Ms.Pammy Jaiswal
Background
With the provision of additional 10% tax to be imposed on the investor on receipt dividend income, the Indian market is witnessing a rush to declare interim dividends before the amendment comes to life, i.e. from April 01, 2016. Accordingly the companies need to adequately arrange for the declaration and payment of interim dividend before the deadline of March 31, 2016. However, although in a haste, the companies will have to be cautious while complying with the all the applicable laws viz. Companies Act, 2013 (‘Act, 2013’), Secretarial Standards (‘SS’) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’), etc.
This write-up contains a detailed discussion on the compliances required to be made by the companies for the declaration and payment of interim dividend.
Concept of interim dividend
Before going into the discussion on the regulatory front, we must have a clear idea of what does an interim dividend mean. As the name suggests ‘interim’ denotes “in the meantime”, therefore interim dividend means a dividend declared by the board of directors before the finalization of the annual financial statements and the holding of the annual general meeting. The interim dividend is based on the “till date” interim financial results of the company and the projected financials prepared for the remaining period of a financial year.
This is to be noted that the definition of “dividend” as given under section 2(35) of the Act, 2013 and section 2(22) of the Income Tax Act, 1961 covers interim dividend as well.
Source of interim dividend
Interim dividend can be declared out of any of the following:
- Current year’s profit – profit pertaining to the current financial year in which the dividend is said to be declared after providing for depreciation. Considering a situation where the company is suffering losses upto the end of the quarter in which the interim dividend is declared, then the rate of such interim divided shall not be higher than the average dividends declared by the company during the immediately three preceding financial years.
- Surplus in profit and loss account – amount standing to the credit of the profit and loss account. The same shall first be applied towards providing of depreciation in accordance with Schedule II of the Act, 2013.
Generally interim dividend can only be declared out of the above two sources, however, if the company wants to declare the same but has insufficient or no profits in the current financial year then the amount lying in the free reserves can be transferred to the credit of the profit and loss account in due compliance of Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 and then this surplus in the profit and loss account can be utilized to declare interim dividend. The said rules require the following conditions to be satisfied:
- The rate of dividend being declared shall not exceed the average of the rate of immediately three preceding financial years. This condition shall not apply to a company which has not declared any dividend in each of the three preceding financial years.
- The aggregate amount to be withdrawn from free reserves shall not exceed 1/10th of the paid-up share capital and free reserves of the company as per the latest audited financial statements.
- Before utilizing the withdrawn amount for declaration of dividend, the same shall be used for setting up of losses incurred.
- The balance left in the free reserves after such withdrawal shall not be less than 15% of the paid-up share capital.
Critical issues
Apart from the above conditions, a company shall be compliant with section 73 and 74 of the Act, 2013 while declaring interim dividend i.e to say that the company should not be inter-alia defaulting in the payment of the principle and interest amount on the deposits accepted by it.
It should be understood that an interim dividend is paid merely as an advance against the final dividend. Hence, although interim dividend is declared in the board meeting however the same shall have to be approved in the forthcoming general meeting. If the board cancels the interim dividend after declaring the same, it might not attract penal consequences; however, such cancellation may affect the reputation and share prices of the company in a negative manner.
Since the declaration of interim dividend is for all the shareholders alike, therefore the question of a related party transaction does not arise when a company pays dividend to its directors who are also the shareholders of the company.
Various Regulatory compliances
♣ Calling a Board meeting at a Shorter Notice: Looking at the time-sensitive aspect of the issue, the board meeting for declaring interim dividend can be called at a shorter notice under section 173 (3) of the Act, 2013 read along with para 1.3.11 of SS 1 subject to either of the following:
- Presence of atleast one independent director in the meeting; or
- In case of absence of an independent director from such meeting, decision taken at the meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director.
However, if the company does not have an independent director the decisions taken at the meeting shall be final only on ratification thereof by a majority of the directors of the company, unless such decisions were approved at the meeting itself by a majority of directors of the company.
Further, apart from calling a board meeting, a company can use the following modes for approving the proposal of declaring interim dividend:
- Video conferencing
- Resolution by circulation
♣ Notes on agenda to be given at a shorter notice – Again on considering the urgency of the matter, the notes on agenda items which in the instant case shall be of declaration of dividend (again which is an unpublished price sensitive information) can be given at a shorter notice with the consent of the majority of the directors including at least one independent director.
Where the company has not obtained the general consent, requisite consent may be obtained before the concerned item is taken up for consideration at the meeting.
♣ Fixation and prior intimation of Record Date: As per regulation 42 (1), (2) and (3) of the Listing Regulations the company shall intimate the stock exchange of the record date atleast seven working days of the record date (excluding the date of intimation and the record date) and it shall declare dividend atleast five working days before the record date (excluding the date of intimation and the record date). The company shall also intimate the concerned depository (NSDL/CDSL) well in advance about the record date so as to enable them to provide the requisite list of shareholders on good time.
♣ Prior Intimation under Reg 29 of the Listing Regulations – The company shall give prior intimation to the stock exchange about the meeting of the board of directors in which the proposal of declaration of dividend is to be approved and also intimate about trading window closure.
♣ Closure of register of members and transfer books – The company shall close its transfer books in due compliance with Rule 10 of the Companies (Management and Administration) Rues, 2014 and regulation 42 (5) of the Listing Regulations.
♣ Publication of notice of book closure in newspaper – As per Rule 10 of the Companies (Management and Administration) Rules, 2014 the notice of book closure shall be published in the newspaper atleast seven days before the date of book closure.
♣ Intimation of the outcome of the board meeting – As per para A Part A of Schedule III of the Listing Regulations, the company shall be required to intimate the outcome of the board meeting to the stock exchange within thirty minutes of the conclusion time of the board meeting.
♣ Deposit the amount of dividend in a separate bank account – The company shall deposit the dividend amount in a separate bank account within five days of declaration as per section 123 (4) of the Act, 2013.
♣ Payment of dividend – As per section 124 (1) the company shall arrange to pay the dividend declared within thirty days of declaration.
♣ Transferring the unpaid dividend – The company shall arrange to transfer the unpaid or unclaimed dividend to the ‘Unpaid Dividend Account’ after the expiry of thirty days from the date of declaration of interim dividend.
The above mentioned compliances shall guide the company to effectively declare and pay interim dividend in perfect harmony with the applicable laws.
Conclusion : In order to avoid the additional tax liability the companies can opt for declaring interim dividend at this stage. However, the same shall require a very prompt action on the company’s part which again can be planned keeping in mind the above regulatory compliances.
(Author is an Executive with Vinod Kothari and Company)
