Dividend
This query is : Resolved
12 October 2013
please tell me which nature reserve & fund eligible for dividend distribution,
12 October 2013
Section 205(1) provides that no dividend shall be declared or paid by a company for any financial year except out of any of the following sources:—
(i) Profits of the company for that financial year arrived at after providing for depreciation under section 205(2);
(ii) Profits of the company for any previous financial year or years arrived at after providing for depreciation under section 205(2) and remaining undistributed;
(iii) Both (i) and (ii), above;
(iv) Moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government;
(v) Out of reserves as stated under section 205A(3).
Section 205(1)(c) however, deals with a case where dividend can be declared or paid without providing for depreciation.
(i) Profits of the company for that financial year arrived at after providing for depreciation under section 205(2);
(ii) Profits of the company for any previous financial year or years arrived at after providing for depreciation under section 205(2) and remaining undistributed;
(iii) Both (i) and (ii), above;
(iv) Moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government;
(v) Out of reserves as stated under section 205A(3).
Section 205(1)(c) however, deals with a case where dividend can be declared or paid without providing for depreciation.
12 October 2013
Basic conditions to be fulfilled for declaration or payment of dividend:
Following are the conditions as to declaration or payment of dividend by a company:—
(i) If the company has not provided for depreciation for any previous year or years, then it shall before declaring or paying dividend for any financial year, provide for such depreciation (earlier not provided for). Such depreciation shall be provided for out of the profits of financial year for which dividend is being declared or paid, or out of the profits of any other previous financial year or years. [Section 205(1)(a)]
(ii) If the company has incurred any loss in any previous financial year or years then amount of the loss or amount of depreciation provided for in that previous financial year whichever is lower, shall be set off against either of the following:—
(a) profits after depreciation under section 205(2) for the year for which dividend is proposed to be declared or paid; or
(b) profits after depreciation under section 205(2) for any previous financial year or years;
(c) against both (a) and (b) above. [Section 205(1)(b)]
(iii) The Board shall pass an appropriate resolution recommending the rate and amount of dividend for declaration by shareholders at an annual general meeting of the company.
(iv) Compulsory transfer of profits as per the Companies (Transfer of Profits to Reserves) Rules, 1975 shall be done.
(v) The shareholders in an annual general meeting may either approve the recommended rate of dividend or lower the same.
(vi) Dividend should be declared and paid out of sources legally available for distribution as dividend.
(vii) Provisions of sections 205 to 207 shall be observed strictly.
(viii) The company has not contravened section 80A. A company, which committed default in redemption of irredeemable preference shares, etc. shall not, so long as such failure continues, declare any dividend on its equity shares.
Basic conditions to be fulfilled for declaration or payment of dividend:
Following are the conditions as to declaration or payment of dividend by a company:—
(i) If the company has not provided for depreciation for any previous year or years, then it shall before declaring or paying dividend for any financial year, provide for such depreciation (earlier not provided for). Such depreciation shall be provided for out of the profits of financial year for which dividend is being declared or paid, or out of the profits of any other previous financial year or years. [Section 205(1)(a)]
(ii) If the company has incurred any loss in any previous financial year or years then amount of the loss or amount of depreciation provided for in that previous financial year whichever is lower, shall be set off against either of the following:—
(a) profits after depreciation under section 205(2) for the year for which dividend is proposed to be declared or paid; or
(b) profits after depreciation under section 205(2) for any previous financial year or years;
(c) against both (a) and (b) above. [Section 205(1)(b)]
(iii) The Board shall pass an appropriate resolution recommending the rate and amount of dividend for declaration by shareholders at an annual general meeting of the company.
(iv) Compulsory transfer of profits as per the Companies (Transfer of Profits to Reserves) Rules, 1975 shall be done.
(v) The shareholders in an annual general meeting may either approve the recommended rate of dividend or lower the same.
(vi) Dividend should be declared and paid out of sources legally available for distribution as dividend.
(vii) Provisions of sections 205 to 207 shall be observed strictly.
(viii) The company has not contravened section 80A. A company, which committed default in redemption of irredeemable preference shares, etc. shall not, so long as such failure continues, declare any dividend on its equity shares.
12 October 2013
Payment of dividend out of reserves:
Section 205A(3) of the Companies Act, 1956 read with the Companies (Declaration of Dividend out of Reserves) Rules, 1975 deals with the power of a company to declare dividend out of reserves.
In case of inadequacy or in the absence of profits in any year, if any company proposes to declare dividend out of the accumulated profits earned by the company in any previous years and transferred by it to the reserves, such declaration or dividend shall be made in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975. The company must observe the following conditions in such case:—
(i) There is either absence or inadequacy of profits in the year for which dividend is proposed to be declared.
(ii) The rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or 10% of its paid-up capital, whichever is less.
(iii) The total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to 1/10th of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilised to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares are declared.
(iv) The balance of reserves after such drawal shall not fall below 15% of its paid-up share capital.
"Profits earned by a company in previous years and transferred by it to the reserves" shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared. In computation of the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve at the expiry of the period specified under the Income-tax Act, 1961 shall be included and all items of Capital Reserves including reserves created by revaluation of assets shall be excluded.
Where, the declaration of dividend out of reserves is not in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975, previous approval of the Central Government has to be obtained by the company. (See Chapter 1 of Part 18 for specimen of application and relevant Rules)
Section 205A(8) of the Companies Act contains penalty provisions in case of failure to comply with any of the requirements of section 205A. Accordingly, the company and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees for every day during which the failure continues.
Payment of dividend out of reserves:
Section 205A(3) of the Companies Act, 1956 read with the Companies (Declaration of Dividend out of Reserves) Rules, 1975 deals with the power of a company to declare dividend out of reserves.
In case of inadequacy or in the absence of profits in any year, if any company proposes to declare dividend out of the accumulated profits earned by the company in any previous years and transferred by it to the reserves, such declaration or dividend shall be made in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975. The company must observe the following conditions in such case:—
(i) There is either absence or inadequacy of profits in the year for which dividend is proposed to be declared.
(ii) The rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or 10% of its paid-up capital, whichever is less.
(iii) The total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to 1/10th of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilised to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares are declared.
(iv) The balance of reserves after such drawal shall not fall below 15% of its paid-up share capital.
"Profits earned by a company in previous years and transferred by it to the reserves" shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared. In computation of the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve at the expiry of the period specified under the Income-tax Act, 1961 shall be included and all items of Capital Reserves including reserves created by revaluation of assets shall be excluded.
Where, the declaration of dividend out of reserves is not in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975, previous approval of the Central Government has to be obtained by the company. (See Chapter 1 of Part 18 for specimen of application and relevant Rules)
Section 205A(8) of the Companies Act contains penalty provisions in case of failure to comply with any of the requirements of section 205A. Accordingly, the company and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees for every day during which the failure continues.
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