When can a company declare a dividend?
A company may declare a dividend only out of profits of the current year or earlier years, after depreciation, or out of money the Central Government or a State Government has provided for the payment. It is a distribution to members. It is not a bonus issue of shares.
No. The company in general meeting may declare a dividend, but not a sum higher than the amount the board has recommended.
Which profits can be used?
Section 123 requires the company to provide depreciation for the current year under Schedule II, and to set off losses and depreciation that were carried and not provided in earlier years. What remains may be used. The company may also use profits of earlier years that were transferred to free reserves, and only in the manner the dividend rules allow: the rate cannot exceed the average of the three immediately preceding years, the amount drawn is limited, and the reserves left behind cannot fall below the percentage of paid-up capital those rules set. A dividend is not declared out of a revaluation reserve.
Section 123(6) bars a dividend where the company has not complied with the provisions on acceptance and repayment of deposits. A section 8 company cannot pay a dividend at all.
Who declares it?
An interim dividend is declared by the board, out of the surplus in the profit and loss account, or out of profits of the financial year up to the quarter before the declaration. If the company has incurred a loss up to the end of that quarter, the rate cannot exceed the average rate of dividend declared in the three years immediately before.
A final dividend is recommended by the board and declared by the shareholders. They cannot declare more than the board recommended. The accounts are adopted before the declaration. The dividend is paid in proportion to the amount paid up on the shares, and a preference share is paid the preferential dividend its terms give it, ahead of the equity dividend.
When must it be paid?
The amount of the dividend, including an interim dividend, is deposited in a scheduled bank in a separate account within five days of the declaration. It is paid in cash, by cheque or warrant, or through an electronic mode, and only to the registered shareholder or to that shareholder’s order or banker. It is paid within 30 days of the declaration.
If it is not paid, or the warrant is not posted, within those 30 days, every director who is knowingly a party to the default is punishable with imprisonment for a term which may extend to two years and with a fine of not less than ₹1,000 for every day the default continues. The company is liable to simple interest at 18 percent a year for the period of default. The section does not apply where a law prevents payment, where the shareholder’s own payment directions cannot be followed, or where the right to receive the dividend is in dispute.
What happens to an unpaid dividend?
An amount that stays unpaid or unclaimed for 30 days is transferred, within the next seven days, to a separate account called the Unpaid Dividend Account. An amount that stays unclaimed in that account for seven years moves to the Investor Education and Protection Fund, and the shares on which that dividend was unpaid move with it. A person who is entitled can claim from the Fund. A fully paid bonus issue, which uses reserves rather than paying cash, is a different act, on the bonus shares page.
Frequently asked questions
Four questions cover the shareholders’ ceiling, a section 8 company, reserves, and an interim dividend in a loss.
Can shareholders raise the board’s figure?
No. The company in general meeting may declare a dividend, but not a sum higher than the amount the board has recommended.
Can a section 8 company declare a dividend?
No. A section 8 company applies its income to its objects and does not pay a dividend to its members.
Is a transfer to reserves compulsory?
No. Before declaring a dividend the company may transfer such percentage of its profits as it thinks fit. There is no fixed percentage the Act now requires.
Can an interim dividend exceed the past rate in a loss?
No. If the company has incurred a loss up to the end of the quarter before the declaration, the interim rate cannot be higher than the average rate of the three immediately preceding years.
Sources
Dividend is section 2(35) and sections 123 to 127 of the Companies Act. Payment in cash is section 123(5). The unpaid dividend account is section 124.