Dividend is the reward on investment by shareholders. Company’s pays dividend out the profits earned and shared part of such profits with shareholders. Dividend refers to that portion of profit that is paid to the shareholders of the company. Section 2(35) of Companies Act, 2013 defines ‘dividend’ includes any interim dividend.
The amount paid of the dividend is in proportion to the amount paid on the share by the shareholder as provided in section 51 of the CA, 2013.
TYPES OF DIVIDEND:
> Interim Dividend
> Final Dividend
It refers to dividend declares by Board of Directors during any financial year or at any time during the period from the closure of financial year till holding of the annual general meeting. Basically, it refers to declaration of interim dividend between two annual general meetings.
It refers to dividend declares by the company after closure of financial year and approved by Board of Directors in Annual General Meeting.
COMPANIES CAN’T DECLARE DIVIDEND:
A company which fails to comply with the provisions of Section 73 ( Prohibition on acceptance of deposits from Public) and 74 (Repayment of Deposits, etc. accepted before commencement of this Act) shall not, so long as such failure continues, declare any dividend on its equity shares.
SOURCE OF DIVIDEND:
The dividend can be declared out of –
> Out of the profits of the company for that year arrived at after providing for deprecation in accordance with the provisions of Schedule II OR
> Out of the profits of the company for any previous financial year or years arrived at after providing for deprecation with the provisions of that sub-section and remaining undistributed or out of both
Provided that 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
> Out of the money provided by the Central Government or a State Government for the repayment of dividend by the company in pursuance of a guarantee given by that Government.
Provided that company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company:
|Sr.No.||Proposed rate of dividend||Percentage of current profits to be transferred to Reserves|
|1.||Above 10% but below 12.5% of the paid up capital||Not less than 2.5% of the current profits|
|2.||Above 12.5% but below 15%||Not less than 5% of the current profits|
|3.||Above 15% but below 20%||Not less than 7.5% of the current profits|
|4.||Above 20%||Not less than 10% of the current profits|
DECLARATION OF DIVIDEND IN ABSENCE OF PROFITS:
Any Company may declare dividend in absence of profits during the financial year out of accumulated profits earned by company in previous years and its free reserves subject to fulfilment of following conditions accordance with Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014:
>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:
Provided that this sub-rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.
>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.
>The amount so drawn shall first be utilised 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.
> 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.
PROCEDURE OF DECLARATION AND PAYMENT OF DIVIDENDS:
The procedure to be followed by companies to declare and payment of dividends, as follow:
> Issue atleast 7 clear days’ notice of the meeting of Board of directors. (In case of listed companies, notify stock exchange(s) where the securities of the company are listed, at least 2 working days in advance excluding the date of the intimation and date of the meeting as per regulation 29 of SEBI (LODR) Regulations, 2015).
> Hold Board meeting and pass resolution for recommending the final amount of dividend.
* Listed companies are required to give advance at least 7 working days’ notice (excluding the date of intimation and record date) of record date/Book Closure to stock exchange as per regulation 42 of SEBI(LODR) Regulations 2015.
> For the securities held in physical form, close the register of members and the share transfer register of the company
> Hold a Board/Committee meeting for approving registration of transfer/transmission of the shares of the company, which have been lodged with the company prior to the commencement of book closure.
* The Listed entity shall declare recommend or declare all dividend at least 5 working days before the record date fixed for the purpose.
> Hold the annual general meeting and pass an ordinary resolution declaring the payment of dividend to the shareholders of the company as per recommendation of the Board.
* In case of Interim dividend, it is not mandatory to take approval of shareholders for declaration of Dividend, the Board may declare it in the Board Meeting- Section 123(3)
> Separate Bank account is required to be opened and amount of dividend payable shall be credited to the said account within 5 days of declaration.
*If the company is listed, then for payment of dividend it has to mandatorily use, either directly or through its Registrars to an Issue and Share Transfer Agents (RTA and STA), any Reserve Bank of India approved electronic mode of payment such as Electronic Clearing Services (ECS), National Electronic Fund Transfer (NEFT) etc.
* Provided that where it is not possible to use electronic mode of payment, ‘payable-at-par’ warrants or cheques may be issued but where the amount of payable as dividend exceeds on thousand and five hundred rupees, the ‘payable-at-part’ warrants or cheques shall be sent by speed post (Regulation 12 of SEBI (LODR) Regulations 2015).
> Make arrangements with the Bank and in collaboration with other banks if required, for payment of the dividends warrants at par.
> Dispatch dividends warrants within 30 days of the declaration of dividend. In case of joint shareholders, dispatch the dividend warrants to the first name shareholder.
> In case dividend remaining unpaid or unclaimed, company is required to arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid dividend Account” within 7 days after expiry of the period of 30 days of declaration of final dividend. (Section 124)
> Transfer unpaid dividend amount to Investor Education and Protection Fund (IEPF) after expiry of seven years from the date of transfer to unpaid dividend a/c
Before April 1, 2020, companies to pay Dividend Distribution Tax (DDT) @ 20.56 percent to Government and 79.44 percent left for the shareholders.
In Budget 2020-21, Dividend Distribution Tax (DDT) has been abolished and dividends received by shareholders after April 1, 2020 will now be taxed in their hands. However, tax will be deducted at source (TDS) on such dividend incomes in excess of Rs 5,000 per annum at the rate of 10%.