Meaning of Dividend: Section 2(35) of the companies Act, 2013, while defining the term dividend simply states that “dividend” includes any interim dividend. In common parlance, “dividend” implies a distribution of any sums to members out of profit and wherever permitted out of free reserve available for this purpose.
Dividend is the part of the distributable profit which has been paid out of them. In simple words, it is a distribution of profits i.e. portion of profits earned and allocated as payable to the shareholders whenever declared.
The company in general meeting may declare dividend but no dividend shall exceed the amount declared by the board.
Sources for Declaration of Dividend
Dividends can be declared :
1. Out of the profits of the company for that year arrived at after providing for deprecation in accordance with the provisions of Schedule II
Or
2.Out of the profits of the company for any previous financial year or years arrived at after providing for deprecation with the provisions of that sub-section and remaining undistributed or out of both
Provided that in computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded.
3. Out of the money provided by the Central Government or a State Government for the repayment of dividend by the company in pursuance of a guarantee given by that Government.
Provided that company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company:
Proposed rate of dividend | Percentage of current profits to be transferred to Reserves |
Above 10% but below 12.5% of the paid up capital | Not less than 2.5% of the current profits |
Above 12.5% but below 15% | Not less than 5% of the current profits |
Above 15% but below 20% | Not less than 7.5% of the current profits |
Above 20% | Not less than 10% of the current profits |
Restriction on Declaring Dividend
A company cannot declare dividends if it has defaulted in any of the following payments:
1. Redemption of debentures or payment of interest on them.
2. Redemption of preference shares.
3. Creation of a capital redemption reserve.
4. Payment of previously declared dividends.
5. Repayment of any term loan to banks or financial institutions.
Declaration of Dividend where there is Inadequacy or Absence of profit under section 123 of Companies Act,2013
Where in any year there are no adequate profits for declaring dividends, the company may declare dividend out of the accumulated profit earned by it in any previous year and transferred by it to the free reserves only in accordance with the procedure laid down in Rule 3 of the Companies Rules, 2014.
Under Rule 3 of Companies Rules, 2014 such declaration shall be subject to the following conditions:
Condition I
The rate of dividend shall not exceed the average rates at which dividend was declared by the company in the immediately preceding three years.
However, this condition shall not apply if the company has not declared any dividend in each of the preceding three financial year.
Condition II
The total amount to be drawn from such accumulated profits shall not exceed 10% of its paid up share capital and free reserves as appearing in the latest audited financial statement.
Condition III
The amount so drawn up shall first be utilised to set off losses incurred in the financial year in which dividend is declared and only thereafter any dividend in respect of equity shares shall be declared .
Condition 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.
It may be noted that all the above three conditions have to be satisfied.
Procedure of Declaration of Dividend
The procedure to be followed by companies to declare and payment of dividends, as follow:
1. Issue at least 7 clear days’ notice of the meeting of Board of directors. (In case of listed companies, notify stock exchange(s) where the securities of the company are listed, at least 2 working days in advance excluding the date of the intimation and date of the meeting as per regulation 29 of SEBI (LODR) Regulations, 2015.
2. Hold Board meeting and pass resolution for recommending the final amount of dividend.
Listed companies are required to give advance at least 7 working days’ notice (excluding the date of intimation and record date) of record date/Book Closure to stock exchange as per regulation 42 of SEBI(LODR) Regulations 2015.
For the securities held in physical form, close the register of members and the share transfer register of the company
3. Hold a Board/Committee meeting for approving registration of transfer/transmission of the shares of the company, which have been lodged with the company prior to the commencement of book closure.
The Listed entity shall declare recommend or declare all dividend at least 5 working days before the record date fixed for the purpose.
4. Hold the annual general meeting and pass an ordinary resolution declaring the payment of dividend to the shareholders of the company as per recommendation of the Board.
In case of Interim dividend, it is not mandatory to take approval of shareholders for declaration of Dividend, the Board may declare it in the Board Meeting- Section 123(3)
5. Separate Bank account is required to be opened and amount of dividend payable shall be credited to the said account within 5 days of declaration.
If the company is listed, then for payment of dividend it has to mandatorily use, either directly or through its Registrars to an Issue and Share Transfer Agents (RTA and STA), any Reserve Bank of India approved electronic mode of payment such as Electronic Clearing Services (ECS), National Electronic Fund Transfer (NEFT) etc.
Provided that where it is not possible to use electronic mode of payment, ‘payable-at-par’ warrants or cheques may be issued but where the amount of payable as dividend exceeds on thousand and five hundred rupees, the ‘payable-at-part’ warrants or cheques shall be sent by speed post (Regulation 12 of SEBI (LODR) Regulations 2015).
6. Make arrangements with the Bank and in collaboration with other banks if required, for payment of the dividends warrants at par.
7. Dispatch dividends warrants within 30 days of the declaration of dividend. In case of joint shareholders, dispatch the dividend warrants to the first name shareholder.
8. In case dividend remaining unpaid or unclaimed, company is required to arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid dividend Account” within 7 days after expiry of the period of 30 days of declaration of final dividend. (Section 124)
9. Transfer unpaid dividend amount to Investor Education and Protection Fund (IEPF) after expiry of seven years from the date of transfer to unpaid dividend a/c
Payment of Dividend
The dividend amount should be deposited in a separate bank account within 5 days of declaration.
2. The dividend must be paid to shareholders within 30 days of its declaration.
3. If any amount remains unpaid, it should be transferred to the unpaid dividend account within 7 days after the expiry of the 30-day period.
4. A list of shareholders with unpaid dividends should be prepared and published on the company's website within 90 days of the transfer to the unpaid dividend account.
5. If the dividend remains unpaid for 7 years, it must be transferred to the Investor Education & Protection Fund (IEPF) along with a statement in Form IEPF-04.
6. In case of default in payment, an interest of 12% per annum will be applicable.
Unpaid Dividend Account
· Where a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.
· The company shall, within a period of ninety days of making any transfer of an amount under sub-section (1) to the Unpaid Dividend Account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the web-site of the company, if any, and also on any other web-site approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed.
· If any default is made in transferring the total amount referred to in sub-section (1) or any part thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve per cent per annum and the interest accruing on such amount shall ensure to the benefit of the member of the company in proportion to the amount remaining unpaid to them.
· Any person claiming to be entitled to any money transferred under sub-section (1) to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed.
· Any money transferred to the Unpaid Dividend Account of a company in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along with interest accrued, if any, thereon to the Fund established under sub-section (1) of section 125 and the company shall send a statement in the prescribed form of the details of such transfer to the authority which administers the said Fund and that authority shall issue a receipt to the company as evidence of such transfer.
· All shares in respect of which dividend has not been paid or claimed for seven consecutive years or more shall be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed:
Provided that any claimant of shares transferred above shall be entitled to claim the transfer of shares from Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed:
Explanation.— For the removal of doubts, it is hereby clarified that in case any dividend is paid or claimed for any year during the said period of seven consecutive years, the share shall not be transferred to Investor Education and Protection Fund.
If a company fails to comply with any of the requirements of this section, such company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of ten lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.
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