Declaration of Dividends by Companies – Legal Guide on Section 123

While the partners in a partnership firm or LLP distribute profits in terms of a pre-determined profit-sharing ratio, the distribution of profits in the case of Companies is slightly different. Companies distribute profits by declaring dividends to the Shareholders of the Company.

Companies can declare the following types of dividends in India:

• Interim Dividend: Interim dividend is the dividend that companies declare during the financial year or at any time during the period from the end of the financial year till the date of holding the AGM (Annual General Meeting).

• Final Dividend: Final dividend is the dividend that is recommended by the Board of Directors of the Company and declared by the Shareholders, bypassing Ordinary Resolution in the AGM.

The declaration of dividends and all the related requirements are governed by Section 123 of the Companies Act, 2013. Let’s understand the requirements and legal provisions for dividend declaration by Indian companies in detail.

Declaration of Dividends Rules 

Declaration of Dividends can be declared by a Company only out of the following accounts:

•  Out of the profits of the Company for the current year after providing for depreciation 
•  Out of the profits of the Company for the previous financial years after adjusting depreciation
•  Out of the money provided by the Central Government or State Government in pursuance of the guarantee given by that government for distribution of dividends.

It needs to be ensured that the profits to be used for the distribution of dividends shall not include the following:

•  Unrealized gains
•  Notional gains
•  Gains representing revaluation of assets 
•  Any change in the carrying amount of the asset or liability during the measurement of such asset or liability at fair value

Further, the depreciation for the above purpose should be calculated as per the provisions of Schedule II of the Companies Act, 2013.

What is Interim Dividend?

Companies can declare interim dividends during any financial year or at any time during the period from the end of the financial year till the date of holding the AGM (Annual General Meeting). Such interim dividend can be declared from any of the following:

• The surplus in the profit and loss account
• Out of the profits of the financial year for which such interim dividend is being planned to be declared
• Out of the profits earned in the financial year till the quarter that precedes the date of declaration of the interim dividend.

However, the Companies Act, 2013 has prescribed the upper limit for the declaration of interim dividend if the company has incurred losses up to the end of the quarter during the current financial year immediately preceding the date of declaration of interim dividend. In such a case, the rate of interim dividend shall not be declared at a rate higher than the average dividends that have been declared by the such company during the immediately previous 3 financial years.

Declaration of Dividends – Key Points

Following are some of the important points to keep in mind when it comes to dividend declaration by Indian companies:

• Declaration of dividends is an appropriation of profit that is arrived after providing for all expenses including interest.
• Dividends should only be declared from the free reserves of the Company
• Dividends cannot be declared unless the carried forward previous losses and depreciation of the previous years are being set off are set off against the profits of the current year.
• The amounts of dividend, including the interim dividend, shall be deposited in a separate Scheduled Bank Account within 5 days from the date of the declaration of dividends.
• The dividend shall be paid only to the registered shareholders of the Company or to his order or his banker and shall not be payable except in cash. A  dividend payment in cash means paying through cheque, warrant, or in any electronic mode.
• A company may transfer a certain percentage of its profits as it may deem fit to the reserves of the company before the declaration of dividends.

Unpaid Dividend – What Happens to Unclaimed Dividends?

In case the Company has declared the dividend but it has not been paid within 30 days from the date of the declaration of dividends to any shareholder, then the Company shall transfer the entire amount of dividend which remains unpaid to a special account to be opened by the Company in a Scheduled Bank known as Unpaid Dividend Account.  The amount should be transferred within 7 days from the expiry of 30 days.

The Company needs to prepare a statement within 90 days after the above transfer containing the names, last known addresses, and the amount of unpaid dividend that shall be paid to each person. These statements should be placed on the website of the Company and also on such other websites as may be specified by the Central Government.

If the company defaults in transferring the total amount of unpaid dividend as above, then it shall be liable to pay interest from the date of such default on the such amount that has not been transferred at the rate of 12% per annum. Such interest shall be received by the members in proportion to the total amount that remains unpaid to them.

Any person who has not received the dividend and claims to be entitled to the money in the unpaid dividend account may apply to the Company for the payment of such money. In case the money transferred to the unpaid dividend account remains unpaid for 7 years from the date of transfer, then the money along with the interest shall be transferred to the Investor Education and Protection Fund (IEPF). Further, all the shares in relation to which dividends have not been paid or claimed for 7 consecutive years shall also be transferred by the company to the Investor Education and Protection Fund. The company shall also submit a statement containing such details as may be prescribed. 

However, if the dividend declaration by Indian companies is paid or claimed in any year during 7 years, then such shares shall not be transferred to the Investor Education and Protection Fund. The Companies Act, 2013 has prescribed a stringent penalty in case the company fails to comply with the above requirements. It shall be liable to a penalty of Rs. 1 lakh and in case of continuing failure, a further penalty of Rs. 500 per day after the first day during which such failure continues subject to a maximum penalty of Rs. 10 lakhs. Further, every officer of the company who is in default shall be liable to a penalty of Rs. 25,000 and in case of continuing failure with a further penalty of Rs. 100 each day after the first during which such failure continues subject to a maximum of Rs. 2 lakhs.

Above were the explicit provisions governing the dividend declaration by Indian companies and their payment. In case you need any assistance, feel free to contact the ASC Group. 
 

Also Read - Bonus Issue of Shares

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Reena Sharma

This article gave me an comprehensive knowledge on Declaration of dividends. I always follow your website for tax and accounting updates due to the reliable information. Thankyou.

ASC Group

Thanks

Shivam

This guide provides me with a clear view of Section 123. Thanks for sharing this useful information...

ASC Group

Thanks