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Update:

a.A proviso for S 123(1) was inserted vide Companies Amendment Act, 2015 wherein it states that “no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.”

b. The following section is substituted vide Companies Amendment Act, 2017 in place of 123(3):

The Board of Directors of a company 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 out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend: Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.

c. The following section is substituted vide Companies Amendment Act, 2020 in place of 127:

If a company fails to comply with any of the requirements of this section, such company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of ten lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.

Introduction:

The word "dividend" has origin from the Latin word “dividendum”. It means a thing to be divided. Every investor is aware that dividend is nothing but profits earned by the company and divided amongst the shareholders in proportion to the amount paid up shares held by them. Simply stated it is a return on investment made by the shareholders. Dividend is paid by a company to its shareholders on a particular date (book closure date) either out of profits or out of reserves. A company may, if so authorised by its Articles of association, pay dividends in proportion to the amount paid-up on each share. Declaration of dividend is usually one of the items of the Agenda of every annual general meeting when directors recommend dividend.

Let us now look at the legal requirements relating to payment of dividend under the old Act as well as under the new Act wherever comparison is necessary for better appreciation of the changes brought in by the Companies Act,2013 (referred as CA 2013 or New Act).

Definition of dividend:

As per  definition u/s 2 (35) of the New Act dividend includes any interim dividend. The same definition was existing in the Companies Act 1956(referred as Old act or CA1956).

Brief reference to Sections in CA1956:

Section 205: It stipulates no dividend shall be paid unless it is paid out of current year’s profits or out of the previous year’s profits or both, arrived at after providing deprecation as per section 350 and mandates that a minimum percentage of profits has to be transferred to reserves as per Rules if dividend paid exceeds 10%.(Corresponds to section 123 of CA2013)

Section 205-A-It stipulates that dividend (including interim) declared should be deposited within 5 days of declaration. Any unpaid or unclaimed dividend should be transferred to a special Account within 7 days from the date of  expiry of said 30 days. It shall remain for 7 years in the said a/c for any claim from the shareholders till it is transferred to Investor protection Fund established u/s 205 –C against which no claims shall lie. (Corresponds to section 124 of New act)

Section 206 -It mandates that dividend to be paid only to the registered shareholder or to his mandatee. (It is merged in section 123)

Section 206A – If an instrument of transfer is delivered but registration of which is  pending, the right to divided, bonus shares shall be kept in abeyance. (It corresponds to section 126 of CA 2013) The contents of the section have been retained as it is.

Section 207 - It imposes penalty if dividend is not paid within 30 days from the date of declaration subject to certain exceptions. (It corresponds to Section 127 of CA 2013)

With the above background it will be easier to comprehend, the provisions of Section 123 which corresponds to Section 205-A of CA1956.

Provisions relating to payment of dividend:

1. Deprecation must be provided:

Companies can not declare or pay dividend for any financial year unless it is paid

-  Out of profits for that year arrived at after providing depreciation in accordance with provisions sub section 2 of Section123  or

-  Out of accumulated profits of the company for any previous financial year or years arrived at after providing depreciation and remaining undistributed  or

-  Out of both above or

-   Out of money provided by the central government or a state government for payment of  dividend  in pursuance of a guarantee given by that government

Readers may note that similar provisions exist in Old Act also

2. Transfer to Reserves for declaration of dividend. A company may, before declaration of any dividend transfer such percentage of its profits for that financial year as it may consider appropriate. The Board of directors is given freedom to decide the percentage of transfer of profits to reserves before declaring a dividend{First proviso to section 123(1)

In the Old Act the transfer of profits to reserves is governed by Companies (Transfer of Profits to Reserves) Rules 1975 and the slab mandated was as follows:-

If proposed dividend is

Minimum amount of  transfer to reserves

Up to 10%

Nil

Above 10.00% but within  12.50% 

2.5%

Above 12.50% (but within 15.00%

5.00%

Above 15.00% (but within  20.00%

7.50%

Above 20%

10.00%

Now the above restriction is removed. This matter is entirely left to the discretion of the Board of directors. The compulsory transfer to reserves enables companies to pay dividend out of accumulated profits when profits are lean and a consistency in the rate of dividend can be maintained. Some companies are known for their distributing high dividends and some are known for issuing bonus shares and thus preventing cash out flow.

3. Declaration of dividend out of accumulated profits

Second proviso stipulates that in case of inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf. Let us see the conditions provided by the recently displayed rules(subject to modification on the basis of feed back)

Essence of Rules.

As per Rule no.8.1,the very first condition is that 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. Further it requires that the amount to be utilised from reserves shall not exceed 1/10th of total paid up capital and reserves.  After drawing reserves for dividend, the balance reserves shall not fall below 15% of its paid up capital. Dividend can be declared only after loss or depreciation in the previous years which ever is less is provided {Rule no.8.2}

The third proviso stipulates that no dividend shall be declared or paid by a company from its reserves other than free reserves.

The word” Free reserves”  has  been defined by Section 2(43) of New Act  to mean such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend. However the following shall not be treated as free reserves:

- any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

-  any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves;

4. Manner of depreciation:

Sub section 2 of123 clarifies that for the purposes of clause (a) of sub-section (1), depreciation must be provided in accordance with the provisions of Schedule II.

5. Interim dividend:

The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared. In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. {Section 123(3)}.This restriction ensures financial prudence.

6. Time limit for deposit of dividend:

The amount of the dividend, including interim dividend, must  be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. Dividend once declared by the shareholders becomes a debt and payable unlike in the case of interim. But the restriction to deposit within 5 days of declaration even the interim also ensures that the Board can not go back on the commitment made by its declaration.{Section 123(4)}

7. Dividend to be paid to registered shareholders:

No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash. Proviso however clarifies that capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount is permissible. {Section 123(5)}.

8. Mode of payment  of dividend:

Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.

9. Prohibition on payment of dividend:

If a company violates the provisions of sections 73 and 74  with regard to acceptance of deposits from public, it  shall not declare any dividend on its equity shares till such non compliance exists. In the old Act, there is prohibition for payment of dividend, if violation of Section 80-A(redemption of preference shares within stipulated time) continues. {Section 123(6)}

Provisions relating to Transfer of Unpaid dividends (Section 124).

a) Transfer of unpaid dividend to Special Account

The provisions as contained in Old Act with regard to transfer of unpaid or unclaimed dividend remains the same except minor changes described below. Any unpaid or unclaimed dividends remaining after expiry 30 days have to be transferred to a Special account called “ unpaid dividend account” within 7 days of expiry of 30 days from the date of declaration.

b) Display of details in the web site

The company, within a period of 90 days of transfer to special account, shall prepare a statement of unpaid dividend and display it in the web site of the company and  also on the web site of the Central Government in such form and manner as may be prescribed. {Section 124(2)}.

Rule no.8.3 mandates that the display of details shall be in PDF format, year wise, with search facility must be easily accessible free of charge and facilitate easy printing.

c) Failure to transfer attracts interest:

If the company fails to transfer dividend to special account, it shall be liable to pay interest @ 12% and such interest has to be passed for the benefit of shareholders in proportion to the amount unpaid. {Section 124(3)}.

d) Claimant can apply:

Any person who claims a right on such dividend may apply to the company for payment. {Section 124(4)}

e) Transfer to IEPF:

If no claim is made till 7 years from the date of transfer to special account, the amount along with interest accrued, if any, shall be transferred to Investor Education Fund established(IEPF) u/s 125(1).Readers may note under the Old Act only unclaimed dividend was to be transferred and not shares but as per New Act, even shares relatable to unclaimed dividend along with dividend are to be transferred with such details as may be prescribed.{Section 124(6)}.The one good feature is that any person who has a claim on such shares can lodge his claim with Investor Education Protection Fund in such manner as may be prescribed.

Rules on transfer to IEPF

Rule no.8.4 prescribes the manner in which unclaimed dividend has to be transferred to IEPF. Company has to deposit the unclaimed amount within 30 days from due date in state bank or any other approved bank. A statement in prescribed Form no.8.2 with duly certified details of dividend by a Company secretary in practice/Chartered accountant/cost accountant along with receipted challan has to be filed with IEPF.Company has to maintain the particulars of unpaid dividend transferred to IEPF for a period of 8 years from the date of such transfer. The same procedure applies to transfer of other amounts such as matured fixed deposits specified. Rule no. 8.5 deals with the manner of transfer shares to IEPF in respect of which dividend remained unclaimed and transferred to IEPF. Rule no. 8.6 gives power to authority constituted to direct companies to transfer amounts due to transfer to Fund and Rule no.8.7 prescribes the procedure to be followed for entertaining a claim against IEPF by shareholders/claimants/legal heirs. Claimants need to establish their claim.

f) Penal provisions:

If any default is committed in compliance of Section 124,the company shall be punishable with a fine ranging from 5 lakhs to 25 lakhs and every officer  who is in default shall also be punishable with a fine of not less than one lakh but extendable up to 5 lakhs. {Section 124(7)}

Punishment for failure to distribute Dividend: {Section 127}

This section corresponds to section 207 of the Old Act and states that where dividend has been declared but not paid or warrants have not been posted within 30 days of declaration, every director who is knowingly a party to the default shall be punishable with imprisonment up to 2 years and with a fine of one thousand for every day during which the default continues and company shall be liable to pay simple interest @18% p.a. However immunity can be claimed from the punishment, if the default in payment is due to operation of any law, dispute about the claim, incorrect mandate.

Conclusion: With the removal of restriction on mandatory transfer of minimum amount of current profits to reserves and allowing payment of dividend out of reserves with some conditions, shareholders can expect good and consistent dividend pay outs from the listed companies. Companies which reward their shareholders with consistent dividend pay outs will be favoured by investors. Dividend pay out is also an indication of the growth and financial health of the company.

G S Rao,

DGM(Legal),OCL India Limited

Tags: The Companies Act, 2013, Dividend , interim dividend, IEPF

Disclaimer:

This article contains interpretation of the Act and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.


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Category Corporate Law, Other Articles by - G S Rao 



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