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 dividend to the Shareholders of the Company.
The declaration of the dividend 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 Dividend can be declared by a Company only out of the following accounts:
It needs to be ensured that the profits to be used for the distribution of dividends shall not include the following:
Further, the depreciation for the above purpose should be calculated as per the provisions of Schedule II of the Companies Act, 2013.
Companies can declare interim dividend 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:
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 such company during the immediately previous 3 financial years.
Following are some of the important points to keep in mind when it comes to the dividend declaration by Indian companies:
In case the Company has declared the dividend but it has not been paid within a period of 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 a period of 7 days from the expiry of 30 days.
The Company need 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 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 the period of 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.
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