Dividend Under Companies Act, 2013

The word “Dividend” has origin from the Latin word “Dividendum”. It means a thing to be divided. Dividend means the portion of the profit received by the shareholders from the company’s net profit, which is legally available for distribution among the members. Therefore, dividend is a return on the share capital subscribed for and paid to its shareholders by a company. Dividend defined under section 2(35) of the Companies Act, 2013, includes any interim dividend.

Dividend:  As per Section 2(35) of Companies Act, 2013 defines the term as including any interim dividend.

• Dividend is basically the share of profit distributed among shareholders.
• Ordinary meaning of dividend is a share of profits, whether at a fixed rate or otherwise, allocated to holders of shares in a company.
• Dividend can be paid on Equity or preference shares both.
• The word “Dividend” has origin from the Latin word “Dividendum”. It means a thing to be divided.

Section under CA 2013	Section under CA 1956	Matters dealt with
2(35)	2(14A)	Definition of Dividend
51	93	Payment of dividend in proportion to amount paid up.
91	154	Declaration of book closure/Record date and publication of notice of record date/book closur
123	205	Payment of dividend-sources, conditions, transfer of profits to reserve, etc.
123(5)	205, 205A(3)	Dividend shall be paid to registered shareholders and beneficial owners under CSDL/NSDL Opening of a separate bank account for making payment of dividend and deposit the amount of dividend into the account within a period of 5 days of its declaration
126(6)	205	Restriction on payment of dividend on equity shares on failure to comply with Deposits
124	205A	Unpaid dividend to be transferred to special dividend account.
126	206A	Right of dividend, etc. — When to be kept in abeyance.
127	207	Payment of dividend must be made within 30 days of its declaration and penalty for failure to pay dividend within prescribed time limit.

Types of dividend: There are following types of dividend:—

a. Interim dividend; and

b. Final dividend

c. Preference share Dividend

Meaning of Final dividend:

Dividend is said to be a final dividend if it is declared at the annual general meeting of the company. Final dividend once declared becomes a debt enforceable against the company.

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

i. Profit of the current year after providing of the depreciation; or

ii. Profit of the previous financial year or years after providing for depreciation for previous years; or

iii. Out of the money provided by Central or State Government for payment of dividend in pursuance of guarantee given by that, if any.

1. Whether it is 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 dividend in any year without charging depreciation in the profit and loss account for the current year and that there is no balance of un provided depreciation of any earlier year or years.

Depreciation shall be provided in accordance with the provisions of Schedule II to the Companies Act, 2013.

2. Whether the term “Profit of the current year” used in 123(1)(a) refers to profits after tax or before tax?

It refers to profits after tax.

Term ‘Profit’- Profit can be either revenue profit or Capital profits or both. Thus, dividend can’t be paid by revaluation of assets, as the surplus has not been actually realized.

For the purpose of prohibition of payment of dividend out of capital, capital means capital according to the Act and not the goods or things on which capital is laid out. [Lubbock v British Bank of South America (1892) 2 Ch. 198 (CA)]

Transfer portion of profit in reserve:

Before declaration of dividend, a company may transfer a portion from the profit to the reserves of the company. The company is free to decide the percentage for such transfer to the reserve.

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

No, it’s not mandatory to transfer the amount. Earlier in Companies Act, 1956 it was Compulsory to transfer the amount in reserve while declaration of dividend. But the same is on the discretion of the Company in Companies Act, 2013.

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 the profits of the company may be properly applied, including provision for meeting contingencies or for equalizing dividends. {As per Clause 82 (i) of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act}.

Declaration of Dividend:

Notice of Dividend:

{As per Clause 87 of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act} Notice of dividend declared shall be given to the persons entitled to share in it.

Process for declaration of Dividend:

{As per Clause 80 of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act}

i. Company in Board Meeting may decide the amount of dividend which they want to recommend in General Meeting.

ii. Company will mention the resolution for Dividend in the Notice of General Meeting.

iii. Company will hold the General Meeting:

a. Declaration of Dividend is Ordinary Business.

b. Ordinary Resolution for declaration of dividend will be passed in the General Meeting.

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

Note:

i. Dividend declared in General Meeting can’t exceed the dividend recommended by the Board.

ii. Dividend declared in General Meeting by member can be less than the dividend recommended by the Board.

iii. Dividend paid in General Meeting is Final Dividend.

4. Whether it is mandatory to Recommendation of dividend by the Board is compulsory

In the matter of payment of dividend or not in any financial year irrespective of the profit earned by a company in the financial year is left to the discretion of the Board to recommend or not to recommend dividend for any year. If the Board does not recommend any dividend, the company in general meeting cannot consider and approve any dividend for payment. The company in general meeting cannot also

Increase the rate of dividend recommended by the Board.

In Maharani Lalita Rajya Lakshmi v Indian Motor Co. (Hazaribagh) Ltd. (1962) 32 Comp Cas 207, the Division Bench of the Calcutta High Court rejected the grievance of the shareholders by observing thus: “It is then argued that the board of directors controlled by the managing agents has not been properly declaring dividends. In fact what is said in paragraph 21 of the petition is that dividend which is much below the actual profit earned by the company has been declared. I fail to see how this is an act of oppression to any member or members within the meaning of section 397 of the Companies Act, 1956 (Now section 241of the Companies Act, 2013). The board of directors has a discretion to declare dividend and the rate of such dividend. There is no company law that I know which obliges a board of directors to use up all its profits by declaring dividend. No company law lays down that all profits must be declared and exhausted in paying dividends. Surely, failure to do so could not be a ground for an application for oppression under section 397 of the Companies Act. Besides, that will also not be a ground for winding up a company as indicated by Lord Blanesburgh in the observation quoted above in the Privy Council decision of Ripon Press and Sugar Mill Co. Ltd. v Gopal Chetty.” The decision has been followed by the Single Judge of Calcutta High Court, in the case of Jaladhar Chakraborty & Ors. v Power Tools & Appliances Co. Ltd. (1994) 79 Comp Cas 505.

5. Whether Board’s recommendation can be withdrawn before communication to others?

Since the director’s recommendation of dividend is only a proposal, it can be withdrawn by the Board before it is included in the notice for the annual general meeting.

6. Whether Dividend becomes unsecured debt against the company after approval in the general meeting?

Where a dividend is approved by the shareholders at the annual general meeting, it becomes a debt against the company and it is deemed to be receivable by the members only in the year at which the members declared the dividend and not at the time when the dividend was recommended by the Board. [Tarajan Tea Co. (P) Ltd. v CIT (1994) 13 CLA 75 (Gau); Hanuman Prasad Gupta v Hiralal (1970) 40 Comp Cas 1058 (SC); Upendra Kumar Joshi v Manik Lal Chatterjee (1982) 52 Comp Cas 177 (Pat)]

Interim Dividend: {As per Clause 81 of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act}

i. Interim dividend can only be declared by board of Directors.

ii. Generally paid in the middle of the year if Board of directors fined that profitability of the Company.

iii. Board of Directors can declare dividend out of surplus in profit and loss account at the beginning of the year or profit during the year.

In case of Company incurred losses in current financial year:

If the company has incurred loss during the current financial year upto the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends by the company during the immediately preceding three financial year- Section 123(3).

Note:

i. Interim dividend is really a mod of keeping shareholder happy and keeping good image of Company in stock market.

ii. All legal provisions applicable on final dividend equally apply on interim dividend.

Condition common for Both Final Dividend and Interim Dividend:

i. Deposit of Amount of declared dividend in separate Bank Account.

ii. Payment of dividend within 30 days of declaration.

iii. Transfer of unpaid dividend in special account.

iv. Interest for late payment

v. Transfer of Investor protection Fund after Seven year.

vi. Penalty for nonpayment etc.

HOW TO DECIDE THE SHAREHOLDERS TO WHOM DIVIDEND WILL BE GIVEN:

Unlisted Companies (Include unlisted Public and Private Limited Company):

i. It is not necessary to close register.

ii. There are few transfers in these Companies.

iii. General Meeting can decide the ‘Cut off’ date or could be date of General Meeting.

In case of the annual dividend, the persons who are members as on the date of the annual general meeting will be eligible to receive the dividend as the dividend is approved by the members on the day when annual general meeting is held.

Listed companies are required to inform the Stock Exchange 1 [atleast 7 working days] in advance of closing the Register of members for payment of dividend declared at the annual general meeting for determining the names of shareholders entitled to dividend.

7. Whether shareholder can give director to the Company to pay his dividend to any third person?

Section 123(5) provides that no dividend shall be paid by a company in respect of any shares therein except to the

i. Registered holders of such shares or

ii. To his order to any person or

iii. To his Bankers

So it is clear that on the director of the register shareholder company can pay dividend to any third person.

8. In case of Transfer of shares, shares are still not registered on the name of the transferee then who will be entitled to receive the dividend on the point of view of the Company?

Merely because a person may have purchased or been in receipt of shares, in the absence of the shares being registered in his name in the books of account of the company, such a person is not entitled to receive the dividend, unless the shares lodged for transfer. The dividend has to be paid by the company in the name of the registered shareholders and it is the registered shareholders alone who claim dividend under section 27 of the Securities Contracts (Regulation) Act, 1956. [CIT v Aatur Holdings Pvt. Ltd. (2008) 146 Comp Cas 152 (Bom)]

Section 126 provides that where valid transfer deed has been lodged which has not been registered by the company, it shall withhold payment of the dividend on such shares till the shares are registered. This section does not apparently apply to a transfer, which has been refused. But where the rejection is on account of reasons like difference in signature, insufficient stamp, etc., it will be desirable for the company to wait and keep in abeyance the dividend till the irregularity is removed to enable the company to register the transfer and pay the dividend to the transferee.

In Nagarajan (S.V.) v Lakshmi Vilas Bank Ltd. (1997) 90 Comp Cas 392 (CLB): (1997) 26 CLA 308 (CLB), it was held that when a person comes with a petition as an aggrieved person all that is required to be seen is whether he has any such prima facie ground for seeking rectification and so long as he had such prima facie ground, he can come as an aggrieved person.

In such cases, the company shall transfer the dividend to the Unpaid Dividend account referred in section 124, unless the company has authorised by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer.

9. In case of joint share holder who will be entitled to receive dividend?

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

In other words:

i. In case of Joint shareholders, the cheque or warrant of dividend should be sent to the holder first named in the register of members.

ii. If the joint holders direct in writing the cheque or dividend can be send to another person as directed by the join shareholders { Regulation 85(i) of Model Articles Table- F as per the 2013 Act.}

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

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

Mode of Payment of Dividend:

There are following Modes of Payment of Dividend: [Section- 123(5)]

a. Cash

b. Cheque

c. Dividend Warrant

d. In any electronic Manner.

Note:

i. Dividend should be paid by cheque or warrant sent through post to the registered address of the shareholder.

ii. Dividend can’t be paid in ‘KIND’ e.g. in form of Gifts, Goods or Bonus Shares.

iii. Payment of dividend to another person as per order of the shareholder is permissible. This is also providing in {Regulation 85(ii) of Model Articles Table- F as per the 2013 Act.}

Issue of Shares with Differential Right:

If share with differential right have been issued, dividend will be declared and paid on the basis of terms of issue. {Regulation 83(iii) of Model AOA Table-F of the Act, 2013}.

Prohibition on Dividend:

A company which has default under Section 73 and 74 related to deposit and repayment of deposit or interest thereon may not declare dividend.

A company cannot declare dividend if the company fails to comply with acceptance of deposits and repayment of deposits accepted prior to the commencement of this Act. (Section 73 & 74 of Companies Act 2013.

Free Reserve:

No dividend shall be paid from its reserves other than free reserves. The term “Free Reserves” is defined under Section 2 (43) of the Company Act 2013. Free reserve means such reserve which, as per the latest audited balance sheet of a Company, are available for distribution of profit.

Punishment for Failure to Distribute Dividend (SECTION 127):

Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen percent per annum during the period for which such default continues.

No offence under this section shall be deemed to have been committed:—

(a) Where the dividend could not be paid by reason of the operation of any law;

(b) Where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;

(c) Where there is a dispute regarding the right to receive the dividend;

(d) Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or

(e) Where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

Some Important Points to be kept in Mind:

i. Declaration of dividend and amount to be transferred to reserve is responsibility of the Board.

ii. Bona fide decision of Board in respect of dividend can’t be challenged.

iii. The dividend should be declared unconditional and must be paid within 30 days.

iv. Dividend on equity shares can be distributed only after dividend on preference shares is declared.

v. The amount of the dividend, including interim dividend, shall be deposited in a schedule bank in separate account within 5 days from the date of declaration of such dividend.

FAQ’S

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

As per regulation 80 of Model Articles Table F of the 2013, Act, “Company in General Meeting may declare dividend”. As per the Regulation 80 of AOA it’s not mandatory to declare dividend in AGM, if dividend not declared in AGM then company can declare dividend in subsequent EGM.

If dividend is declared in AGM, it can’t be increased further in subsequent EGM.

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

In case of new shares issued during the year, offer document may provide that dividend is payable on pro rata basis from the date of allotment or a date specified in offer document. Thus, Old shares will be entitled for dividend for full year, while new shares will be entitled to dividend only from the date of allotment on pro rate basis.

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

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

Dividend is not payable on call money paid in advance.

4. TDS not required on dividend.

With effect from 1st April, 2003, no deduction of tax will be made by an Indian company on 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) had allowed banks for opening of fixed deposit accounts for the purpose of maintaining the unpaid/unclaimed dividend amount of a company and to pay interest thereon.

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

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

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

However, it should be noted that any interest accrued/earned on the unpaid dividend account during the period of 7 years, has to be transferred to the Investors Education and Protection Fund of the Central Government.

6. Whether Company required to take approval of shareholder in AGM for payment of dividend (decide at the time of issue of preference share) to preference share holders?

As per section 102 declaration of dividend is ordinary business of General Meeting. According to this provision all the final dividend declared by the Company will be approved by the shareholder in the AGM.

But in case of Preference share,

1. company has already taken the approval of shareholders by passing of special resolution and

2. As stated in Rule 9(1)(a) of The Companies (Share Capital and Debenture) Rules, 2014 A company issuing preference shares shall set out in the resolution particulars in respect of the following matters relating to such shares, namely: (i) the priority with respect to payment of dividend or repayment of capital vis-avis equity shares; (ii) the payment of dividend on cumulative or non-cumulative basis.

From the above mentioned two points it seems that company has already taken the approval of shareholder for payment of a fixed percent of dividend to preference share holder. Therefore, there is no need to put the matter for dividend to preference share holder every year in AGM.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

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