Procedure for Declaration and payment of dividend

PRIYANKA HARNOTIA | Last updated: 13 April 2021

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This article outlines the legal procedure for declaring and paying dividends, as stipulated by the Companies Act, 2013. Dividends are a distribution of surplus profits to shareholders, and their declaration must adhere to specific rules regarding the source of profits, such as current year's profits or accumulated profits. The process involves board approval, shareholder resolution at an Annual General Meeting, and timely deposit and payment of the dividend amount.

Dividend has not been defined under the Companies Act, 2013. However, as per our common understanding, the term dividend implies amount of return a shareholder is entitled to receive at a determined rate on the shares subscribed by him in a company. A company issues shares to its shareholders in lieu of their investments made in the company. When a company wants to distribute its surplus profits to its investors, it is known as declaration of dividend.

There is a prescribed procedure under the law for declaration of dividend under section 123 of the Companies Act, 2013 and the rules made thereunder. Let us discuss the same step by step in this write-up.

• Section 123 (1) says that 'No dividend shall be declared except as provided'.

It implies that a company shall declare dividend for any of its financial year only-

a) Out of the profits of the company for that particular financial year or for any of its previous financial years after providing for depreciation in accordance with the prescribed provisions;

Exclusions for calculating profits:

Any amount representing:

i) Unrealized gains
ii) Notional gains
iii) Revaluation of Assets
iv) Any change in the fair value of assets or liabilities

b) Out of money provided by Central Government or State Government for the payment of dividend in pursuance of a guarantee given by that Government;

Dividend Declaration and Payment: A Step-by-Step Guide

Provided that for the purpose of declaration of dividend, a company may transfer a suitable amount of profits to the reserves of the Company.

Provided further that where profits are not sufficient for the payment of dividend, the dividend may be declared out of accumulated profits which have been transferred to free reserves of the Company, in accordance with the rules prescribed hereunder:

(1) 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.

(2) 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.

(3) 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.

(4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement.

• The amount of dividend shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

• The dividend shall be paid in cash only and to the registered shareholder only or strictly to their order.

• The dividend payable in cash may be paid through any cheque, warrant or online mode.

• A company defaulted in deposit compliances i.e. Section 73 and 74 shall not be allowed to declare any dividend.

Interim Dividend: Dividend includes interim dividend. Interim dividend is no different than dividend. It is just that when the dividend is declared by the Board of Directors and the dividend is declared at the time other than the Annual General Meeting, it is said to be interim dividend.

The Board of Directors may declare interim dividend:

a) During any financial year
b) At any time from the closure of financial year and holding of annual general meeting.
c) Out of the surplus in the P&L A/c
d) Out of the profits of the FY for which such dividend is sought to be declared
e) Out of the profits generated till the latest quarter in the financial year of declaration of dividend

In case the Company has losses in the current Financial Year, it will not declare dividend at a higher rate than average dividend declared by the Company during the immediately preceding three financial years.

Procedure for declaration of dividend:

1. Conduct a Board Meeting for approving the proposal for declaration of dividend subject to approval of shareholders in the ensuing Annual General Meeting.

2. Send notice of the Annual General Meeting to all the entitled stakeholders before 21 clear days.

3. Take approval of shareholders for declaration of dividend by passing ordinary resolution in the Annual General Meeting.

4. Within 5 days of the declaration of dividend, the amount of dividend shall be deposited in a scheduled bank in a separate bank account.

5. Within 30 days of the declaration of the dividend, the amount of dividend has to be paid by the company.

Note: Procedure for the declaration of interim dividend does not require approval of shareholders in the Annual General Meeting.

DISCLAIMER: THE ENTIRE CONTENTS OF THIS DOCUMENT HAVE BEEN PREPARED ON THE BASIS OF RELEVANT PROVISIONS. THE INFORMATION STATED ABOVE IS NOT A PROFESSIONAL ADVICE OR LEGAL OPINION. IN NO EVENT I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM THE USE OF THE INFORMATION.