Declaration and Payment of Dividend

1 1 Declaration and Payment of Dividend Meaning of Dividend The literal meaning of the term Dividend stands for the sum payable as interest on loan or as share of profit to shareholders in a business of a company or a profit of a company to the creditors of the ruined property or as an individual s share of it. Whereas in commercial sense, Dividend has two meanings: one in relation to companies as going concerns as a portion of profits earned and allocated as payable to the shareholders yearly or whenever declared, and the other arising in winding up as that part of the residuary balance left after settling all creditors in full to be divided as between the contributories according to their respective rights from out of the value of the assets realized.

2 The term Dividend is used in this chapter in the former sense portion of profits allocated to the holders of shares. Declaration of Dividend (Section 123 of the Companies Act, 2013) A new section 123 of the Companies Act, 2013 came into force from 1st April, 2014 which provides for Declaration of Dividend . According to this section: (i ) Dividend shall be declared or paid by a company for any financial year only (a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of section 123(2), or (b) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or [Note: Such depreciation shall be provided in accordance with the provisions of Schedule II.]

3 ] (c) out of both; or (d) out of money provided by the Central Government or a State Government for the Payment of Dividend by the company in pursuance of a guarantee given by that Government. (ii) Transfer to reserves: A 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. Therefore, the company may transfer such percentage of profit to reserves before Declaration of Dividend as it may The Institute of Chartered Accountants of Indiaconsider necessary. Such transfer is not mandatory and the percentage to be transferred to reserves is to be decided at the discretion of the company.

4 (iii) Declaration of Dividend out of accumulated profits: Where a company, owing to inadequacy or absence of profits in any financial year, proposes to declare Dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such Declaration of Dividend shall be made only in accordance with prescribed rules. Such Dividend shall be declared or paid by a company only from its free reserves. No other reserve can be utilized for the purposes of Declaration of such Dividend . For Declaration of Dividend out of accumulated profits, the Ministry of Corporate Affairs has provided the Companies ( Declaration and Payment of Dividend ) Rules, 2014. Thereby, when there is inadequacy or absence of profits in any year, a company may declare Dividend out of free reserves.

5 However, the following conditions shall be fulfilled before declaring Dividend out of reserves: (a ) The rate of Dividend declared shall not exceed the average of the rates at which Dividend was declared by it in the 3 years immediately preceding that year: However, this rule will not apply if a company has not declared any Dividend in each of the three preceding financial year. (b) 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 audited financial statement. Therefore, (c) 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.

6 (d) 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. (e) No company shall declare Dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company of the current year. [The Companies ( Declaration and Payment of Dividend ) Amendment Rules, 2014.] (iv) Depositing of amount of Dividend : In terms of section 123(4), the amount of the Dividend , including interim Dividend , shall be deposited in a scheduled bank in a separate account within five days from the date of Declaration of such Dividend . 1/10 of (Paid up share capital + Free reserves) Total amount that can be drawn from accumulated profits The Institute of Chartered Accountants of India(v) Payment of Dividend : According to section 123(5): (a) Dividends are payable in cash.

7 Dividends that are payable to the shareholder in cash may be paid by cheque or warrant or in any electronic mode. (b) Dividend shall be payable only to the registered shareholder of the share or to his order or to his banker. (c) Nothing in sub-section 5 of section 123, shall prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company. (vi) Prohibition on Declaration of Dividend : The Act by virtue of Section 123 (6) specifically provides that a company which fails to comply with the provisions of section 73 (Prohibition on acceptance of deposits from public) and section 74 (Repayment of deposits, etc.)

8 , accepted before the commencement of this Act) shall not, so long as such failure continues, declare any Dividend on its equity shares. Interim Dividend : According to section 2(35), Dividend includes any interim Dividend . According to section 123(3), the Board of Directors of a company may declare interim Dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim Dividend is sought to be declared. However, in case the company has incurred loss during the current financial year up to 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 declared by the company during the immediately preceding three financial years.

9 The Board of directors may declare interim Dividend and the amount of Dividend including interim Dividend shall be deposited in a separate bank account within five days from the date of Declaration of such Dividend . Various points of comparison in respect to old law the Companies Act, 1956 (i) This section corresponds to section 205 and 205A (3) of the Companies Act, 1956 Dividend to be paid only out of profits and Unpaid Dividend to be transferred to special account . (ii) According to the Companies Act, 2013, a company which fails to comply with the provisions of section 73 (Prohibition on acceptance of deposits from public) and section 74 (Repayment of deposits, etc., accepted before commencement of this Act) shall not, so long as such failure continues, declare any Dividend on its Equity shares.

10 However, according to the Companies Act, 1956 the restriction was imposed only in case of failure of redeem redeemable preference accepted before the commencement of the Companies Act, 1956. The Institute of Chartered Accountants of India(iii) According to the New Act, a company can at its discretion transfer such % of profit to the reserves before declaring Dividend as it deem necessary and such transfer is not mandatory. However, under the Old Act, it was mandatory to transfer a certain specified percentages before Declaration of Dividend . (iv) According to the Companies Act, 1956, the Central Government may, in the public interest, allow any company to declare or pay Dividend for any financial year out of the profits for that year or any previous financial year or years without providing for depreciation.