Dividend Distribution
A dividend represents a portion of the company’s earning distributed to its shareholders. It is payable as a proportion of the face value of shares. Dividends may be categorized as either Final or interim. The final dividend is usually declared after the finalization of the accounts, whereas interim dividend is declared prior to the finalization of accounts.
The Rate of the Final dividend is recommended by the Board of directors, and must be approved by an ordinary resolution during a general meeting. Shareholders may approve the dividend at the recommended rate or at a lower rate, but not higher rate. Once approved, a final dividend becomes irrevocable, must be recorded as a liability in the accounts, and must be paid within prescribed timeframe.
Interim dividend is declared by the Board of directors at duly convened board meeting, subject to certain conditions. Interim dividend after declaration can be revoked with consent of all shareholders.
Prohibition on declaration of dividend Section 123(6)
Certain companies are restricted from declaring dividend:
(i) Section 8 Companies are prohibited from paying any dividend to its member.
(ii) Company which failed to comply with the provisions of section 74 and 75 shall be prohibited from declaring dividend till such failure is continues.
Transfer to reserve:
The transfer of profit to reserve before declaration of dividend is recommendatory in the nature as given in the first proviso to section 123(1). Companies may choose to transfer any portion of their profit or forgo such transfers entirely based on their financial strategies. It is considered prudent to allocate profit to reserve to ensure financial stability and soundness.
Final Dividend
A dividend declared at the Annual General Meeting (AGM) is termed as Final dividend. Its rate is recommended by the Board of directors and shareholders cannot increase this rate but may approve a lower rate. It is approved by passing ordinary resolution at the AGM. Once declared, it cannot be revoked, even by-passing special resolution. The source of final dividend can be the following
(i) Profit of the current financial year calculated after deducting depreciation as per schedule II,
(ii) Profit of any previous financial years calculated after deducting depreciation as per schedule II and remain undistributed and free reserve,
(iii) Both (i) and (ii), and
(iv) Out of the money provided by central or state government.
Declaration of Interim dividend
The Board of directors have the authority to declare interim dividend at any time during the period form the closure of financial year till holding annual general meeting. It may be declared from surplus in the profit and loss account or profit earned in the current financial years.
If the company reports a loss up to the end of the quarter preceding the declaration, the interim dividend rate must not exceed the average of rates of dividend declared by the company in immediately preceding three financial years, if the company has reported loss up to the end of the quarter immediately preceding date of declaration of such dividend.
Dividend declaration with inadequate or no profit
When the company has insufficient or no profit in a financial year but wish to declare a dividend, It may may declare the dividend out of accumulated profit transferred to free reserve, provided the conditions prescribed in Rule 3 of the Companies (Declaration and Payments) Rules, 2014 are cumulatively satisfied. The conditions that need to satisfied are as follows;
(i) The dividend rate does not exceed the average of the rates at which dividend was declared in the immediately preceding three years; (However, this condition shall not apply if the company has not declared dividend in each of the three preceding years)
(ii) The total withdrawal from free reserve does not exceed 10% of its paid-up share capital and free reserve as appearing the latest audited financial statement. (Paid-up share capital for this purpose shall be both equity and preference share capital;
(iii) The amount withdrawal as mentioned in (ii) above shall first be utilized for setting off losses incurred in the current financial year and remaining amount, if any, can be used to declare dividend in respect of equity shares; and
(iv) The balance of reserve, after the withdrawal mentioned in (ii) above, shall not fall below 15% of its paid-up capital as reflected in the latest audited financial statement.
Unclaimed or Unpaid dividend (Section 124)
The dividend must be paid within 30 days of its declaration. The unpaid or unclaimed dividend must be deposited in Unpaid Dividend Account (UDA) within 7 days from the expiry of the said 30 days period, maintained with a scheduled bank.
Failure to deposit the dividend into the UDA attract an Interest penalty of 12% shall be payable by the company. Shareholders may claim unclaimed amount from the UDA within seven years, after which such amount, along with accrued interest, are transferred to Investor Education and Protection Fund (IEPF). The shares for which dividend remains unclaimed for seven consecutive years are also transferred by the company to IEPF, though shareholders may reclaim such shares subsequently from the IEPF.
Penalties for contravention –
Non-compliance with the requirements the company and its officer shall be made liable to penalty as follow.
| Company | One lakh Rupees | Subject to maximum ten lakhs rupees |
| Further penalty of rupees of five hundred for each day of default in case of continuing failure. | ||
| Officer | Twenty-Five thousand Rupees | Subject to maximum two lakhs rupees |
| Further penalty of rupees of one hundred for each day of default in case of continuing failure. |
Punishment for default in paying dividend within 30 days (Section 127)
The declared dividend must be paid within 30 days from the date of its declaration. Non-payment may attract punishment as per section 127.
(a) Every director, who is deliberately a party to the default, shall be punished with imprisonment of up to two years and also liable to pay fine of ₹ 1,000 for each day the default continues.
(b) The company shall be liable to pay simple interest at the rate of 18% p.a. during the period of default.
Immunity from punishment
No offence shall be deemed to have been committed, even if the dividend is not paid within 30 days, and hence, punishment shall not be attracted as above, where…
(i) The dividend could not be paid by reason of the operation of any law;
(ii) The direction of shareholders regarding payment of dividend cannot be complied with and such non-compliance has been communicated to them;
(iii) There is a dispute regarding the right to receive the dividend;
(iv) The dividend is lawfully adjusted against any sum due to company from the shareholder;
(v) The failure to pay within 30 days is not attributable to the company.
Right to received dividend, Right, and Bonus Shares
When an instrument of transfer of share is delivered to the company, and such shares is not registered by the company in the name of buyer, the company needs to take following steps;
- Transfer the corresponding dividend in respect of such share to UDA, unless the explicitly authorized to pay it to transferee; and
- Keep in abeyance, in relation to such share, any offer of right share and fully paid-up bonus shares.
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Disclaimer: The information presented in this article is intended solely for general informational purposes and should not be considered professional advice. No actions should be undertaken based exclusively on the content of this article. For advice tailored to your specific circumstances, it is always recommended to consult a qualified professional.
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