Analysis on Dividend Chapter of Companies Act, 2013

When company earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business.

Applicable provisions: Chapter VIII- Declaration and Payment of Dividend (Section 123 to 127) read with Companies, (Declaration and Payment of Dividend), Rules 2014.

As per section 2(35) of the Companies Act, 2013 defines the dividend as including the interim dividend.

Types of Dividend:

1. Final Dividend

2. Interim Dividend

Every kind of companies is eligible for the payment of dividend except section 8 company.

Section 123(6): Company who made default in Section 73 or 74 relating to the acceptance and repayment of deposits would be barred to declare dividend.

Difference between Final Dividend and Interim Dividend:

Final Dividend	Interim Dividend
Recommended by Board and approved by the shareholders	Approved by the shareholders
Declared in the Annual General Meeting	Declared between any 2 Meeting
It cannot be revoked	It can be revoked subject to the approval of shareholders.
No special clause in the articles is required.	It will be declared only if the articles expressly authorize the declaration.
Rate of dividend is high compared to interim dividend.	Rate of dividend is generally less than the Final dividend
Declared only once in a year.	Can be declared more than one times in a year.

Section 123(1): Source of Dividend:

1. Out of the profits of the company of the current year, after providing for deprecation.

2. Out of the profits of the company for any previous financial year, after providing for deprecation.

3. Any amount received from the Central Government or State Government for the payment of dividend.

Proviso: Before declaring the dividend, consider the following points:

1. Unrealized Gain, Notional Gain 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 not be considered for the dividend.

2. Before declaration of dividend, company requires to transfer such percentage of profit as it may be consider appropriating to the reserve of the company.

3. No dividend shall be declared or paid by the company from its reserve other than General Reserve.

4. No company can declared dividend, unless previous year losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.

Rule: 3 Inadequacy of Profit:

In the event of inadequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the fulfillment of the following conditions, namely:-

1. The rate of declared dividend shall not exceed the average rate at which dividend was declared in the last 3 years. This rule shall not apply if company did not declared dividend in last 3 years.

2. The total amount withdrawn from the accumulated profits shall not exceed 1/10 of the sum of the paid-up share capital and free reserves.

3. The amount so withdrawn shall be first utilized to set off the losses incurred in 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 15% of its paid up share capital as appearing in the latest audited financial statement.

Proviso: In case, a company is incurring loss as per financials of latest quarter, interim dividend shall not be higher than average dividend declared by the company during last three financial years.

Mode of payment of dividend:

Proviso: Any dividend payable in cash may be paid up cheque or warrant or any electronic mode to the shareholder.

Section 123(2): depreciation shall be provided in accordance with the provisions of Schedule II.

Section 123(3): 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.

Section 123(4): The amount of dividend shall be deposited in a separate account in a scheduled Bank within five days from the date of declaration of such dividend. When dividend has been declared by the company, shareholder can claim such portion of profit within 30 days from the date of depositing.

Section 123(5): No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash:

Section 124(1): If the dividend has not been paid or claimed within 30 days from the date of declaration to any shareholder, such amount shall be transferred to Unpaid Dividend Account with 3 days from the expiry of such 30 days. This special account on the name of Unpaid Dividend is to be opened by the Company.

Thus number of days to transfer unpaid or unclaimed amount of dividend to unpaid dividend account comes to 30 + 7 = 37 days.

Section 124(2): The company shall, within a period of 90 days of making any transfer of an amount to the Unpaid Dividend Account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose.

Section 124(3): If any default is made in transferring the total amount or any part thereof to the Unpaid Dividend Account of the company, company shall pay, from the date of such default, interest on amount that has not been transferred to the said account, at the rate of 12% per annum and the interest accruing on such amount shall ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them.

Section 124(4): Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed.

Section 124(5): Any money transferred to the Unpaid Dividend Account of a company which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along with interest accrued, if any, thereon to the IEPF Fund established and the company shall send a statement in the prescribed form of the details of such transfer to the authority which administers the said Fund and that authority shall issue a receipt to the company as evidence of such transfer.

Section 124(6): All shares in respect of which dividend has not been paid or claimed for seven consecutive years or more shall be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed:

Section 126: Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares

Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company,

Transfer the dividend in relation to such shares to the Unpaid Dividend Account unless the company is authorized by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer; and keep in abeyance in relation to such shares (a) any offer of rights shares and (b) any issue of fully paid up bonus shares.

Section 127: Punishment for Failure to Distribute Dividend

Where dividend has been declared by the company but has not been paid within 30 days from the date of declaration of dividend ‘

Every Director: Imprisonment extends to 2 Years + Fine not less than Rs. 1000  for every day during which such default continues

Company- Simple Interest @18% p.a. during the period which defaults continues.

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

1. If dividend could not be paid by the reason of Operation of Law

2. Where a shareholder given direction regarding the payment of dividend

3. Where there is Dispute regarding the dividend

4. Where the dividend is lawfully adjusted by the company against sum due from the shareholder

5. Where for any other reason, the failure to pay dividend within the specified period.

******

Disclaimer: –The above mentioned article has been based on relevant provisions of Companies Act, 2013. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.