MEANING OF DIVIDEND

·         Portion of profits of the Company allocated to holders of shares in the Company

·         Return on investment to shareholders

·         S. 2 (35): Dividend includes any interim dividend

MEANING OF PROFITS

Maintaining the Capital intact and taking out the surplus of current period’s receipts over expenses.

 PROFITS AVAILABLE FOR DISTRIBUTION AND PROFITS AVAILABLE FOR DIVIDEND

·         Maximum profits that law allows a company to distribute to its shareholders by way of dividend

·         Profits the Directors consider should be distributed after making provision for past losses, for reserve and for other purposes

COMPANIES (DECLARATION AND PAYMENT OF DIVIDEND) RULES, 2014.

(Rule 3. Declaration of dividend out of reserves.)

In the event of adequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the following conditions, namely:-

(1) The rate of dividend declared shall not exceed  the average of the rates at which dividend was declared by it in the three (five) 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.

(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 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 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.

(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.

(5) No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.

PROCEDURE FOR DISTRIBUTION OF THE DIVIDEND

1. DECLARATION DATE

Declaration date is the announcement that the company’s board of directors approved the payment of the dividend.

2. EX-DIVIDEND DATE

The ex-dividend date is the date on which investors are cut off from receiving a dividend. If for example, an investor purchases a stock on the ex-dividend date, that investor will not receive the dividend. This date is two business days before the holder-of-record date.

The ex-dividend date is important as, from this date and forward, new stockholders will not receive the dividend. As a result, the stock price of the company will be reflective of this. For example, on and after the ex-dividend date, a stock most likely trades at lower price, as the stock price is adjusted for the dividend that the new holder will not receive.

3. HOLDER-OF-RECORD DATE

The holder-of-record (owner-of-record) date is the date on which the stockholders who are to receive the dividend are recognized.

Look Out!

Remember that stock transactions typically settle in three business days.

Understanding the dates of the dividend payout process can be tricky. We clear up the confusion in the following article:

4. PAYMENT DATE
Last is the payment date, the date on which the actual dividend is paid out to the stockholders of record.

Example of the process of dividend payment

Suppose Newco would like to pay a dividend to its shareholders. The company would proceed as follows:

1.On Jan 28, the company declares it will pay its regular dividend of $0.30 per share to holders of record on Feb 27, with payment on Mar 17.

2.The ex-dividend date for the dividend is Feb 23 (usually four days before of the holder-of-record date). On Feb 23 new buyers do not have a right to the dividend.

3. At the close of business on Feb 27, all holders of Newco’s stock are recorded, and those holders will receive the dividend.

4. On Mar 17, the payment date, New co mails the dividend checks to the holders of record.

Computation of Depreciation
dividendCIRCUMSTANCES UNDER WHICH DIVIDEND NEED NOT BE PAID:

a. Where it could not be paid because of operation of any law;

b. Where a shareholder has given direction to the company regarding payment of dividend and those directions could not be complied with;

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 from the shareholders; and

e. Where the dividend could not be paid not due to any default on part of the company.

 

TAX LIMIT

In addition to the income tax chargeable in respect of the total income of a company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) and also whether paid out of current or accumulated profits is charged with additional tax at the rate of 15 %.[4] The liability of payment of tax is on the principle officer of the company. The tax has to be paid within 14 days of declaration, distribution or payment of any dividend whichever is the earliest. The tax on distributed profit paid by the Company would be treated as the final payment of tax in respect of dividend.

PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS (S. 127) {S.207}

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 (three 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 percent perannum 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) where a shareholder has given directions to the company regarding the payment of the dividend and those directions 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.

(Author Ankita Chopra is Partner at White Collar Legal LLP and can be contacted at whitecollarlegal@gmail.com)

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Category : Company Law (3706)
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Tags : Companies Act (2171) Companies Act 2013 (1944)

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