pri Short Note on Secretarial Standard -3 on – Dividend Short Note on Secretarial Standard -3 on – Dividend

Short Summary:

In this spark editorial, the author begins by referring the provisions of Secretarial Standard 3 on Dividend issued by the ICSI. Author shall Shed Some Light on the important provisions mentioned under the SS-3. The main thrust of the article, however, is upon to understand the SS-3 in undersized.

Also Read:Dividend Under Companies Act, 2013


Before writing on SS-3 one Quick Question is “Whether adherence of this Secretarial Standard is Mandatory or recommendatory for the Corporates”. These standards are issued by ICSI, However, adherence of these standards are “Recommendatory

Purpose to issue these standards are to set principles in relation to the declaration and payment of dividend and matter related thereto.

This Standard shall come into effect from 1st January, 2018

Applicability of SS-3

These standards are applicable on;

  • Equity Share Capital, and
  • Preference Share Capital
  • Final Dividend as well as Interim Dividend

Non Applicability

These standards are not applicable to a Company Limited by guarantee not having share Capital and does not deal with Dividend, if any, declared by company under liquidation.


Final Dividend Means a distribution of any sums to Members out of profits and wherever permitted out of free reserves available for the purpose.
Interim Dividend Means the Dividend declared by the Board of Directors.
Free Reserve “Free Reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as Dividend. However, the following amount shall not be treated as free reserves:

(i) Any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as reserve or otherwise, or

(ii) Any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value.

Source for payment of Dividend: 

Dividend can be paid out of Followings mentioned Below:  Section- 123 (1)(a)

  • Profit of the current year after providing of the depreciation; or
  • Profit of the previous financial year or years after providing for depreciation for previous years; or
  • Out of the money provided by Central or State Government for payment of dividend in pursuance of guarantee given by that, if any.

Source can’t be use for payment of Dividend:

  • Dividend shall not be declared out of the
  • Securities Premium Account or
  • The Capital Redemption Reserve or Revaluation Reserve or
  • Amalgamation Reserve or
  • Out of profits on re-issue of forfeited shares or
  • Out of profits earned prior to incorporation of the company.

Restriction of payment of Dividend:

A company shall also not declare any Dividend, if it has defaulted in –

(a) Redemption of debentures or payment of interest thereon or creation of debenture redemption reserve,

(b) Redemption of preference shares or creation of capital redemption reserve,

(c) Payment of Dividend declared in the current or previous financial year(s), or

(d) Repayment of any term loan to a bank or financial institution or interest thereon,

        till such time the default is subsisting.

Interim Dividend: {As per Clause 81 of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act}

  • Interim dividend can only be declared by board of Directors.
  • Generally paid in the middle of the year if Board of directors fined that profitability of the Company.
  • Board of Directors can declare dividend out of surplus in profit and loss account at the beginning of the year or profit during the year.

In case of Company incurred losses in current financial year:

If the company has incurred loss during the current financial year upto the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends by the company during the immediately preceding three financial year- Section 123(3).

Quick Question:

In the event a loss or inadequacy of profits during a financial year, Whether Interim Dividend can be declared/ paid out of Free Reserves?

In the event of a loss or inadequacy of profits during a financial year, no Interim Dividend shall be declared/ paid out of Free Reserves. However, Final Dividend may be declared / paid out of Free Reserves subject to fulfilment of conditions to be discussed below.

Whether dividend can be declare by the shareholders in General Meeting?

Dividend shall be declared only on the recommendation of the Board, made at a meeting of the Board.  Unless the Dividend has been recommended by the Board, Members in Annual General Meeting cannot on their own declare any Dividend.

Whether rate dividend can be increase by the shareholders in General Meeting?

Members may declare a lower rate of Dividend than the rate recommended by the Board but have no power to increase the amount or rate of Dividend recommended by the Board.

However, The Members may also decide not to declare the Dividend recommended by the Board.

Whether Dividend can be declare on equity shares for previous years in respect of which annual financial statements have already been adopted at the respective Annual General Meetings?

No Dividend shall be declared on equity shares for previous years in respect of which annual financial statements have already been adopted at the respective Annual General Meetings.


i. Distribution of discount coupons to all the Shareholders shall not be treated as deemed Dividend.

ii. A company is prohibited to issue Bonus shares in lieu of Dividend.

Whether shareholder can give director to the Company to pay his dividend to any third person?

Section 123(5) provides that no dividend shall be paid by a company in respect of any shares therein except to the

  • Registered holders of such shares or
  • To his order to any person or
  • To his Bankers

So it is clear that on the director of the register shareholder company can pay dividend to any third person.

Entitlement Dividend: Dividend shall be paid:

(i) Shares in Electronic Form: in respect of shares held in electronic form, to those Members whose names appear as beneficial owners in the statement of beneficial ownership furnished by the Depository(ies) as on the record date fixed by the company for this purpose;

(ii) Shares in Physical Form: in respect of shares held in physical form, to those Members whose names appear in the companies Register of Members after giving effect to all valid share transfers in physical form lodged with the company before the date of book closure or as on the record date, as the case may be.

Dividend in Abeyance:

In case of shares which have not been transferred because the ownership thereof is in dispute, or where specific prohibitory orders have been passed by a court or statutory authority, Dividend should be kept in abeyance and be transferred to the Unpaid Dividend Account, as and when it becomes due.

Payment of Dividend:

Dividend shall be deposited in a separate bank account within five days from the date of declaration and shall be paid within thirty days of declaration. The intervening holidays, if any, falling during such period shall be included.

However, such requirement shall not apply to a Government Company in which the entire paid up share capital is held by the Central Government or State Government(s) or jointly by both or by one or more Government Company

Mode of Payment of Dividend:

There are following Modes of Payment of Dividend: [Section- 123(5)]

  • Cash
  • Cheque
  • Dividend Warrant
  • In any electronic Manner.


  • Dividend should be paid by cheque or warrant sent through post to the registered address of the shareholder.
  • Dividend can’t be paid in ‘KIND’ e.g. in form of Gifts, Goods or Bonus Shares.
  • Payment of dividend to another person as per order of the shareholder is permissible. This is also providing in {Regulation 85(ii) of Model Articles Table- F as per the 2013 Act.}

Provisions Regarding Cheque or Warrant:

Speed Post:

In case of payment of Dividend through warrant or cheque payable at par, if the amount of Dividend exceeds one thousand and five hundred rupees, the company shall ensure to despatch such Dividend warrant or cheque either by speed post or registered post to the concerned Member at his registered address

Validity: A cheque or warrant for payment of Dividend shall be valid for a period of three months from the date of issue.

The Dividend cheque or warrant shall be accompanied by a statement in writing showing the amount of Dividend paid, Folio no./DP ID and Client ID nos., number of shares held by the concerned Member as on the record date, amount paid up on each share and the financial year to which the Dividend pertains

How to deal with situation when Cheque or warrant got expired?

Where such cheque or warrant remains unpaid after the initial period of validity, a fresh instrument shall be issued in lieu thereof, within fifteen days of the receipt of a valid request in this regard and such instrument shall also have a validity of three months from the date of its issue.

A duplicate Dividend cheque or warrant shall be issued only after obtaining requisite indemnity/ declaration from the concerned Member and after ascertaining the encashment status of the original Dividend cheque or warrant.

Proportionate Dividend:  Unless the Articles provide otherwise,

  • Dividend shall be paid in proportion to the amount paid-up on the shares and
  • for the portion of the period of the financial year in respect of which it is paid

Whether shares issued during the year are entitled to dividend for full year?

In case of new shares issued during the year, offer document may provide that dividend is payable on pro rata basis from the date of allotment or a date specified in offer document. Thus, Old shares will be entitled for dividend for full year, while new shares will be entitled to dividend only from the date of allotment on pro rate basis.

It is usually provided that share issued during the year will be entitled to dividend on pro rata basis i.e. only for part of the year for which new shares were held.

Preservation of Records:

Dividend cheques or warrants returned by the Bank, after payment thereof, and the Dividend Registers shall be preserved by the company for a period of eight years

Where the company has given an undertaking to the Bank for preservation or safe keeping of paid Dividend cheques or warrants for a specified period, the said instruments shall be preserved for such specified period or eight years from the date of the instrument, whichever is longer.

Disclosure of Dividend:

♠ Notes to Accounts forming part of the financial statements of the Company shall disclose the aggregate amount of Dividend proposed to be distributed to equity and Preference Shareholders for the financial year and the related amount of Dividend per share. Arrears of fixed cumulative Dividend on preference shares shall also be disclosed separately.

♠ The Balance Sheet of the company shall also disclose under the head ‘Current Liabilities and Provisions’, the amount lying in the Unpaid Dividend Account together with interest accrued thereon, if any.

♠ Directors Report: The amount of Interim Dividend, if any, paid during the financial year and final Dividend recommended by the Board of directors shall be disclosed in the Board’s Report

♠ The Annual Report of the company shall disclose the total amount lying in the Unpaid Dividend Account of the company in respect of the last seven years and when such unpaid Dividend is due for transfer to the Fund. The amount of Dividend, if any, transferred by the company to the Investor Education and Protection Fund during the year shall also be disclosed


I. Whether Dividend can be revoked?

Dividend, once declared, becomes a debt and shall not be revoked.

II. Whether calls in arrears and any other some due from a member can be adjust in lieu of dividend?

Calls in arrears and any other sum due from a Member in relation to the shares of the company may be adjusted against Dividend payable to the Member.

III. Whether dividend will be payable on call money paid in advance?

Dividend is not payable on call money paid in advance.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION

(Author can be reached at )

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July 2021