The word ‘dividend’ comes from the Latin word ‘dividendum‘ (‘thing to be divided’). A dividend is a payment made by a Company to its shareholders, usually as a distribution of profits. When a company earns a profit or surplus, it can re-invest it in the business (called retained earnings), and pay a fraction of this reinvestment as a dividend to shareholders.
In India, companies declaring or distributing dividend, are required to pay a Corporate Dividend Tax in addition to the tax levied on their income. Dividend received is exempt in the hands of the shareholders, in respect of which Corporate Dividend Tax has been paid by the company.
In this Article we are discussing below Provisions Related to Dividend Under Companies Act,2013 in India :-
|WHAT IS DIVIDEND||As per section 2(35) of the Companies Act, 2013, “Dividend includes interim dividend”|
|SOURCES OF DIVIDEND||Dividend can be paid out of following sources: |
Lets understand the various provisions discussed under the Companies Act, 2013
|DECLARATION OF DIVIDEND OUT OF PROFITS||Dividend should be paid out of- |
|Note:1. Dividend shall be declared/paid only after providing for depreciation in accordance with Schedule II of the Companies Act, 2013.Before declaration of dividend out of profit in any financial year, Company may transfer a percentage of its profits to reserves of the company (at its discretion) for that financial year. |
(1) 1.Earlier Companies Act, 1956, imposes burden to transfer certain percentage of profit to reserve before declaration of dividend in any financial year.
(2) However, Companies Act, 2013 introduced a liberal provision in this regard to transfer such percentage of profit to reserves of the company as company may consider appropriate.
(3) Dividend shall not be declared/paid by a company from its reserves other than free reserves.
(1) In Simple words, Dividend should not be declared out of the securities premium account or the Capital redemption reserve account or revaluation reserve or Amalgamation reserve or out profit on re-issue of forfeited shares or out of profit earned profit to the incorporation of the company.
(2) “Free Reserve” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:
(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.
|DIVIDEND DECLARED OUT OF RESERVES||In a year in which the profits are inadequate or there are no profits, the company may declare and pay dividend out of past year profit earned and transferred to reserves subject to the provision of the Companies (Declaration And Payment of dividend) Rules, 2014.Notes: |
1. For the purpose of declaration of dividend out of reserves,Company shall have to fulfils following Conditions:
(i) The rate of dividend shall not exceed the average of 3 years immediately preceding that year.
Above condition shall not apply to the company which has not declared any dividend in each of the 3 years immediately preceding that year.
(ii) The total amount to be drawn from such accumulated profit 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.
(iii) The amount so withdrawn 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.
(iv) 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.
(v) No company shall declare dividend unless previous losses and depreciation not provided in previous year or years are set off against profit of the company of the current year.
|STEPS||STEP 1– MAXIMUM DIVIDEND RATE Average of 3 years immediately preceding that year.STEP 2– MAXIMUM AMOUNT DRAWN FROM ACCUMULATED PROFIT 1/10* Of Paid Up Share Capital & Free Reserves. |
STEP 3–MAXIMUM AMOUNT DRAWN FOR DIVIDEND MINUS(-)losses incurred in the financial year in which dividend is declared.
|CHECKPOINT –||1. Balance of reserves after such withdrawal (In 2nd) Step) shall not fall below 15% of its paid up share capital.2. Set off entire previous losses and depreciation not provided in previous year or years|
|DECLARATION OF DIVIDEND|| |
|INTERIM DIVIDEND||As we know that Dividend includes interim dividend, it means entire provisions related to declaration of dividend shall be applicable to interim dividend unless otherwise specifically provided the provisions in this regards.♠ The board of director of the company may declare interim dividend. |
♠ Such dividend shall be declared out of-
|DEPOSIT THE AMOUNT OF DIVIDEND||♠ Company shall deposit amount of dividend (including interim dividend) in separate account with a scheduled bank.♠ Such amount must be deposited within 5 days from the date of declaration of dividend. |
♠ Dividend must be paid within 30 days from the date of declaration of dividend.
♠ Dividend shall be paid in cash i.e.it shall not be paid in kind.
1. It should be noted that ‘Dividend payable in cash’ may be paid through following modes to shareholders who are entitled to receive dividend :-
a. By cheque; or
b. By warrant; or
c. Through any electronic mode
♠ Calls in arrears and other sum due from a member may be adjusted against dividend payable to the member.
♠ Company shall not issue any bonus share in lieu of dividend. Dividend should be paid proportionately on the paid up value of shares.
|ENTITLEMENT TO DIVIDEND|| |
|ADDRESS TO PAY DIVIDEND (In case payment made by cheque or warrant)|| |
|UNPAID DIVIDEND||The amount of dividend which remains unpaid or unclaimed after 30 days from the date of declaration should be transferred to a special dividend account of the company.♠ Account shall be called ‘Unpaid Dividend Account’ opened by the company in any scheduled bank. |
♠ Amount of unpaid dividend shall be transferred to ‘Unpaid Dividend Account’ within seven days from the date of expiry of the 30 days period provided for payment of dividend.
♠ The company shall prepare a statement related to persons to whom unpaid dividend are to be paid and such statement shall place on the website of the company or any other website as approved by the Central Government.
♠ Such statement shall contain following information’s-
♠ After transferring the unpaid dividend to ‘Unpaid Dividend Account’, Any person (who is entailed to claim such money) may apply to the company for payment of money so claimed.
♠ Any amount in the Unpaid Dividend Account of the company which remains unclaimed and unpaid for a period of seven years from the date of transfer of such amount to the Unpaid Dividend Account should be transferred to the Investor Education and Protection Fund.
♠ Any interest earned on the Unpaid Dividend Account should be transferred to the investors Education and Protection Fund.
♠ The company shall send a statement containing details of such transfer to the authority which administers the Fund and such authority shall issue a receipt to the company as evidence.
|DIVIDEND IN ABEYANCE||The amount of dividend in respect of shares for which an instrument of transfer has been transferred to company but which have not been registered for any valid reason should be transferred to Unpaid Dividend Account.|
|DISCLOSURES REQUIREMENT||♠ The Balance Sheet of the company should disclose under the head ‘current liabilities and provisions’, the amount lying in the Unpaid Dividend Account together with interest accrued thereon, if any.♠ The annual report of the company should disclose the total amount lying in the Unpaid Dividend Account of the company in respect of the last seven years. The amount of dividend, if any, transferred by the company to the investor Education and Protection Fund during the year should also be disclosed. |
♠ The annual return of the company should mention that the amount of dividend remaining unpaid or unclaimed for a period of seven years from the date such dividend became payable by the company, together with interest accrued thereon, if any, has been credited to the investor Education and Protection Fund.
|PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS|
|Dividend declared BUT has not been paid or dividend warrant has not been posted within 30 days from the date of declaration||Every director of the company, if knowing a party to the default PUNISHABLE WITH Imprisonment – which may extend to 2 years; andFine – At least Rs. 1,000 for every day during which such default continues; AND Company shall be liable to pay simple interest at the rate of 18% p.a. during the period for which such default continues.|
|NO PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS UNDER SPECIFIED CASES||(i) DIVIDEND COULD NOT BE PAID DUE TO OPERATION OF ANY LAW(ii) DIVIDEND COULD NOT BE PAID DUE TO ANY DEFAULT WHICH WAS NOT ON THE PART OF THE COMPANY |
(iii) EXCEPTION TO PUNISHMENT FOR FAILURE TO DISTRIBUTE I DIVIDENDS
(iv) DIVIDEND HAS BEEN DULY ADJUSTED AGAINST ANY DUES FROM SHAREHOLDERS
(v) ANY DISPUTE REGARDING RIGHT TO RECEIVE THE DIVIDEND
(vi) DIRECTION OF SHAREHOLDER TO PAY DIVIDEND CAN NOT BE COMPILED WITH & SAME HAS BEEN COMMUNICATED TO HIM
(CA Surendra Agrawal (M.COM,LLB,ACA) PH-9313336776 – Author can be contacted by those who wants to Complete CA Final Audit in 18 Days)