Declaration and Payment of Dividend

Introduction: Section 123 to 127 of the Companies Act, 2013 contains the provision about  declaration and payment of dividend.

Definition: The term “Dividend” has been defined in the Sec.2(35) of the Companies Act,2013 whch says “Dividend includes interim dividend”. In normal sense the term dividend means “Distribution of a portion of a company's earnings, decided by the board of directors, to a class of  shareholders which can be  issued as cash payments, shares of stock, or other property.”

Sources from which dividend can be declared:

Section 123(1)  of the Companies Act,2013 mention’s two sources from which dividend can be declared:

a. Out of the profits of the Company after providing necessary adjustment for depreciation or out of the profits of the Company for any previous year after making necessary adjustment for depreciation or out of both.

b. Out of the money which has been provided by central or state government in pursuance of a guarantee given by the government.

c. Before the declaration of dividend company should transfer certain amount of profit to the reserves of the Company.

d. The payment of dividend can be made only through “Free Reserve”.Any reserve which has been created for any specific purpose through them dividend cannot be declared.

e. No Dividend can be declared unless losses and depreciation not provided in previous year are set off against profits for the Current year.

Interim Dividend:

The term “Interim dividend” has not been defined in the Companies Act,2013.The normal meaning of the aforesaid trem is “A dividend payment made before a company's Annual General Meeting and final financial statements.

Sources of declaration of Interim dividend {Sec 123 (3)]:

Out of the surplus in the profit and loss account

Out of the profits of the Financial year in which such interim dividend sought to be declared.

If the Company has incurred loss during the current Financial year upto the end of quarter immediately preceding the date of declaration, then the dividend amount should not exceed at a rate higher of the average dividends declared by the company during the immediately preceding three financial years.

After declaration of dividend including interim dividend the amount should be deposited in scheduled bank in separate account with 5 days from the date of declaration.{Sec 123(4)}

The above said proviso doesn’t applies to government companies in which entire paid up capital is held  by Central or State government or both.

The dividend can be paid only to the registered shareholders and be payable in terms of cash.The dividend payable in cash may be paid by way of cheque, warrant or in any other electronic mode.

Company cannot declare dividend if the company has defaulted in payment of deposit amount as mentioned in section 73 and 74 (Sec.73 {Acceptance of Deposits by Companies} & Sec.74 {Repayment of Deposits etc..accepted before the commencement of Companies Act,1956) of the Companies Act,2013

Procedure after declaration of dividend:

Where dividend has been declared but not paid and claimed by shareholders within 30 days from the date of declaration, Company shall, within seven days from the date of expiry of 30 days transfer the said amount to special bank account which will be created for the said purpose known as “Unpaid Dividend Account”.{Sec.124(1)}

Company shall within a period of 90 days of making transfer in the special account prepare statement containing the names, address, the unpaid dividend to be paid and place it on the website of the company.

If the Company fails to transfer the unpaid dividend amount within 7 days it shall pay from the date of such default interest @ 12% P.a.

Any money transferred to Unpaid dividend account and not been claimed for a period of seven(7) years will be transferred to Investor Education and protection fund constituted under Sec.125 of the Companies Act, 2013 along with the interest accrued, if any.

Any claimant of shares shall be entitled to claim the transfer amount from the fund in accordance with such procedure and on submission of such documents as may be prescribed.

If the company  fails to comply with the above mentioned requirements,then it shall be punishable with fine of not less than Rs.5,00,000/- lakh rupees but which may extend to Rs.25,00,000/- Lakh and every office of the Company who is in default shall be punishable with fine which shall be not less than Rs.1,00,000/- Lakh and may extend to Rs.5,00,000/- Lakh.

Punishment for failure to distribute dividends {Sec.127}:

Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend, every director if he/she is knowingly party , be punishable with imprisonment which may extend to two years and with fine of not less than Rs.1,000/- for every day during which such default continues.

If the default continues, company shall be liable to pay interest @ 18% p.a till the period for which such default continues.

Companies (Declaration and Payment of Dividend) Rules,2014.

Declaration of dividend out of reserves

In   the   event   of   adequacy   or  absence  of  profits  in any  year,  a  company  may  declare  dividend  out  of  surplus subject to the fulfillment of the following  conditions:

a. 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.

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

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.

d. The balance of reserves after such withdrawal shall not fall below fifteen percent 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 are set off against profit of the company of the current year .

Forms which is required to be filed:

• Form 1INV: Statement of amounts credited to investor education and protection fund
• Form 5INV: Statement of unclaimed and unpaid amounts

***Time Limit: Companies are required to file the form 5INV annually within  90 days from the date of Annual General Meeting.

Compliance to be made by Listed Entity’s

SEBI (Listing Obligation and Disclosure Requirements) Regulation,2015

Regulation 12: Payment of dividend

The listed entities use the electronic mode of payment facility approved by the RBI for the payment payment of dividend.

Where it is not possible to use electronic mode of payment,’payment at par’ warrants or cheque may be issued.

***Note: Where the amount payable as dividend exceeds Rs.1,500, the payable at par warrants or cheque shall be send by speed post.   

Regulation 42: Record Date or Date of closure of transfer books:

• The listed entity shall intimate the record date to all stock exchanges where its securities are listed for declaration of dividend.
• The listed entity shall give notice in advance of atleast seven working days (excluding the date of intimation and the record date) to stock exchange(s) specifying the purpose of record date.
• The listed entity shall recommend or declare all dividend at least 5 working days (exclusing the date of intimation and the record date) before the record date fixed for the purpose.
• The listed entity shall ensure the time gap of atleast 30 days between two record dates.
• If the securities held in physical form, the listed entity may, announce dates of closure of its transfer books in place of record date for complying with the Regulation 42.

Regulation 43: Dividends

• The listed entity shall declare and disclose the dividend on per share basis only.
• The listed etity shall not forfeit unclaimed dividends before the claim becomes barred by law and such forfeiture shall be annulled in appropriate cases.

***As per Schedule III Part A:Disclosure of events or information

Outcome of Meeting of Board of Directors

a. The listed entity shall disclose to the exchange within 30 minutes of the closure of the meeting about dividends recommended or declared or the decision to pass any dividend and the date on which dividend shall be paid or dispatched.

b. Any cancellation of dividend with reasons thereof.