DECLARATION AND PAYMENT OF DIVIDEND UNDER COMPANIES ACT, 2013

[Mr. M. GOVINDARAJAN]

Dividend

Section 2(35) of Companies Act, 2013 (‘Act’ for short) defines the term as including any interim dividend.   No exact definition has been given in the Act.  Dividend is generally defined as a pro-rata share in an amount to be distributed or a sum of money paid to the shareholders of a corporation out of its earnings.   Chapter VIII of the Act deals with the declaration and payment of dividend in Sections 123 to 127.   The Companies (Declaration and Payment of Dividend) Rules, 2014 (‘Rule’ for short) has been framed for this purpose.

Sources for making dividend

Dividend may be declared-

• Out of the profits of the company for that year arrived at after providing for depreciation ;
• Out of the profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed; or
• Out of both of the above two;
• Out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by the Government.

No dividend shall be declared or paid by a company from its reserves other than free reserves.  A company may, before the declaration of any dividend in any financial year, transfer of such percentage of its profits to the reserves of the company.  If there is any inadequacy or absence of profit any company proposes to declare dividend out of the accumulated profits and transferred to the reserved such declaration shall not be made in accordance with the rule 3.

Rule 3 provides that in the event of inadequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the following conditions-

• The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in three years immediately preceding that year.   This shall not apply to a company which has not declared dividend in three preceding financial years;
• The total amount to be drawn from such accumulated profits shall not exceed 10% of sum of its paid up share capital and free reserves as appearing in the latest audited financial statement;
• The amount so drawn shall first to be utilized  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;
• The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as appearing in the latest audited financial statement;
• 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 year is set off against the profit of the company for the year for which dividend is declared or paid.

Declaration of dividend

The Board of Directors 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 upto 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.  A company, which fails to comply with the provisions of Section 73 (prohibition on acceptance of deposits from public) and Section 74 (repayment of deposits etc., accepted before commencement of this Act), shall not declare any dividend on its equity shares.

The amount of the dividend, including interim dividend shall be deposited in a scheduled bank in a separate account within 5 days from the date of declaration of such dividend.  The dividend shall be paid only to the registered shareholder by cash.  It may be paid by cheque or warrant or in any electronics mode to the eligible shareholder.

Unpaid dividend account

Where a dividend has been declared but has not been paid or claimed within 30 days from the date of declaration, the company shall within 7 days from the date of expiry of the said period, transfer the unpaid or unclaimed amount to a specified account to be opened by a company in any scheduled bank called the Unpaid Dividend Account.  If the amount is not transferred to this account the company shall pay interest at the rate of 12% per annum.

The company shall, within a period of 90 days of transferring the amount Unpaid Dividend Account prepare a statement containing then name, address, unpaid dividend etc., in the website of the company and also on any other website approved by the Central Government in such form, manner and other particulars as may be prescribed.

Any person claiming to be entitled to any money transferred to said account may apply to the company for payment of the money claimed.   If the unpaid or unclaimed dividend remains unpaid for a period of 7 years from the date of such transfer shall be transferred by the company with interest accrued to the Investor Education and Protection Fund established under Section 125 of the Act.  Any claimant of shall be entitled to claim from the Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed.

If a company fails to comply with any of the above requirements shall be punishable with fine which shall not be less than ₹ 5 lakhs but which may extend to rs.25 lakhs and every officer of the company who is in default and every officer of the company who is in default shall be punishable with fine which shall not be less than Re.1 lakh but which may extend to ₹ 5 lakhs.

Dividend pending registration of transfer of shares

Section 126 provides that where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company it shall transfer the dividend in relation to such shares to the unpaid dividend account unless the company is authorized by the shareholders in writing to pay such dividend to the transferee specified in such instrument of transfer and keep in abeyance in relation to such shares, any offer of right shares and any issue of fully paid up bonus shares.

Punishment for failure to distribute dividend

Section 127 provides that where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not bee paid within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment up to 2 years and with fine which shall not be less than ₹ 1000/- for every day during which such default continues and the company shall be liable to pay simple interest @ 18% per annum during the period for which such default continues.

The proviso to this section provides that no offence under this section shall be deemed to have been committed-

• Where the dividend could not be paid by reason of the operation of any law;
• Where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;
• Where there is a dispute regarding the right to receive the dividend;
• Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
• Where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this Section was not due to any default on the part of the company.