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Provisions relating to Declaration and Payment of Dividend under Companies Act, 2013

Ashish M. Shaji

| Updated: May 01, 2020 | Category: Company Share Transfer

Declaration and Payment of Dividend

Overview

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.

Who can declare Dividend?

As per the provisions contained in the Companies Act, 2013, all companies can declare dividends except for those who are registered under section 8.

Provision relating to Declaration of Dividend

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.

What are the sources 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:

  • Profit of the company of the current year
  • Undistributed or accumulated profits of the company for any previous years
  • Money provided by the Central Government or State Government for paying dividend by the company in pursuance of a guarantee given by the government.

Conditions precedent to Declaration of Dividend

  • Depreciation- A Company will provide depreciation to all its depreciable assets before declaration of dividend according to the rates or useful life depending on the case as provided in Schedule II, Companies Act, 2013.
  • Transfer to Reserves- A Company before declaring dividend in any financial year may transfer such a percentage of its profit for that financial year in accordance with the reserves of the company. 
  • Free reserves- A Company other than free reserves will not declare or pay dividends out of its reserves.
  • Setoff of previous year losses and depreciation- A company cannot make a declaration of dividend unless the carries over losses and depreciation not provided in previous years are set off against the profit of the company for the current year.

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.

Conditions Precedent to Declaration of Dividend out of Surplus reserves under the Companies (Declaration and Payment of Dividend) Rules, 2014

The following conditions must be met in order to declare dividend out of surplus reserves:

  • The rate of declared dividend should not be beyond the average of the rates at which the dividend was declared by it in three years preceding that year.

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 total amount to be withdrawn from the accumulated profits must not be more than one-tenth of the paid-up share capital and free reserves, as shown in the latest audited financial statement.
  • The withdrawn amount shall be utilized. Firstly it shall be used to set off the losses sustained in the financial year in which declaration of dividend is made prior to any dividend relating to equity shares is declared.
  • It must be affirmed that the balance amount of reserves is maintained that means that the balance of reserves must not go below 15% of its paid-up share capital after such withdrawal, as shown in the latest audited financial statement under the rules of Declaration and Payment of Dividend.

Provisions relating to Payment of Dividend

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.

Interim Dividend

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.

Unclaimed or Unpaid Dividend Amount

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.

  1. Open up a specific account in any scheduled bank that will be called the “Unpaid Dividend Account.”
  2. The unpaid or unclaimed amount is then transferred into that specific account within seven days period from the expiry of the thirty days mentioned above.

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.

Penalties for failure in distributing dividends

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.

Exceptions:-

No offence would have deemed to be committed in the following situations:

  • Dividend not paid due to the reason of operation of any law.
  • Wherein a shareholder has directed the company for the payment of dividend, but those directions can’t be complied with, and it has been communicated to him.
  • In case of a dispute regarding the right to receive dividend.
  • In case of dividend adjusted lawfully by the company against any amount due to it from the shareholder.
  • In case the failure to pay the dividend or post the warrant within the time prescribed under this section was not owing to the default from the company.

Procedure followed for Declaration and Payment of Dividend

  1. Issuance of 7 days notice for the meeting of the board of directors under section 173 of the Companies Act, 2013.
  2. Notify stock exchange where the securities of the company are listed, in case of listed companies at least two days in advance from the date of the meeting.
  3. Board Meeting is held, and the resolutions are passed for-
  4. Approval of the annual accounts
  5. Recommendation of the final amount of dividend
  6. Fixing the date and time of the AGM
  7. Approval of the notice of AGM
  8. Authorising the company secretary  or the director for the issuance of notice for AGM
  9. Give seven days notice of book closure to stock exchanges in case of a listed company.
  10. In listed company scenario, publication of the notice of book closure in a newspaper in the place where the registered office of such company is located. It must be done a minimum seven days prior to the date of commencement of book closure.
  11. Thereafter close the share transfer register as well as the register of members of the company.
  12. A board meeting is held in order to approve the registration for transferring shares of the company that has been lodged before the commencement of book closure.
  13. Then the AGM of the company is held where an ordinary resolution is passed declaring the payment of dividend to the shareholders under the recommendation of the board.
  14. A statement of dividend is prepared in respect of each shareholder.
  15. Make sure that the tax on dividend is paid to the tax authorities in the prescribed time period.
  16.  Then a separate bank account must be made in order to make payment of dividend and thereafter credit such account with the amount of dividend payable inside five days of such declaration of dividend.
  17. In case of a listed company, the payment of dividend can be made directly or through its registrars. It has to be done mandatorily through any of the RBI approved electronic modes of payment like NEFT etc.
  18. If required, make arrangements with the bank for the payment of dividend.
  19. The dividend warrants should be dispatched in 30 days from the declaration of dividend.
  20. The transfer of unclaimed dividend or unpaid dividend must be made to the specific account “Unpaid Dividend Account” in 7 days after the expiration of 30 days period of declaration of final dividend.
  21. The Unpaid Dividend Amount shall be transferred to the Investor Education and Protection Fund after seven years period expires from the date of transfer to the unpaid dividend account under the rules of declaration and payment of Dividend.

Conclusion

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.

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Ashish M. Shaji

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 criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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