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Meaning of Dividend Dividend means that portion of the corporate profit set aside and declared by the company which will be shared by each individual member of a company. Almost all Corporate operate with a view to make profits and to share the same with its members. Thus, the profits of a Corporate when distributed among its members are called “Dividends”. Further, the power to pay dividends is implied and it need not necessarily be captured in the Memorandum of Association or in the Articles to enable a company to pay dividends. Before declaring and payment of dividend a company has to fulfil various formalities and in case of listed companies, the same is compounded with listing formalities. This Article enumerates the various laws and provisions governing declaration and payment of dividend from Company Law, Listing Agreement and Regulatory point of view. Provisions governing declaration and payment of dividend The provisions governing declaration and payment of dividend by a company are provided in the Companies Act, 1956 (referred to as “Act”) and the Rules made there under including the Companies (Transfer of Profits to Reserve) Rules, 1975, Companies (Declaration of Dividend out of Reserves) Rules, 1975. Further, in case of companies listed on the Stock Exchanges, the relevant clauses of Listing Requirements are to be followed. The Companies Act allows dividends to be paid out of three sources namely (a) Profits of the company for the year for which dividends are to be paid. (b) Undistributed profits of the previous financial years. (c) Moneys provided by the Central Government or a State Government for the payment of dividends in pursuance of a guarantee by the Government concerned. Determination of Dividend Section 205 of the Act only prescribes that dividend shall be paid out of profits of the company. As dividends can only be declared out of surplus earnings, there must be an exact method of determining whether surplus earnings for that purpose actually exist. But the Companies Act do not provide any guidance in this regard. In the matter of Hariprasad Vs. Amalgamated Commercial Traders the Chief Justice of Madras High Court observed that the Companies Act, 1956 does not say further how those profits have to be ascertained. There is nothing at all in the Act about how dividends are to be paid, nor how profits are to be reckoned; all that is left and very judiciously and properly left, to the commercial world. Further, it has become obligatory for a company to provide for depreciation as required by Section 205(2) of the Act. Depreciation has to be provided for the current year as well as for arrears of depreciation if any. It further states that the depreciation must be provided to the extent specified in the Section 350 of the Act. If we refer this Section, it states that the depreciation is to be calculated at the rate specified in Schedule XIV of the Act. Further, it is to be noted that if the Act makes no provision for a particular kind of asset, then its depreciation may be worked out on a basis approved by the Central Government in this regard. A company has got two choice to arrive at depreciation i.e. either to adopt the above said procedure or to work out depreciation by dividing ninety five percent of the original cost of the depreciable asset by the specified period in respect of such asset. But, if any asset is sold, discarded, demolished or destroyed for any reason before depreciation for such asset has been provided for in full, the excess, if any of the written down value of such asset over its sale
The company may. For e. certain percentage of profits as may be prescribed by the Central Government.5% of current profits Exceeding 12. b) b) When a Company fails to redeem its preference shares as per the provisions of Section 80A of the Companies Act.e. Further. the requirement of providing for depreciation. According to the Companies ( Transfer of Profits to Reserves) Rules 1975. the company has to pay dividends out of the previous year‟s reserves.g. is a loss making company.proceeds or its scrap value shall be written off in the financial year in which it is sold. CIT (1991) SC). profits shall be compulsorily transferred to reserves at the following rates:Rate of proposed dividend Amount to be transferred to Reserves Not exceeding 10% Nil Exceeding 10% but not exceeding 12. 1961 (V. if any must also be set off against the profits of any subsequent year or years before any dividend can be paid. Capital Reserve or Special Reserve will not come under the category of free reserves for the purposes of this rule.5% but not exceeding 15% 5% of current profits Exceeding 15% but not exceeding 20% 7. voluntarily create more than the prescribed percentage and transfer to the reserves of the Company. a Company cannot declare a dividend without the prior approval of Financial Institution. It is to be noted that the Act does not require any provision to be created for depletion of a wasting asset. but not exceeding 10% will have to be transferred to the reserves of the Company. The proviso (c) of Section 205(1) of the Act empowers the Central Government to waive in any particular case. reserve which are not created or set apart or intended for any special purpose. Development Rebate Reserve. Compulsory Reserves Section 205 (2A) of the Act prescribes that before any dividend is declared or paid. In case of any deviation from such rules.5% of current profits . the previous years‟ losses. then the company can do so only with the previous approval of the Central Government. The word loss also includes depreciation (as declared in the case of Garden Silk Weaving Factory Vs.V. before declaration or payment of dividend. There is no reason to give the word “loss” as used in Section 205 a different meaning from one in which it is ordinarily understood only because it has to be read with Section 115 of the Income Tax Act. If in a particular year. in case if the covenants of the loan agreement stipulates in this regard. it should follow such rules as may be made by the Central Government. (Sub Section 2B) Further. Dividends cannot be declared out of the Securities Premium Account or the Capital Redemption Reserve Account or Revaluation Reserve or Amalgamation Reserve or out of the Profit on re-issue of forfeited shares or out of profit earned prior to the incorporation of the Company. on account of inadequacy of profit. however.5% 2.e. The term “Reserve” meant in the said Rules means “Free Reserves” i.Trans-Investments (P) Ltd Vs CIT (1999) SC) Declaration of Dividend A company cannot declare dividend in the following circumstances:a) a) When a Company is not having profit i. Section 205(3) stipulates that no dividend shall be payable except in cash.
As a general rule only such funds can be capitalised as would be available for dividend distribution. Dividend in arrears on cumulative preference shares can be paid in the subsequent years where there are profits sufficient for such payment.(2009) stating that issue is well within the scope of Section 86 of the Companies Act as well as the Companies ( Issue of Share Capital and Differential Voting Rights) Rules. a company can issue shares with differential rights as to voting as well as dividend subject to fulfilment of certain conditions given thereunder. Entitlement -Equity Shareholders A company can pay dividend only to the shareholders of that company a) a) whose name appears on the Register of members maintained by the Company (in case the shares are held in physical form) or b) b) whose name appear on the register of beneficial owners maintained by a depository (in case the shares are held in dematerialised form) Preference shareholders (a) Preference shares carry a preferential right as to dividend in accordance with the terms of the issue and the Articles. it is left to the discretion of the company to determine the percentage of profits to be transferred to reserves. 1956 and also according to the Companies ( Issue of Share Capital and Differential Voting Rights) Rules. a limited number of companies have come forward to issue shares with differential voting . Thus. as it was settled through a consent order. 2001. if no dividend is paid in a year.Jagatjit Industries Limited. Capitalisation of Profits The proviso to Section 205 further states that there is no prohibition for capitalisation of profits or reserves 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. it must be stated that CLB did not have the opportunity to get into much deeper details of this case. In case of non-cumulative preference shares. Dividend entitlement for shares with Differential voting rights/dividend As per Section 86(a) (ii) of the Companies Act.Exceeding 20% 10% of current profits. there is no right to receive it in future years. and hence preference shareholders are paid dividend before the dividend is paid to the equity shareholders of the company. on the recommendation of the Board of Directors resolve and convert into capital any sum standing to the credit of profit or loss account or reserve fund account or otherwise available for distribution. Further if any shares are delivered to a Company for registration and the same have not been registered by the Company then any dividend to be paid on those shares need to be transferred to the unpaid dividend account. In this connection. Under the Companies Bill 2009. (b) Preference shares may be cumulative or non-cumulative. In fact such issue of shares with Differential voting rights were also upheld by Company Law Board in Anand Pershad Jaiswal Vs. 2001. Based on this judgement. a company may in general meeting.
For this purpose. cannot issue shares in any manner conferring superior rights as to voting and dividend on equity shares. But there is no transitory provision in the Bills for those companies which had already issued share capital with differential rights or dividend. such declaration shall be passed by a resolution at the Board Meeting with the consent of all the directors and approval of the financial institution whose term loans are subsisting and also to be passed by the shareholders by a special resolution at the Annual General Meeting. superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed. Thus. 2009. So. b) book closure date for dividend purposes c) date of annual general meeting d) Bank with which the account shall be opened for the purpose of remittance of dividend. the Companies Bill prohibits issue of equity share capital with differential voting rights as well as differential dividend. stating that the resolution passed by the Board should be approved by all the directors present at the Board Meeting and not by with the consent of all the directors of the company. provides that a company can declare dividend out of the profits of the previous years. It stipulates that if owing to inadequacy or absence of profits in any Financial Year. Procedure for declaration of Dividend A company which intends to declare and pay dividend should adopt the following procedures. 2009 SEBI amended the Listing Agreement to state that listed Companies are prohibited from issuing shares with “superior” voting rights and Clause 28A was inserted in the Listing Agreement. Declaration of dividend out of profits earned by earlier years Section 205 of the Act.rights as well as dividend. after this amendment a Company whose equity shares are already listed on the Stock Exchange. It is to be noted that under Clause 37 of the Companies Bill. The Board of Directors after considering and approval of the financial statements of the Company. 2) Approval by the Shareholders:- . the different kinds of share capital which can be issued by a company excludes issue of equity share capital with differential voting rights. In July. It states that “ The Company agrees that it shall not issue shares in any manner which may confer on any person. a Board Meeting shall be convened to pass the resolution for a) rate of dividend and the amount of dividend to be paid. determines the rate of dividend to be declared and then recommends the same to the shareholders. additional requirements relating to Listing Agreements are to be followed.” So. Clause 110 of the Companies Bill. it is utmost necessary that the Bill should include certain period to allow the companies which had issued equity share capital with differential voting or dividend to bring back their capital structure in accordance with the provisions of the Bill. The shareholders do not have any power to declare any dividend. Further. But. in case the company‟s shares are listed on the Stock Exchanges. the Company proposes to declare dividend out of the profits of the previous financial year or years and transferred to its reserves. 1) Recommendation by Board of Directors:Dividend can be declared only on the recommendation of the Board of Directors of the Company. Already the Ministry has received suggestions. Tata Motors is one such example which had issued shares both with differential rights as to vote as well as dividend. 2009 stipulates further conditions to declare dividend in such cases.
1956. the dividend warrants shall be despatched within 30 days of declaration of dividend.The dividend recommended by the Board of Directors is declared by a resolution passed at the Annual General Meeting by the shareholders. Dividend when declared becomes debt against the company. It means that the interim dividend will have to be deposited in a bank account within 5 days of the Board Meeting whereas final dividend will have to be deposited within 5 days from the date of Annual General Meeting in which it was approved by the shareholders.company Limited. 6) Time frame for payment of dividend As per Section 207 of the Companies Act. 3) Dividend now includes interim dividend:After the Companies (Amendment) Act. 8) Transfer of unpaid or unclaimed dividend to the Investor Education and Protection Fund:Any amount of dividend which remains unpaid or unclaimed for a period of 7 years from the date it became due for payment shall be transferred by the company to the Investor Education and Protection Fund. When making a transfer to the Fund. 206A and 207 shall apply to interim dividend. interim dividend is now recognised as a part of final dividend (clause 14A of Section 2). 205A. 206. c) names and last known addresses of the persons entitled to receive the sum.a. 205C. While approving the rate of dividend at the Annual General Meeting. 7) Transfer of unpaid dividend As per Section 205A of the Act. The declaration of dividend should form part of an ordinary business item to be transacted in the notice of the Annual General Meeting. Interim dividend can be declared by the Board of Directors and they have authority to do so. D) the amount to which each . Interest at the rate of 12% p. the Company shall furnish to the authority appointed by the Central Government. the Company shall within 7 days from the expiry of the said period of 30 days transfer the total amount of dividend which remains unpaid or unclaimed within the said period of 30 days to a special account to be opened by the Company in that behalf with any Scheduled Bank which is called “unpaid Dividend Account of ----. where a dividend has been declared by a company but has not been paid (or claimed) within 30 days from the date of declaration to any shareholder entitled to the said payment of dividend. Also Section 205 (1B) stipulates that the amount so deposited shall be used only for the purpose of payment of dividend ( whether interim or final). Further. 2000. the details relating to a) all sums included in such transfer b) nature of the sums. the shareholders have power to declare a lower rate of dividend than what is recommended by the Board but they have no power to increase the amount or the rate of dividend so recommended by the Board of Directors. the provisions contained in Section 205. is payable by the Company for delay in making the above transfer. 1956 provides that the dividend payable in cash may be paid either by cheque or warrant. 5) Dividend to be paid by cheque or warrant Section 205(5)(b) of the Companies Act. 4) Dividend to be deposited in a separate bank account:The Company should deposit the dividend amount ( including interim dividend) within 5 days of its declaration in the separate bank account opened for this purpose.
no claim. right etc. awareness and protection in accordance with the Rules as may be prescribed. Further. the Company will recommend or declare dividend at least 5 days before commencement of the closure of its transfer books. Regarding the book closure. 3) Clause 19 :The company will give prior intimation to the Stock Exchange about the Board Meeting at which proposal for recommendation of dividend and or passing over of dividend due to be considered at least 2 working days in advance. 4) Clause 20A The company agrees to declare and disclose the dividend on per share basis only. if any. offer of rights shares and bonus shares in abeyance in a situation where such dividend. 2001. from any person shall be entertained by the Fund. the said fund shall be used for protection of investors‟ education. 1956 shall stand credited to the Investor Education Protection Fund established under sub section (1) of Section 112 of the said Bill. Also. Further as per Section 205B of the Act. Further Clause 112 of the Bill stipulates that the fund shall be utilised for the refund in respect of unclaimed dividends. application monies due for refund and interest thereon etc. which is different from the present provisions. once any amount on account of unpaid / unclaimed dividend has been transferred to the Investor Education and Protection Fund in pursuance of Section 205C. any person claiming to be entitled to any dividend Clause 113 of the Companies Bill 2009 stipulates that the amount lying in the Investor Education and Protection Fund established under section 205C of the Companies Act. 1956). for payment for any sum. 9) Directors Report Section 217(1)(c) of the Companies Act. Thus. which it recommends should be paid by way of dividend. are declared in the interval between lodgement of a valid instrument for transfer of shares with the company and its eventual registration. Compliance relating to Listing Agreement:-1) Clause 12A (4) As per this clause. 1956. the company should adhere to the provisions of Section 206A as well as Section 27 of the Securities Contracts (Regulations) Act. The said fund shall be utilised for promotion of investor awareness and protection of the interests of investors in accordance with the Investor Education and Protection Fund Rules. advertisement should be issued in the newspapers and copies of such advertisements shall be sent to Stock Exchanges ( As per Section 154 of the Companies Act. 1956 requires that the report of the Board of directors shall state the amount. The Board may choose not to declare any dividend even though the company has made profit and the same be captured in the Directors Report with reasons. 2) Clause 16 The Company agrees to close its transfer books for the purpose of declaration of dividend and will give notice to the Stock Exchange at least 7 working days in advance of the date of closure of transfer books and will also intimate the purpose for which the transfer books are closed. . wherein it is the duty of the company to keep dividend.person is entitled and such other particular as the case may be prescribed.
under the matters to be placed before the Board Meeting. with collection charges. a board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder. This Committee shall be designated as „Shareholders/Investors Grievance Committee‟. in any bank in the country at centres other than the centres agreed to between the Exchange and the company so as to reach the holders of shares on or before the date fixed for payment of dividend. b) b) Where dividend is paid or proposed to be paid pro-rata for shares allotted during the year. 6) Clause 28A The Company agrees that it shall not issue shares in any manner which may confer on any person.5) Clause 21 The Company will fix and notify the Stock Exchange at least 21 days in advance of the date on from which the dividend on shares will be payable and will issue simultaneously the dividend warrants/cheques which shall be payable at par at such centres as may be agreed to between the Exchange and the Company and which shall be collected at par. 9) Clause 49 In respect of complaint received from any shareholder regarding non-receipt of dividend. Hence a listed company will have to compulsorily place before the Board of Directors any grievances relating to shareholders with respect to non-payment of dividend. when effected will be annulled in appropriate cases. the dividends paid or recommended for the year. Further. the Company agrees that if any amount be paid up in advance of calls on any shares. Interim Dividend –Whether a statutory debt . the date of allotment and number of shares allotted. the Company shall disclose the following to the Stock Exchanges. 8) Clause 41 In respect of requirements as to financial figures. superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed. it will stipulate that such amount may carry interest but shall not in respect thereof confer a right to dividend or to participate in profit. 10) Shareholders’ Information under Corporate Governance Report Under the Corporate Governance Report. if any. 7) Clause 34 The Company agrees that it will not forfeit unclaimed dividends before the claim becomes barred by law and that such forfeiture. including interim dividends:a) a) the amount of dividend distributed or proposed for distribution per share and the amounts in respect of different classes of shares shall be distinguished and the nominal values of shares shall also be indicated. being borne by the Company. Further. pro-rata amount of dividend per share and the aggregate amount of dividend paid or proposed to be paid on pro-rata basis. the dividend payment date should be mentioned under the heading “ Shareholders‟ Information”. one of the item is to place the non-compliance relating to payment of dividend.
Conclusion The payment of dividend will instil confidence to the shareholders of the company. because. it does not create a debt enforceable against the company. Thus. Clause 110(3) of the Companies Bill. payment of dividend consistently over a period of time would enhance the image of the company. 1956. While declaring interim dividend. in law one cannot take advantage of his own default. since the penalty prescribed is by way of both fine and imprisonment. going by the principle. it can very easily tap the capital markets (as investors would be ready and willing to invest) without resorting to huge borrowings from Banks and Financial Institutions. It is to be noted that Section 207 of the Companies Act which applies to interim dividend also. the Directors can very well rescind the resolution before payment. if so permitted by the Articles of Association of the company. The company would also stand to benefit as whenever it requires additional funds for expansion. 2009 also stipulates that the board of directors of a company may declare interim dividend during any financial year out of the profits of the company for part of the year. after the 30th day. it becomes a statutory default. the Board should carefully assess and examine the financial statements and should ensure that the company has adequate profits. Further. during the period for which such default continues. then any person who is a director of the company at the time when default is made. However. But. shall not be eligible to the appointed a director of any other public company for a period of 5 years. the Board of Directors have got power to rescind the payment of dividend only upto the 29 th day of its declaration and not thereafter. a company need not pay dividend within 30 days from the date of declaration:a) a) Where dividend could not be paid by reason of the operation of any law. c) c) Where there exist a dispute regarding the right to receive the dividend. d) d) Where dividend is lawfully adjusted by the company against any sum due to its from the shareholder. When dividend need not be paid In the following cases. Disqualification for directors:As per Section 274 (1)(g) of the Companies Act. Thus. the Directors can declare an interim dividend between two Annual General Meetings. Dividends can be declared only by a resolution of the shareholders in accordance with the Directors‟ recommendation at a general meeting. after all a company can declare and pay dividend only if it makes profit. The penalty prescribed under the Act is that the directors shall be punishable with simple imprisonment of three years along with a fine of Rs. stipulates penalty for failure to distribute dividend to the shareholders within 30 days of its declaration. if a public company fails to pay dividend and such failure continues for one year or more. the shareholders do not get any vested right under a Directors‟ resolution declaring an interim dividend. e) e) Where the non-payment of dividend is not due to any default of the company. It is because. rights shares etc. declaring bonus shares.1000 for every day during which such default continues and the company shall be liable to pay simple interest at the rate of 18% p. the offence is also not compoundable under Section 621A of the Companies Act. The shareholders also enjoy additional benefit since the dividend which they receive is tax free and need not pay any tax on dividend and the company would be liable to . but since dividend is paid in cash it is considered one of the best reward a company can do to its shareholders for enhancing their wealth. The shareholders can be rewarded by other means i. Further.e. b) b) Where a shareholder has given directions to the company regarding payment of dividend and those directions cannot be complied with.a.The declaration of an interim dividend does not create a debt against the company.
pay Dividend Distribution Tax. . a consistent dividend paying company is considered to be a good investment option to the investors. Thus.
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