Section 123 of the Companies Act, 2013 deals with the declaration and payment of dividend
As per provisions of section 123(3) which deals with payment of Interim Dividend, it states that,
“The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend:
Provided that in case the company has incurred loss during the current financial year up to 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 declared by the company during the immediately preceding three financial years.”
Our interpretation of the aforesaid subsection for availability of profits for declaration of Interim Dividend is as follows:
1. If AGM for previous year is held
Profit of current financial year till the quarter preceding the date of declaration of interim dividend is available for declaration of interim dividend.
Profits of previous financial years are not available for distribution of dividend as they are transferred to free reserves.
Consequently, interim dividend cannot be declared if there is loss in current financial year.
2. If AGM for Previous year is not held; and
1. Company has earned profit in current financial year,
Interim Dividend can be declared out of profits from start of current year till end of quarter preceding the date of declaration and accumulated profits of previous financial year, which are not yet transferred to the free reserves. Thus, the period can be more than 12 months in such cases.
2. Company has incurred loss in current financial year
If company has incurred loss in the current financial year, interim dividend can be declared out of accumulated profits of previous (which are yet not transferred to free reserves). But in such a case, rate of dividend cannot be higher than the average dividends declared by the company during the immediately preceding three financial years.
PS: while calculating profits available, appropriate considerations should be given to depreciation for full year, taxes on profits including deferred taxes, other anticipated losses and dividend full year on preference shares, if any
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