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Savvy Midha
| Updated: 11 Oct, 2019 | Category: SEBI Registration

Dividend Declaration: Sources, Mandatory Conditions and Procedure

Dividend Declaration

A dividend means the proportion of the profit that the company distributes to its shareholders as a return on their investment. Dividends are paid for the financial year after the finalization of accounts. In layman language, the company pays a dividend to its shareholders out of the profit made in a financial year in proportion to the paid-up amount of their entire shareholding. All the companies other than Section-8 companies (Not for Profit Organization) are allowed to declare the dividend.

As per the Companies Act, 2013, dividend includes interim dividend. Interim Dividends are paid in the middle of the financial year.

The detailed provisions related to dividend payment and declarations are discussed henceforth.

Sources of Dividend

The basic principle of a declaration of dividend is that it shall be paid out of profit only. As per the Companies Act, it can be paid out of the following sources:

  • From the current year’s profit
  • Accumulated profit from the previous year
  • Out of the money provided by the Central or State Government for the payment of dividends in pursuance of guarantee given

Mandatory Conditions for Dividend Declaration

Declaring dividend out of current year’s profit

Company has to meet the following requirements for declaring dividend out of its profit:

  • Depreciation: Depreciation shall be provided on all depreciable assets as per the prescribed rate or its useful life before declaring the dividend.
  • Reserve: Company cannot declare or pay a dividend unless it transfers a certain percentage of profit to reserve.
  • Set off previous year loss: Company must set off the carried forwarded previous year’s loss from the current year’s profit before declaring the dividend.
  • Free Reserve: Company shall not declare its dividend out of any reserve other than Free Reserve.

Declaring Dividend out of Surplus Reserves in case of insufficient current year’s profit

The company can declare the dividend [1] out of surplus reserve in case of insufficient current year’s profit subject to the following conditions:

  • Rate of Dividend: The dividend rate shall not exceed the average of the declared dividend of three immediately preceding years.
  • Withdrawal amountThe total amount of withdrawal from accumulated reserve shall not exceed 1/10th of the paid-up share capital and free reserves as per the latest audited financial statement.
  • Utilization of money withdrawnSuch withdrawn money from accumulated reserve shall be first used to set off the previous year’s loss before declaring a dividend for the current year.
  • Balance: Balance of surplus reserve after withdrawal shall not fall below 15% of its paid-up share capital as per its latest financial statement.

Procedure to pay Final dividend

Following are the steps to be followed by the company for declaring and payment of final dividend:

  • Issue the seven days notice to hold the board meeting for discussing the following agendas:
  • Approving the Financial Statement
  • Recommending the quantum of the final amount of dividend for declaring at an AGM.
  • Consideration of source of fund for the dividend
  • The board shall also discuss the amount of profit to be transferred to the reserve account.
  • Fix the date, time, and venue of AGM.
  • Send the notice of AGM of clear 21 days before holding the AGM.
  • The company shall ensure the transfer of the required percentage of profit to the Company’s reserve account.
  • Hold and conduct the AGM for declaration of a final dividend of the amount not less than recommended by the board in the Board’s Meeting.
  • Open the separate account for the transfer of dividend amount within five days of such declaration.
  • Prepare dividend statement for each shareholder and
  • Ensure that the company has paid corporate dividend tax to the tax authority within 14 days of declaration of dividend at the rate of 15% on the gross amount of dividends.
  • Complete the procedure by paying the final dividend to the shareholders within 30 days of declaration in any mode, such as cash, cheque, warrant, or through any electronic method.

Understanding Dividend as per Companies Act 2013

Following are the certain key points for a general understanding of about dividend:

  • Pro-rata basis of dividend payment: Section 51 allows the Company to pay the dividend on pro-rata in case all the equity shares of the company are not paid-up. Pro-rata means in proportion or proportionality.
  • Annual General Meeting: The final dividend is declared at an AGM.
  • Board Report: Board of Directors shall mention the amount of dividend declared in its Board’s report.
  • Corporate dividend Tax: Dividend is the income in the hands of shareholders subjected to income tax. The company needs to pay Corporate Dividend Tax at the rate of 15% of the gross amount within 14 days of declaring dividends under section 115 of the Income Tax Act.
  • Transfer to Reserve: Company has to transfer to reserve such percent of profit before declaring the dividend.
Proposed Dividend Transfer to Reserve
  10-12.5 percent of paid-up capital   More than 2.5% of the profit
  12.5- 15 percent of paid-up capital   More than 5% of the profit  
  15-20 percent of paid-up capital   More than 7.5% of the profit
  More than 20 percent of paid-up capital   More than 10% of the profit
  • Separate Bank Account: Amount of Dividend (Interim and Final) shall be deposited to separate bank account within five days of declaring such dividends.

Unpaid Dividend

  • Unpaid Dividend Account: 

Company shall pay the dividend within 30 days of declaring. In case of failure to pay or claim the dividend within 30 days of the declaration, the company has to transfer such an unpaid or unclaimed dividend to the special account opened in a scheduled bank in the name of “Unpaid Dividend Account” within seven days after the expiry of 30 days.

  • Investor Education and Protection Fund: 

Amount remains unpaid or unclaimed in unpaid dividend account for seven years shall be transferred to Investor Education and Protection Fund The company shall file DIV-5 to the concerned authority for the administration of the fund.

  • Penalty for Failure: 

In case of default to pay dividend within 30 days of declaration, directors in default shall be liable to pay fine up to INR 1000 per day and imprisonment for two years and the company shall pay interest at the rate of 18% (12% in case of failure to transfer to unpaid dividend account) for the period of such default.

Non-Payment of Dividend

Following are the circumstances in which dividend is not required to be paid:

  • Due to the operation of law
  • When the members have given the direction to the company which the company dint complied.
  • Due to dispute regarding payment of dividend
  • If the company has adjusted the dividend against the money due from shareholders.

Interim Dividend vs. Final Dividend

As per Section 2(35) of the Companies Act 2013, an Interim Dividend will be declared by the board any time before the closure of the fiscal year by the Private Limited Company.

Following is the difference between interim and final dividend:

Basis of Difference Interim Dividend Final Dividend
Definition The interim dividend is paid by the company in the middle of the year before finalizing the accounts. The final dividend is paid at the end of the closure of the financial year on AGM.
Declaration It is declared before finalization of accounts It is declared after the finalization of accounts.
Revocation Revocable with the shareholder’s consent Can’t be revoked
Dividend rate Interim dividends are paid at the fewer rate Rate of final dividends are comparatively high
Article Authorization It can be made only if AOA authorizes specifically It doesn’t require any special provision in AOA.

Punishment for failure to distribute dividends: Section 127

If a company fails to pay dividend within a time period of 30 days from the date of its declaration, to the shareholders entitled to dividend then the company shall be liable to fine at 18% p.a. for the default period and every such director shall be sent to imprisonment which shall be maximum of 2 years and fine upto Rs. 1000/- for each day which such default continues.

Conclusion

Every form of investment has a certain kind of returns, such as dividends are the Return on Investment on the company’s shares by shareholders. Unlike the fixed nature of debenture interest, dividend keeps fluctuating depending upon the profit of the company. The company shall decide upon the quantum and kind of dividend to be paid wisely since the dividend is important to keep investors of the company satisfied. You can further contact us for guidance on what kind of dividend investment can match your portfolio needs.

Read our article:Shareholders Right – Know Its Variations and Procedures of Modification

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Savvy Midha

Savvy Midha holds the degrees of Bachelor of Commerce(honors), LL.B and Company Secretary. She is an experienced Legal and Financial writer with expertise in research, drafting, and copy-writing.

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