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Discussion > Corporate Law > Others >

Dividend Declaration

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Article Assisitant

[ Scorecard : 330]
Posted On 26 April 2011 at 18:21 Report Abuse

Whether a public limited company can declare dividend if its having a mere profit after providing the depreciation as per Sec 205 and is there any limit or condition that it has to satisfy ????


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Saroj Kumar
Keen to learn something new every moments

[ Scorecard : 2366]
Posted On 27 April 2011 at 12:01

 

 

DIVISIBLE PROFITS AND DIVIDEND

20.1      INTRODUCTION TO DIVIDEND                                          [Sec. 2 (14A)]

Meaning of dividend

§       Dividend is the return on the investment of shareholders in a company. Only profits can be distributed as dividend

§       Dividend means the portion of the profits of the company which is distributed to the shareholders

Definition of dividend

§        Dividend includes any interim dividend [Sec. 2(14A)]

§        Ordinarily, the term interim dividend means the dividend declared between two AGMs

Procedure for declaration of dividend

Final dividend

§       Firstly, dividend is recommended by the Board (Sec. 217)

§       The members in the AGM may declare the dividend by passing OR. Declaration of dividend at an AGM is an item of ordinary business (Sec. 173)

§       The members may reduce the rate or amount recommended by the Board, but they cannot increase it.

Interim dividend

Interim dividend is declared by the Board

 

 

 

20.2      CONDITIONS FOR DECLARATION OR PAYMENT OF DIVIDEND                                                                                                                      (Sec. 205)

Source of dividend

a)      Profits of current FY

b)      Undistributed profits of previous FY(s)

c)      Money provided by CG or SG in pursuance of a guarantee given by it.

Provision of Depreciation

a)      Profits for every FY shall be arrived at after providing for depreciation

b)      CG may allow a company to declare dividend for any FY without providing for depreciation

c)      If in any previous FY, depreciation has not been provided, it shall be provided before declaring dividend

Set off of past losses

Lowest of the following shall be set off against the profits of the current year:

a)      The amount of past losses after providing depreciation

b)      The amount of depreciation provided for that year

Transfer to reserves

Companies (Transfer of Profits to Reserves) Rules, 1975. Before declaration or payment of dividend, profits shall be compulsorily transferred to reserves at the following rates:

Rate of proposed dividend

Amount to be transferred to reserves

Not exceeding 10%

Nil

Exceeding 10% but not exceeding 12.5%

2.5% of current profits

Exceeding 12.5% but not exceeding 15%

5% of current profits

Exceeding 15% but not exceeding 20%

7.5% of current profits

Exceeding 20%

10% of current profits

Prohibition on declaration of dividend

A company which fails to redeem its irredeemable preference shares shall not, so long as such failure continues, declare any dividend on its equity shares

Mode of payment

§     No dividend shall be payable except in cash or by cheque

§     However, issue of bonus shares or payment of a bonus call by capitalizing the profits or reserves is permissible. But, issue of bonus shares in lieu of dividend declared, is not permissible

Deposit of dividend

§     The dividend shall be deposited in a separate bank account within 5 days of declaration of dividend.

§     The amount so deposited shall be used only for the purpose of payment of dividend (whether interim or final)

 

20.3      UNPAID DIVIDEND AND INVESTOR EDUCATION AND PROTECTION FUND                                                                            (Sec 205A to 205C)

Dividend declared but remaining unpaid

§     Any dividend declared but remaining unpaid or unclaimed for 30 days from the date of its declaration shall be transferred to unpaid dividend account.

§     The transfer shall be made within 7 days to a special accounts in any scheduled bank to be called ‘Unpaid Dividend Account of … Company Limited/Company (Private) Limited’.

§     Interest at the rate of 12% p.a. is payable by the company for delay in making the above transfer

Dividend remaining unpaid in ‘unpaid dividend account’-Consequences

Transfer to ‘Investor Education and Protection Fund’

Any money transferred to the unpaid dividend account of a company which remains unpaid for 7 years from the date of such transfer shall be transferred by the company to the Fund

Furnishing of details

When making a transfer to the Fund, the company shall furnish to the authority appointed by CG, the following details;

§       All sums included in such transfer;

§       Nature of the sums;

§       Names and last known addresses of the persons entitled to receive the sum;

§       The amount to which each person is entitled;

§       Such other particular as may be prescribed

‘Investor Education and Protection Fund’

Credits to the Fund

Following sums shall be credited to the Fund:

§     Following sums remaining unpaid for 7 years from the due date:

a)    Amounts in the unpaid dividend accounts

b)    Application money received and due for refund

c)    Deposits matured but unpaid

d)    Debentures matures but unpaid

§     Interest accrued on the amounts referred to in clauses (a) to (d)

§     Grants and donations by CG or SG or any other institutions

§     Interest or other income received out of the investments

Utilisation of Fund

§     For promotion of investor awareness; and

§     Protection of the interest of investors

Administration of Fund

The authority appointed by CG shall administer the Fund and shall be competent to spend money for carrying out the objects

No payment from the Fund

a)      No person shall be entitled to any money transferred to the Fund.

b)      No claim shall lie against the company in respect of any amount transferred to the Fund, i.e., when any amount is transferred by the company to the Fund, the liability of the company comes to an end.

 

20.4      PAYMENT OF DIVIDEND TO WHOM?                                           (Sec. 206)

a)     The registered shareholder

b)     The order of registered shareholder

c)     The bankers of registered shareholder (the bankers need not make a separate application)

d)     The bearer of share warrant

 

20.5      DIVIDEND ETC. TO BE HELD IN ABEYANCE                             (Sec. 206A)

Where the instrument of transfer of shares has not been registered by the company, it shall

a)     Transfer the dividend in relation to such shares to the Unpaid Dividend account, unless the registered shareholder consents to payment of such dividend to the transferee.

b)     Keep in abeyance in relation to such shares any offer to right shares on bonus shares

 

20.6      FAILURE TO DISTRIBUTE DIVIDENDS WITHIN 30 DAYS      (Sec. 207)

Time limit for payment of dividend

The dividend shall be paid within 30 days from the date of declaration

Exceptions

a)    Where dividend could not be paid by reason of the operation of any law

b)    Where a shareholder has given directions to the company regarding payment of dividend and those directions cannot be complied with

c)    Where dividend is lawfully adjusted by the company against any sum due to its from the shareholder.

d)    Where there is a dispute regarding the right to receive the dividend

e)    Where the non payment of dividend is not due to any default of the company

 

20.7      REVOCATION OF DIVIDEND

No revocation of dividend

Sec 207 requires payment of dividend within 30 days of declaration. Sec 207 also covers certain circumstances in which dividend need not be paid. Revocation of dividend is not a ground for non-payment of dividend. Thus, ordinarily a dividend once declared cannot be revoked

Exceptions

§ Where a dividend has been illegally declared, the members can revoke the dividend. However, if illegally declared dividend is paid, then the directors shall be responsible and accountable to the company personally

§ Where the company ceases to be a going concern, declared dividend may be revoked.

 

20.8      PAYMENT OF INTEREST OUT OF CAPITAL-CONDITIONS   (Sec. 208)

When is payment of interest out of capital permissible?

Shares are issued to raise money to defray the cost of works or building or plant which cannot be made profitable for a long period

Conditions for payment of interest on paid up share capital

Authorization

Authorisation is required by the articles or by SR

Sanction

Previous sanction of CG is required

Time period

(i)    The payment of interest shall be made only for such period as may be determined by CG

(ii)   Such period shall in no case extend beyond the close of the half year next after the half year during which the work of building has been actually completed or the plant provided (i.e., upto the end of next half year)

Rate of interest

£4% p.a. or a rate notified by CG

Inquiry by CG

Before sanctioning any such payment, CG may-

a)      Appoint a person to inquire into and report to the CG.

b)      Require the company to given security for the payment of the costs of the inquiry

Charge the interest paid to cost of works etc.

a)      The interest paid on capital shall be charged to capital as part of the cost of works or building or plant (i.e., the interest shall be capitalised).

b)      The payment of interest shall be operate as a reduction of paid up share capital

 

20.9      INTERIM DIVIDEND                                                [Sec. 2(14A), 205(1C)]

Definition        

§ Dividend includes any interim dividend [Sec. 2(14A)

§ In other words, interim dividend is a part of dividend. Therefore, all the provisions applicable to final dividend shall apply to interim dividend.

§ The put the things beyond doubt, it has been provided u/s 205(1C) that the provisions of Sec. 205, 205A, 205C, 206, 206A and 207 shall, as far as may be, also apply to any interim dividend.

Meaning

§ Dividend declared between two AGMs is called as interim dividend

§ The Board may, from time to time, pay such interim dividend as may appear to it to be justified by the profits of the company

Power to declare interim dividend

No specific power in the articles is required

Revocation of interim dividend

Interim dividend once declared, like final dividend, is a debt due from the company, and thus is not revocable except under the same circumstances in which the final dividend can be revoked.

Consequence if profits are inadequate

While declaring interim dividend the Board should carefully assess the adequacy of profits. Therefore, the opinion of auditors should be obtained. In the event of absence or inadequacy of profits, the distribution shall amount to unauthorized reduction of capital

 

20.10    CONSEQUENCES OF PAYMENT OF DIVIDEND OUT OF CAPITAL

Personal liability of directors

The directors shall be held personally liable to make good to the company the amount distributed as dividend [Re, Oxford Benefit Building & Investment Society].

Directors’ right of indemnity

Directors have a right of indemnity against the members who received dividends knowing that they were being paid up dividends out of capital.

No liability of directors

Where dividends improperly paid out of capital have been made good out of subsequent profits, liability ceases to attach to the directors

 

Practical Problems

Nov. 2004           Time limit for payment of interim dividend and legal requirements w.r.t. payment of unpaid dividend                                                                                                        [Sec. 2(14A)]

P1. The Board of Directors of M/s Optimistic Company Ltd. propose to pay interim dividend of Rs. 2 per equity share of Rs. 10 each. Advise the Board regarding:

(i)            The time limit for payment of interim dividend to the shareholders; and

(ii)           Steps to be taken in case any dividend amount remains unpaid in the books of the company

Ans.

Interim dividend must be paid

-        Within 30 days of declaration of interim dividend;

-        Since all the provisions applicable to final dividend also apply to interim dividend, because as per Sec. 2(14A), dividend includes interim dividend.

Dividend remaining unpaid within 30 days must be transferred

-       To the “Unpaid Dividend Account of …. Company Limited/Company (Private) Limited” within next 7 days

 





Suraj (Thirsty for KNOWLEDGE)
Article Assisitant

[ Scorecard : 330]
Posted On 29 April 2011 at 10:15

Thank u so much saroj ji...that was really informative.....



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