The main aim for most of the business organizations is to earn profits and to distribute those profits to its owners/stakeholders. When we talk about a Company, the distribution of profits among the shareholders who are the owners of the company is called Dividend. Therefore, the distribution of profits by a company to its shareholders is called Dividend.
As per Section 2 (35) Companies Act, 2013, Dividend includes Interim dividend. Therefore, dividend includes both Final dividend and Interim dividend.
In this article we will study the provisions of the Companies Act’2013 in respect of declaration, distribution, payment of dividend.
As per the Companies Act’2013, dividend can be paid out of:
- The profits for the year for which dividend is to be declared or
- free reserves or surplus in the profit & loss account i.e. profits for any previous year or years
- out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government
Interim dividend can be paid out of:
- Surplus in the profit & loss account or
- The profits for the financial year for which interim dividend is to be declared or
- The profits earned/generated during the financial year till the end of the quarter preceding the date of declaration of dividend
An important point to be noted here is that the dividend can only be distributed out of Free reserves and in case of interim dividend out of surplus in the profit or loss account and no other reserves can be used for payment of dividend.
There are different types of reserves made by a company for ex: Debenture redemption reserve etc.
Not all reserves are free reserves. As per the Companies Act, Free reserves refer to those reserves which are free for distribution as dividend. Free reserves are profits that have been formally transferred and earmarked.
A Company may if it wants before distribution of dividend transfer amounts to the reserves. These reserves are reserves other than free reserves and dividend cannot be declared out of these reserves.
Ques: What happens if there are no profits in the company or there is a lack of profit in the financial year for which dividend is to be declared?
Ans: We have already discussed that dividend can be paid out of profits of the financial year for which the dividend is to be declared but what happens if there are no profits in the company or there is a lack of profit in the financial year. In this case, the dividend can be declared out of the accumulated profits of the company earned by it in the previous years and which have been transferred to free reserves and as prescribed in the Companies (Declaration and Payment of Dividend) Rules, 2014. Hence, dividend can be declared out of free reserves in case of absence or inadequacy of profits.
Ques: What are the conditions for payment of dividend in case of inadequacy or absence of profits?
Ans: The conditions for payment of dividend in case of inadequacy or absence of profits are prescribed under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 and are as follows:
1. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year, this will not be applicable if no dividend was declared in each of the three preceding financial years.
2. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
3. The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.
4. The balance of reserves after such withdrawal shall not fall below fifteen percent of its paid-up share capital as appearing in the latest audited financial statement.
Ques: How are profits calculated for the payment of dividend?
Ans: The profits calculated for the payment of dividend are:
- Profits after providing for depreciation as per schedule II of the Companies Act,2013.
- Also, in computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded.
- Also, no dividend shall be paid by the company unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.
Ques: When can Interim Dividend be declared?
Ans: Typically, a company can declare interim dividend at any time during the financial year. A company can also declare interim dividend after the end of the financial year for which it proposes to declare dividend but before the date of AGM after close of the Financial Year.
Ques: Is there a requirement to open a separate bank account for depositing the amount aside for dividend?
Ans: After declaration, the company (Except Government company with its entire share capital owned by Central Govt./ State Govt. or both) needs to deposit the amount of dividend to be paid in a separate bank account with a scheduled bank within 5 days of declaration of dividend. This provision is also applicable to a Private limited or a closely held Company. The Company must ensure that the amount of dividend to be paid be transferred to the dividend account from the current account of the company within 5 days of declaration and be paid to the shareholders within 30 days.
For this purpose, as per the intention of the Act it seems that an already opened bank account can also be used for payment of dividend provided that this bank account is used only for payments of dividend and not any other day to day operational purposes of the company.
Ques: What can be the mode of payment of Dividend?
Ans: Dividends can only be paid in cash, cheque, warrant or by any other electronic mode of payment to a registered shareholder of the Company or to his order or to his banker.
Ques: Is there any company which cannot pay dividend?
Ans: Yes, a company which fails to comply with sections 73 and 74 i.e. defaulted in complying with the provisions of payment or acceptance of deposits cannot pay dividend until the default exists.
Ques: What happens if the company pays interim dividend on the basis of profits for the preceding quarters but after preparing the financial statements for the whole year. It is found that company has incurred a loss?
Ans: Interim dividend can be paid out of:
- Surplus in the profit & loss account or
- The profits for the financial year for which interim dividend is to be declared or
- The profits earned/generated during the financial year till the end of the quarter preceding the date of declaration of dividend
As long as the company has complied with the provisions of the Companies Act’2013 i.e section 123 read with the rules made thereunder for calculating the amount of Interim dividend, i.e the rate of Interim dividend shall not exceed the average rate of dividend declared in the last 3 financial years, even if the company suffers a loss at the end of the year, there is no contravention of the Act.
Ques: Can a company pay dividend to another person other than the shareholder?
Ans: As per section 123, no dividend shall be paid by the company except to the registered shareholder or his order or to his banker. Since, the words shareholder or to his order are mentioned, therefore it can be inferred that shareholder may direct the company to pay the dividend payable to him to another person. However, the company should receive such instruction in writing from the registered shareholder preferably from the registered email ID of the Company.
Ques: What is the process for declaration and payment of Dividend?
Ans: The procedure for declaration and payment of dividend is as follows:
1. Calling a board meeting for proposing and declaration of Dividend
2. Passing a Board resolution for proposing and declaration of Dividend in case of both final and interim dividend.
3. In case the dividend is final dividend, calling a general meeting to declare the final dividend as proposed by the Board of directors.
4. Passing a resolution at the general meeting to declare the final dividend by the members of the company.
5. On declaration of the dividend, open a separate bank account and transfer the amount of dividend to be paid to that separate bank account within 5 days of the date of declaration.
6. Payment of dividend to the shareholders within 30 days of the declaration of dividend.
7. Disclosure with respect to dividend in Board’s report.
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(The author is a Chartered Accountant and can be contacted at info@youronlinefilings.in or capratikanand@gmail.com or Mobile: +91-9953199493)
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