Applicable Provision: Second Proviso of Sub-section (1) of Section 123 of Companies Act, 2013 & Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014
If there’s any inadequacy or inadequate profits in any year, a company may declare dividend out of surplus provided fulfilment of below-mentioned conditions:
a. 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. However, this sub-rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.
b. The total amount to be drawn from such accumulated profits shall not exceed 1/10th of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
c. 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.
d. 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.
The procedure is mentioned below:
a. Give notice to all the directors of the company for holding a Board meeting. In the meeting, take decision to declare dividend out of company’s reserves because of inadequacy or absence of profits and also fix the date, time and place of the Annual General Meeting. Authorise the Company Secretary or any competent person if company does not have a company secretary to issue the notice of the AGM on behalf of the Board of directors of the company to all the members, directors and auditors of the company and other persons entitled to receive the same.
b. Need to ensure that the above cited provisions related to concerned rules are complied with.
c. Need to take only Net Profit after tax when calculating profits of the previous years.
d. Ensure that while computing the amount of profits, the amount transferred from the Development Rebate Reserve is included and all items of capital reserves including reserves created by revaluation of assets are excluded.
e. As per Regulation 30 of SEBI (LODR) 2015, in the case of listed companies, inform the Stock Exchange with which the shares of the company are listed within 30 minutes of closure of Board meeting about decision to recommend declaration of dividend out of Company’s Reserves.
f. Issue notice for AGM at least 21 days prior to it, convey the meeting, and pass the necessary resolution.
g. If it’s a case of listed entity, do ensure that the copies of notice as well as that of proceedings of meeting are forwarded to the concerned stock exchange.
h. Need to open a separate bank account for paying dividend and credit the said bank account with the amount of dividend to be payable within 5 days of declaration of dividend.
i. Issue dividend warrants within 30 days from the date of declaration of dividend, and if it’s a case of joint shareholders, dispatch the warrant to the first named shareholder.
j. Send sufficient number of cancelled dividend warrant forms with MICR code allotted by the RBI, to the bank or circulation to the branches where the dividend warrants will be payable at par.
k. Instructions to all the specified branches of the bank that dividend should be paid at par should be sent by the Bank.
l. Publish a Company notice in a newspaper circulating in the district in which the registered office of the company is situated to the effect that dividend warrants have been posted and advising those members of the company who do not receive them within a period of 15 days, to get in touch with the company for appropriate action.
m. Issue bank drafts and/or cheques to those members who inform that they received the dividend warrants after the expiry of their currency period or their dividend warrants were lost in transit after satisfying that the same have not been encashed.
n. Arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid dividend A/c” within 7 days after expiry of the period of 30 days of declaration of final dividend.
Note: The above-mentioned points and procedures are Ad Verbatim as per the same provided under the Act of 2013 r/w concerned Rules of 2014 related to payment of dividend.
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