the company to its shareholders. The shareholders may sue the company in case the dividend is not paid.
A company must primarily adopt its books of accounts, and then only shall it be entitled to declare the dividend. A company without passing a resolution for the adoption of accounts cannot pass a resolution for the Declaration and Payment of dividend.
The principle governing the declaration and payment of dividend is that dividend shall be paid out of the profits only, but as per the Companies Act, dividend may be declared out of:
It may be observed that in case any company intends to declare dividend out of the accumulated profits that were earned by the company in previous years and were transferred by it to the reserves due to inadequacy or absence of profits in any financial year, such declaration of dividend cannot be made except in consistency with the Companies (Declaration and Payment of Dividend) Rules, 2014.
The following conditions must be met in order to declare dividend out of surplus reserves:
An essential thing to be noted is that the above-mentioned condition shall not apply to the company that has not declared any dividend in any of the three financial years.
The provisions under the Companies Act, 2013 provides that no dividend shall be paid except through cash and where the dividend is payable in cash, it can be paid by way of cheque, warrant or by any electronic mode to the shareholder who is eligible to receive the dividend. However, it may be kept in mind that a company, who has defaulted in compliance with respect to the provisions of section 73 and section 74 comprising of prohibition of acceptance of deposits from public and repayment of deposits, shall be barred to declare dividend.
The amount of the dividend (Including the interim dividend) must be deposited in the bank in a separate account in five days from the date such declaration of dividend is made. The dividend shall be payable to the eligible shareholder by way of cash.
Under the provisions of Section 123 (3), the Board of directors in a company may declare interim dividend during any financial year, arising from profits made by the company during the financial year or out of undistributed profits of the previous year in accordance with the Companies (Declaration and Payment of Dividend) Rules, 2014.
The phrase “Dividend includes interim dividends” under section 2(35) shows that the provisions of the Companies Act applicable on the final dividend to the possible extent will be applicable also on interim dividends.
There are occasions when the dividend declared by the company either has not been paid or not claimed, and wherein such dividend remains to be unpaid or unclaimed within 30 days since the date of declaration, such company may follow measures that are mentioned below.
If the company defaults in making the timely transfer of such amount to the specific account, then the company shall be required to pay interest at the rate of 12% per annum from the date of committing default.
Once the amount is transferred to Unpaid Dividend Account, the company within 90 days of such transfer prepare a statement specifying the name, address, unpaid dividend, etc., in the company’s website and also on any other website approved by the Central Government in the prescribed form under the rules of Declaration and Payment of Dividend.
In case the unclaimed or unpaid dividend stands unpaid for a period of seven years, then such amount shall be transferred by the company with interest accrued to the Investor Education and Protection Fund. In case of non-compliance with the provisions, the company shall be punished with a fine of not less than Rs. Five lakhs, which may extend to Rs. Twenty Five lakhs and each officer of the company who defaulted shall be punished with fine not less than Rs. One lakh, which may extend to Rs. Five lakhs.
As per the provisions contained in section 127 of the Companies Act, if a company declares a dividend but it does not pay the dividend within 30 days from the date of its declaration to the shareholder entitled to such payment of dividend, every director of such company will be penalised with imprisonment of up to two years term and along with fine that shall not be less than 1000 Rs. for each day during the continuation of default. Moreover, the company shall be required to pay simple interest at 18 % per annum during the continuation of default.
No offence would have deemed to be committed in the following situations:
When any company is lent money by the shareholders, it ultimately shares its profits out of business. Such profit or share of profit is known as a Dividend, but it must be critical to understand that a dividend is not a part of the rights of the shareholders, but when the company declares the dividends, the right to claim for dividends arise.
Also, Read: FAQ’s for Understanding Declaration of Dividend.