CAN A COMPANY DECLARE DIVIDEND FROM FREE RESERVES

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JAANU (Querist)
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10 June 2023 CAN A COMPANY DECLARE DIVIDEND FROM THE FREE RESERVES RECEIVED ON PART OF DEMERGER EVENT AND WITHIN 1 MONTH OF BUYBACK OF SHARES IN PRIVATE LIMITED COMPANY.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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06 July 2024 Yes, a company can declare dividends from its free reserves received as a result of a demerger event, subject to compliance with certain legal and regulatory requirements. Here are the key considerations:

1. **Use of Free Reserves**: Dividends can typically be declared out of profits, including free reserves. Free reserves are those reserves which, as per the latest audited balance sheet of the company, are free for distribution as dividends.

2. **Demerger Event**: If a demerger results in the creation of free reserves for the company, these reserves can be used for declaring dividends, provided they are recognized as distributable profits according to the company’s financial statements.

3. **Timing with Buyback of Shares**: Regarding the buyback of shares, a private limited company can buy back its shares subject to compliance with the Companies Act, 2013 and other applicable regulations. The buyback process involves several steps, including approvals, disclosures, and compliance with funding and procedural requirements.

4. **Legal Compliance**: Companies need to comply with the provisions of the Companies Act, 2013 regarding the declaration of dividends and buyback of shares:
- **Section 123 of the Companies Act**: Specifies conditions under which dividends can be declared.
- **Section 68 and 70 of the Companies Act**: Deals with the procedure for buyback of shares.

5. **Board and Shareholder Approval**: Both the declaration of dividends and the buyback of shares require approval from the board of directors and, in some cases, from shareholders.

6. **Interval Between Transactions**: While there is no specific restriction on declaring dividends within a month of completing a share buyback, companies must ensure that they have sufficient funds and comply with all statutory requirements for both transactions.

**Consultation with Professionals**: Given the legal complexities and financial implications involved, it is advisable for companies to seek guidance from qualified professionals such as company secretaries or legal advisors. They can provide tailored advice based on the specific circumstances and ensure compliance with all regulatory requirements.