Declaration of dividends by a private limited company

3. 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, namely:-

(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.

(5) 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 the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.

so in your case you can maximum withdraw for dividend is 1/10th of paid up capital and free reserves i.e 1,00,000+2,25,00,000/10 =22,60,000.

The company wants to declare a dividend of 50% and if it transfers 4,00,000 ( in excess of 10% of paid up capital. Can the dividends go through for 50% or 60% dividends. It is a closely held company.

If the sum total of free reserves and share capital is around 5 crores and the company wants to declare a dividend of 60%. Will it be ok if the paid up capital is around 2 lakhs only. The company is a closely held private limited company.

Dear Sekhar,

If free reserves and capital is 5crores means your maximum withdrawal limit is 1/10 of 5crores i.e 50 lakhs.