Everything you need to know about Dividends

As per Section 2(35) of Companies Act, 2013 defines the term as including any interim dividend.

• Dividend is basically the share of profit distributed among shareholders.
• Ordinary meaning of dividend is a share of profits, whether at a fixed rate or otherwise, allocated to holders of shares in a company.
• Dividend can be paid on Equity or preference shares both.
• The word “Dividend” has origin from the Latin word “Dividendum”. It means a thing to be divided.

​

Source for payment of Dividend:
Dividend can be paid out of Followings: Section- 123 (1)(a)

• Profit of the current year after providing of the depreciation; or
• Profit of the previous financial year or years after providing for depreciation for previous years; or
• Out of the money provided by Central or State Government for payment of dividend in pursuance of guarantee given by that, if any.

Term ‘Profit’- Profit can be either revenue profit or Capital profits or both. Thus, dividend can’t be paid by revaluation of assets, as the surplus has not been actually realized.

Note:
It is not necessary to distribute whole of profits among shareholders.

Transfer portion of profit in reserve:
Before declaration of dividend, a company may transfer a portion from the profit to the reserves of the company. The company is free to decide the percentage for such transfer to the reserve.

Mandatory transfer to reserve is not required under Companies Act 2013. Companies are free to transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves. {First Proviso to Section 123(1) of the Companies Act, 2013}.

The reserve shall, at the discretion of the Board, be applicable for any purpose to which the profits of the company may be properly applied, including provision for meeting contingencies or for equalizing dividends. {As per Clause 82 (i) of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act}.
THUS TRANSFER OF SPECIFIC AMOUNT TO RESERVES IS NOT MANDATORY.

DECLARATION OF DIVIDEND
Notice of Dividend:
As per Clause 87 of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act} Notice of dividend declared shall be given to the persons entitled to share in it.

Process for declaration of Dividend:
As per Clause 80 of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act.

• Company in Board Meeting may decide the amount of dividend which they want to recommend in General Meeting.
• Company will mention the resolution for Dividend in the Notice of General Meeting.
• Company will hold the General Meeting:
  • Declaration of Dividend is Ordinary Business.
  • Ordinary Resolution for declaration of dividend will be passed in the General Meeting.
• Once dividend is declared, it must be paid within 30 days.

Note:

• Dividend declared in General Meeting can’t exceed the dividend recommended by the Board.
• Dividend declared in General Meeting by member can be less than the dividend recommended by the Board.
• Dividend paid in General Meeting is Final Dividend.

INTERIM DIVIDEND:
As per Clause 81 of Model Articles of Company Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act.

• Interim dividend can only be declared by board of Directors.
• Generally paid in the middle of the year if Board of directors fined that profitability of the company.
• Board of Directors can declare dividend out of surplus in profit and loss account at the beginning of the year or profit during the year.

In case of Company incurred losses in current financial year:
If 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 by the company during the immediately preceding three financial year- Section 123(3).

Note:

• Interim dividend is really a mod of keeping shareholder happy and keeping good image of company in stock market.
• All legal provisions applicable on final dividend equally apply on interim dividend.

Condition common for Both Final Dividend and Interim Dividend:

• Deposit of Amount of declared dividend in separate Bank Account.
• Payment of dividend within 30 days of declaration.
• Transfer of unpaid dividend in special account.
• Interest for late payment
• Transfer of Investor protection Fund after Seven year.
• Penalty for non payment etc.

DIVIDEND DECLARES IS A DEBT:

• Dividend declared in the General Meeting is a debt payable by the company to its registered shareholders.
• Interim dividend declared by the Company in Board Meeting is a debt payable by the company to its registered shareholders.
• If, Dividend declared in the General Meeting is found to be against law same can always be revoked or considered as void.

HOW TO DECIDE THE SHAREHOLDERS TO WHOM DIVIDEND WILL BE GIVEN:
Unlisted Companies (Include unlisted Public and Private Limited Company):

• It is not necessary to close register.
• There are few transfers in these Companies.
• General Meeting can decide the ‘Cut off’ date or could be date of General Meeting.

ISSUE OF SHARES WITH DIFFERENTIAL RIGHT:
If share with differential right have been issued, dividend will be declared and paid on the basis of terms of issue. {Regulation 83(iii) of Model AOA Table-F of the Act, 2013}.

MODE OF PAYMENT OF DIVIDEND:
There are following Modes of Payment of Dividend: [Section- 123(5)

• Cash
• Cheque
• Dividend Warrant
• In any electronic Manner.

Note:

• Dividend should be paid by cheque or warrant sent through post to the registered address of the shareholder.
• Dividend can’t be paid in ‘KIND’ e.g. in form of Gifts, Goods or Bonus Shares.
• Payment of dividend to another person as per order of the shareholder is permissible. This is also providing in {Regulation 85(ii) of Model Articles Table- F as per the 2013 Act.}

DIVIDEND IN CASE OF JOINT SHAREHOLDER:

• In case of Joint shareholders, the cheque or warrant of dividend should be sent to the holder first named in the register of members.
• If the joint holders direct in writing the cheque or dividend can be send to another person as directed by the join shareholders { Regulation 85(i) of Model Articles Table- F as per the 2013 Act.}

PROHIBITION ON DIVIDEND:
A company which has default under Section 73 and 74 related to deposit and repayment of deposit or interest thereon may not declare dividend.

A company cannot declare dividend if the company fails to comply with acceptance of deposits and repayment of deposits accepted prior to the commencement of this Act. (section 73 & 74 of Companies Act 2013.

RIGHT OF MEMBERS PENDING REGISTRATION OF TRANSFER (SECTION 126):
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,—

1. Transfer the dividend in relation to such shares to the Unpaid Dividend Account unless the company is authorized by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer; and
2. Keep in abeyance in relation to such shares, any offer of rights shares and any issue of fully paid-up bonus shares.

FREE RESERVE:
Where a company has no adequate profit or any profit in a financial year or any accumulated profit to distribute as dividend, it may declare dividend out of reserves in accordance with the rules made by the government. The company may pay dividend only from free reserves, not from any other reserves.

No dividend shall be paid from its reserves other than free reserves. The term “Free Reserves” is defined under Section 2 (43) of the Company Act 2013. Free reserve means such reserve which, as per the latest audited balance sheet of a Company, are available for distribution of profit.

PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDEND (SECTION 127):
Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty 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 which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen percent per annum during the period for which such default continues.

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.

SOME IMPORTANT POINTS TO BE KEPT IN MIND:

• Declaration of dividend and amount to be transferred to reserve is responsibility of the Board.
• Bona fide decision of Board in respect of dividend can’t be challenged.
• The dividend should be declared unconditional and must be paid within 30 days.
• Dividend on equity shares can be distributed only after dividend on preference shares is declared.
• The amount of the dividend, including interim dividend, shall be deposited in a schedule bank in separate account within 5 days from the date of declaration of such dividend.

FAQ’S

1. Whether Company can declare dividend in EGM instead of AGM?
Ans: As per regulation 80 of Model Articles Table F of the 2013, Act, “Company in General Meeting may declare dividend”. As per the Regulation 80 of AOA it’s not mandatory to declare dividend in AGM, if dividend not declared in AGM then company can declare dividend in subsequent EGM.
If dividend is declared in AGM, it can’t be increased further in subsequent EGM.

2. Whether shares issued during the year are entitled to dividend for full year?
Ans: In case of new shares issued during the year, offer document may provide that dividend is payable on pro rata basis from the date of allotment or a date specified in offer document. Thus, Old shares will be entitled for dividend for full year, while new shares will be entitled to dividend only from the date of allotment on pro rate basis.
It is usually provided that share issued during the year will be entitled to dividend on pro rata basis i.e. only for part of the year for which new shares were held.

3. Whether dividend will be payable on call money paid in advance?
Ans: Dividend is not payable on call money paid in advance.

PROVISIONS OF DIVIDEND GIVEN IN ARTICLE OF ASSOCIATION: {TABLE- F OF SCHEDULE – I OF COMPANIES ACT, 2013}

Dividends and Reserve

80. The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the Board.

81. Subject to the provisions of section 123, the Board may from time to time pay to the members such interim dividends as appear to it to be justified by the profits of the company.

82. The Board may, before recommending any dividend, set aside out of the profits of the company such sums as it thinks fit as a reserve or reserves which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the company may be properly applied, including provision for meeting contingencies or for equalizing dividends; and pending such application, may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the Board may, from time to time, thinks fit.
The Board may also carry forward any profits which it may consider necessary not to divide, without setting them aside as a reserve.

83. Subject to the rights of persons, if any, entitled to shares with special rights as to dividends, all dividends shall be declared and paid according to the amounts paid or credited as paid on the shares in respect whereof the dividend is paid, but if and so long as nothing is paid upon any of the shares in the company, dividends may be declared and paid according to the amounts of the shares.
No amount paid or credited as paid on a share in advance of calls shall be treated for the purposes of this regulation as paid on the share.
All dividends shall be apportioned and paid proportionately to the amounts paid or credited as paid on the shares during any portion or portions of the period in respect of which the dividend is paid; but if any share is issued on terms providing that it shall rank for dividend as from a particular date such share shall rank for dividend accordingly.

84. The Board may deduct from any dividend payable to any member all sums of money, if any, presently payable by him to the company on account of calls or otherwise in relation to the shares of the company.

85. Any dividend, interest or other monies payable in cash in respect of shares may be paid by cheque or warrant sent through the post directed to the registered address of the holder or, in the case of joint holders, to the registered address of that one of the joint holders who is first named on the register of members, or to such person and to such address as the holder or joint holders may in writing direct.
Every such cheque or warrant shall be made payable to the order of the person to whom it is sent.

86. Any one of two or more joint holders of a share may give effective receipts for any dividends, bonuses or other monies payable in respect of such share.

87. Notice of any dividend that may have been declared shall be given to the persons entitled to share therein in the manner mentioned in the Act.

88. No dividend shall bear interest against the company.