Declaration And Payment Of Dividend: Section 123 Of The Companies Act, 2013

DEFINITIONS

Dividend is a return on the investment made in the share capital of a company. It’s the share of profits of a company that is distributed among its Members.

The term 'Dividend' has been inclusively defined in the Act to the effect that it includes Interim Dividend. The Act neither specifically defines the term Dividend nor makes any distinction between Interim and Final Dividend.

'Final Dividend' means the Dividend recommended by the Board of Directors and declared by the Members at an Annual General Meeting.

'Interim Dividend' means the Dividend declared by the Board of Directors.

'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:

1. any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as reserve or otherwise, or
2. 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.

DIVIDEND CAN BE PAID OUT OF

• profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Schedule II to the Act, or
• 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 out of both.

Provided that in computing profits any amount representing unrealized 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; or

• 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.

Provided that a company may, before 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.

Note: Under Companies Act, 1956 the Companies were required to transfer such percentage of profits for that financial year to reserves in accordance with Companies (Transfer of Profits to Reserves) Rules 1975.

But now it is not mandatory to transfer such specific percentage to reserves and board of directors have a freedom to decide the percentage of profits to be transferred to reserves before declaring a dividend.

DIVIDEND CANNOT BE DECLARED OUT OF

• Securities Premium Account or
• The Capital Redemption Reserve or
• Revaluation Reserve or
• Amalgamation Reserve or
• Out of profits on reissue of forfeited shares or
• Out of profits earned prior to incorporation of the company.

DECLARATION OF DIVIDEND IN CASE OF INADEQUACY OR ABSENCE OF PROFITS

In case of inadequacy or absence of profits in any financial year, the company may declare dividend out of the accumulated profits earned by it in previous years and its free reserves subject to fulfillment of following conditions in accordance with Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014

• The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three 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.

• The total amount to be drawn from such accumulated profits shall not exceed 1/10 of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
• The amount so drawn shall first be utilized 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.
• 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.

PRACTICAL EXAMPLE:

ABC Ltd has inadequate profits but propose to declare dividend out of general reserves.

1. Calculate 1/10 of paid up capital + Free Reserves

Paid up Capital -Preference = 10,50,000
-Equity = 60,00,000
General Reserve = 20,00,000
Surplus (P&L) = 55,000
-------------------
Rs. 91,05,000
--------------------

Thus 1/10 of Rs. 91,05,000 = Rs. 9,10,500

2. Calculate Maximum Amount that can be taken from Reserves

Balance of Reserve after such withdrawal shall not fall below 15% of paid up capital:
Paid up Capital -Preference = 10,50,000
-Equity = 60,00,000
------------------
Rs. 70,50,000
-------------------

15% of Rs. 70,50,000 = Rs. 10,57,500

3. Calculate Profits Available

Surplus (P&L) = 55,000
Net Profit for the Year = 2,70,000
-----------------
Rs. 3,25,000
(-) dividend amount for Pref Shares Rs. 94,500
(10,50,000*9/100)
------------------
Profits Available Rs. 2,30,500
------------------

4. Calculate dividend amount that board of directors wants to declare

Equity Capital= 60,00,000*10/100= Rs. 6,00,000

5. Finally calculate balance amount that can be withdrawn from Reserves

Dividend Amount BOD wants to declare = Rs. 6,00,000
Profits Available for dividends = Rs. 2,30,500
-------------------
Bal. Amt that can be withdrawn from reserve = Rs. 3,69,500
--------------------
Hence, the Company can declare dividend @10%

INTERIM DIVIDEND SHALL NOT BE DECLARED 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 conditions set out in Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014

THE COMPANY SHALL NOT DECLARE ANY DIVIDEND, IF IT HAS DEFAULTED IN

1. Redemption of debentures or payment of interest thereon or creation of debenture redemption reserve,
2. Redemption of preference shares or creation of capital redemption reserve,
3. Payment of dividend declared in current or previous financial year(s), or
4. Redemption of any term loan to a bank or a financial institution or interest thereon till such time the default is subsisting.

Further the Company shall not declare dividend on its equity shares in case of non-compliance of provisions relating to the acceptance of deposits under the Act, till such time the deposits accepted have been repaid with interest in accordance with the terms and conditions of the agreement entered with the depositors.

PAYMENT OF DIVIDEND AND OPENING OF SEPARATE BANK ACCOUNTS

Pursuant to the provisions of section 123(4) of the Act, amount of dividend shall be deposited in schedule bank in a separate account within 5 days from the date of declaration of such dividend.

The Company is required to open two bank accounts:

Separate Bank Account

This separate bank account is required to be opened within five days of declaration of Dividend and the entire amount of dividend should be transferred to this separate bank account for payment of dividend to the members within 30 days of declaration of dividend;

Unpaid Dividend Account

In case of any amount remaining as unpaid/unclaimed in the above separate bank account, Unpaid Dividend Account needs to be opened within 7 days after the expiry of 30 days from the date of declaration of Dividend.

OTHER PROVISIONS

1. Dividends shall be declared only on the recommendation of the board, made at a meeting of the board.

Final Dividend- recommended by the board and declared by members.

Interim Dividend- declared by the board, members approval or ratification is not required.

[If Company has Audit Committee, then such committee shall consider financial statement and submit it to board for consideration and declaration of interim dividend]

2. Preference shareholders have priority over equity shareholder in respect of payment of dividend. However, when the board declares interim dividend on equity share, it is not necessary to declare interim dividend on preference shares also.

3. Dividends can only be declared at Annual General Meeting of the Company and not at an Extra-Ordinary General Meeting or by way of a postal ballot.

4. Interim dividend may be declared before the approval of financial statements and if financial statements are already approved then board of directors cannot declare interim dividend.

5. The board may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting.

6. The Company shall pay dividend to:

• Registered holder of shares or,
• By order of registered holder to any person or,
• To his banker

7. Entitlement of dividend:

• For shares in electronic form- Beneficial owner of shares
• For shares in physical form- Registered member of shares

In case shares are not yet transferred because of ownership dispute, then the dividend shall be kept in abeyance and shall be transferred to unpaid dividend account as and when it became due.

8. Disclosures:

• Notes to Accounts- shall disclose aggregate amount of dividend proposed to be distributed to equity and preference shareholders for the FY, amount of dividend per share and arrears of fixed cumulative dividend on preference shares if any.
• Balance Sheet- shall disclosure under 'Current Liabilities and Provisions' the amount lying in the Unpaid Dividend Account together with interest accrued thereon, if any.
• Board’s Report- Amount of interim dividend if any paid during FY and final dividend recommended by the board of directors shall be disclosed.
• Annual Report- shall disclose the total amount lying in the Unpaid Dividend Account of the Company in respect of last 7 years and when such unpaid dividend is due for transfer to the Fund. Further the amount of dividend, if any, transferred by the Company to the Investor Education and Protection Fund during the year shall also be disclosed.

The author can also be reached at csneharedekar@gmail.com

Disclaimer: Please note that the above article is based on the interpretation of related laws, which may differ from person to person and is not legal advice.