Procedure for Declaration and payment of Interim Dividend by a Private Limited Company

Meaning of Interim Dividend (Section-123):- 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.

An interim dividend can be paid by the Board of directors of the company:

♦ 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.

Steps for Declaration of Interim Dividend and transfer of unclaimed dividend in IEPF

1. Company shall be authorized by its articles for payment of dividend.

2. Issue notice for holding a meeting of the board of directors of the company to consider the matter (Section-173).

3. Hold the board meeting and consider the following matters:

i. Ascertain whether financial position of the Company allows the payment of Interim dividend out of profits available for distribution.

ii. Recommending the rate and quantum of dividend

iii. Deciding a record date.*

*Record date: Record date shall be decided for the purpose of ascertaining who are eligible to receive the interim dividend on the date of declaration of dividend and to pay the interim dividend. The persons who are members as on the record date will be eligible to receive the dividend as approved by the Board of directors of the company.

iv. Pass a Board Resolution approving Payment of dividend

v. Pass a Resolution for opening of Account in the name of the Company.

A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares

4. Open the separate account with the scheduled bank and deposit the amount of dividend payable in the account within 5 Days of Declaration of dividend.

5. Dividend payable in cash may be paid by Cheque or warrant or through any other electronic mode to the shareholders entitled to the payment of the dividend.

6. Dividend shall not 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.

7. Dividend shall be paid within 30 days from the date of declaration of dividend.

8. Where a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.

9. The company shall, within a period of ninety 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 web-site of the company, if any, and also on any other web-site approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed.

10. If any default is made in transferring the total amount in Unpaid Dividend Account or any part thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve per cent 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.

11. Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply in form IEPF-5 to the company for payment of the moneyclaimed.

12. 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 Fund established under sub-section (1) of section 125 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.

13. 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.

Declaration of Interim Dividend In case of inadequate or absence of profit

In case of inadequate or absence of profit, the dividend can be paid out of the free reserves of the company. However, following point shall be taken note of:

1. The rate of dividend shall not exceed average of the rates at which dividend was declared by it in the 3 financial years immediately preceding that year:

Provided that this rule shall not apply to a company, which has not declared any dividend in each of the 3 preceding financial year.

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 per cent of its paid up share capital as appearing in the latest audited financial statement.

Punishment for Failure to Distribute Dividends (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 per cent per annum during the period for which such default continues.

Provided that 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) Directions of the shareholders regarding payment of dividend 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.]

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  1. Shailesh Patel says:

    What is the process of paying dividend to foreign corporate share holder by an indian Pvt Ltd co, we have only 1 shareholder. Even in this case we need to open a separate dividend account

  2. Brajesh Kumar says:

    The Company wants to declare interim dividend from the profits of current half year (i.e. 01/04/2019 to 30/09/2019) but company incurred loss as on 31st March, 2019.
    In case of interim dividend, is there any requirement under the Companies Act, 2013 to set off previous year losses and depreciation from the profits of current year 2019-20.

  3. Padmanabh Ranchhoddas Merchant says:

    Could the formality of opening of a special bank account for payment of interim dividend by a Private Limited Company, which may be having members less than two hundred, be statutorily skipped over, for the sake of blessed ‘ease of doing business’, much hyped cliche of Modi Government? Moreover, there could be less chances of unpaid dividend, as the number of members of a private limited company would not exceed two hundred.

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January 2021