Provided below is the content on: -
👉𝐃efinition;
👉𝐈mportant points;
👉𝐒ec 123 of the Companies Act, 2013;
👉𝐑ule 3 of The Companies (Declaration and Payment of Dividend) Rules, 2014.
Regulatory Law: SECTION 123 TO 127 OF THE COMPANIES ACT, 2013 READ WITH THE COMPANIES (DECLARATION AND PAYMENT OF DIVIDEND) RULES, 2014.
Section 2(35) of the Act defines-
DIVIDEND- which says Dividend includes any interim dividend.
Definition as per Secretarial Standard 3: -
“Dividend” means a distribution of any sums to Members out of profits and wherever permitted out of free reserves available for the purpose.
“Final Dividend” means the Dividend recommended by the Board of Directors and declared by the Members at an Annual General Meeting.
“Interim Dividend” means the Dividend declared by the Board of Directors.
Important Point to be noted: -
Regulatory Law Provisions
Section 123(3) Interim Dividend shall be declared by Board of Directors.
Secretarial Standard 3 Recommendation of Final Dividend shall be done by. Board of Directors
Secretarial Standard 3 Final Dividend shall be declared at an Annual General Meeting only on recommendation of the Board, made at a meeting of Board.
Section 102(2) Declaration of Dividend at an Annual General Meeting shall be of Ordinary Business.
The relevant provisions for declaration and payment of Dividend are reproduced herein: -
Following conditions shall be fulfilled by the Company: -
❖ No dividend shall be declared or paid by a company from its reserves other than free reserves.
❖ No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.
❖ Before declaration of dividend, depreciation shall be provided in accordance with the provisions of Schedule II – [Section 123(2)].
❖ No declaration of dividend, if default in compliance with the provision of section 73 and 74, so long as such failure continues- [Section 123(6)].
The Companies (Declaration and Payment of Dividend) Rules, 2014: -
✱Rule-3 - Declaration of Dividend Out of Reserves
In the event of inadequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the fulfilment 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.
Provisions related to interim dividend: -
Section 123(3) of the Act
The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting-
❖out of the surplus in the profit and loss account
or
❖out of profits of the financial year for which such interim dividend is sought to be declared or
❖out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend.
Provided that in case the company has incurred loss during the current financial year up to 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.
Deposit of declared amount in a separate bank account: -
Section 123(4) of the Act
The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.
Payment of Dividend: -
Section 123(5) of the Act
The dividend shall be paid by a company in respect of any share therein to the
❖ registered shareholder of such share
or
❖ to his order
or
❖ to his banker
and shall be payable in cash only.
Provided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company:
Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.
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