Dividend equalisation reserve

An amount retained from earnings to provide for distribution of a minimum dividend in subsequent business periods.

It is Revenue reserve that serves as a buffer between a certain dividend level and profits available. Sums are transferred to this reserve account in good years, and withdrawn from in poor years to maintain the dividend amount

Further in Feeleminds :

by A. Rajagopalan on Fri Sep 04, 2009 7:58 am

Dividend can be paid only out of revenue profits. If there is accumulated profits of earlier years remaining in General Reserve or in any other revenue reserves such as Dividend Equalisation Reserve, dividend can be declared, irrespective of deficiency of profits in any particular year.
Declaring a dividend without there being sufficient profits, will mean a dividend out of capital, which is not generally allowed under law.

Quantum of divedend is restricted by only the availability of revenue profits.

Section 205 of the Companies Act clearly mentions that no dividend can be declared except out of profits of the company for that year or out of profits of the company for any earlier year or years. Authoritative views will be available only in cases where there is ambiguity, there being two three possible interpretations of law.