Dividends Sec.

205:

The companies which are existent today are the brain child of that person who starts, by his own
investment and works hard to make it big. In this process he is helped by those set of people who
invests in that company and who has confidence in him that there money is safe in the hands of
him.

These people who invest in a company are called as Investors. The investor invests his own
capital in this and always expects some kind of gain or profit. He will get some gains when the
company makes profit. His gains are up to an extent on his capital invested. It means his profits
are divided as per his investment. And if the company declares some extra profit it is called as
Dividends.

As per Section 2 (14A) (inserted by the Companies Amendment Act, 2000) dividend includes
interim dividend.

The expression “dividend” has one meaning. This is applied mainly to a going concern; it
ordinarily means the portion of the profits of the company which is allocated to the holders of the
company.

Dividends mean the share of profit that falls to the share of each individual member of a
company. It is that portion of the corporate profits which has been set aside and “declared by the
company as liable to be distributed among the shareholders”. Almost all commercial corporate
enterprises are undertaken with the view of making profits for their members. The profits of a
company when distributed among its share holders are called Dividends. No special authority
either in the Memorandum or in articles is necessary to enable a company to pay dividends. The
power is implied.

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The payment of dividends is bound by two fundamental principles. The first is that dividends
must never be paid out of capital. It is supplemented by the second that dividends shall be paid
only out of profits. The dividends are to be paid out of three sources:

1. Profits of the company for the year for which dividends are to be paid;
2. Undistributed profits of the previous financial years;
3. Moneys provided by the central or a state government for the payment of dividends in
pursuance of a guarantee by the government concerned.

Dividends to be paid out of profits S. 205:

The principle of profits is explained in the case of Re. Spanish Prospecting Co. Ltd, (1911) ch.92
by FLETCHER MOULTON CJ. He said that “Profit implies a comparison between the states of
business at two specific dates usually separated by an interval of a year. The fundamental
meaning is the amount of gain made by the business during the year. This can only be
ascertained by a comparison of the assets of the business at the two dates… if the total assets of
the business at the two dates be compared, the increase which they show at the later date as
compared, the increase which they show at the later date as compared with the earlier date
represents in strictness, the profits of the business during the period in question”.

In simple sense profit is maintaining the capital intact and taking out the surplus of current year’s
receipts out of expenses. The profits of a business mean the net proceeds of the concern after
deducting the necessary outgoings without which those proceeds could not be earned1.

1
Bharat Insurance Co, Ltd. v. CIT (1931) 1 Com cases 192, 196 (Lah).

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Profits available for distribution:

The term “profits available for distribution” and “profits available for dividend” have different
meanings and should not be confused. The first term means the maximum profits which the law
allows a company to distribute to the shareholders by way of dividends. The latter term implies
the profits which the directors consider, should be distributed after making provisions for past
losses, for reserve or for other purposes.

If the directors on some fair basis taken a decision as to the proportion of profits which should be
distributed by way of dividend, the courts do not interfere in these matters even if there are larger
profits and more dividends could have been paid 2. The courts do not compel directors to declare
a dividend against their judgement.3

In PALMERS Company Law 23rd edition, Para 76.03 at page 991 it is stated that “dividend could
be paid out of divisible profits though they might not be profits in the business sense”. It is
therefore legally permissible for the company to distribute dividend from proceeds of the sale of
its assets. There is no prohibition against Profits from the sale of assets being treated as
distributable profits and dividends being declared out of the same, but the prudence of such a
course of action is another matter. Cf Palmer 25th Edn. 1992 Vol.2 paras 9.802 and 9.803

Share holders Right to Dividend:

Right to claim dividend will only arise after a dividend is declared by the company in general
meeting. Unless and until it is so declared, no shareholder has any claim against the company in
respect of it. This observation of the Bombay High Court in Bacha F. Guzdar v. CIT (1952) was
improved upon by the Supreme Court saying that the right to participation in the profits exists
independently of any declaration by the company with the only difference that the enjoyment of
profits is postponed until dividends are declared. The usual practice is that the Board of Directors
to recommend, and the annual general meeting to declare the dividend, and unless the articles
contain a provision like Regulation 85 of Table A of first schedule, the annual general meeting
will have the power, subject to the provisions of the Act, to determine the amount of dividend to
be distributed.

2
Stewart v. Sashalite Ltd (1936) 2 All ER 1481.
3
Lambert v. Nuechatel Asphalte Co (1882) 51 LJ Ch 882.

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Declaration of Dividend:

Apart from paying interim dividends which the Board of Directors may do at their discretion
where the company’s profits warrant such payment before the holding of the annual general
meeting, a final dividend for any financial year can, as a rule, be declared and paid only when the
balance-sheet and profit and loss account are presented to the shareholders at the annual general
meeting, and the shareholders after a consideration of the amount recommended by the directors
approve the same or such lesser amount as may appear to them as reasonable and proper. It is
thus the whole prerogative of the Board to recommend the amount of dividend to be distributed.
Maharani Lalita Rajya Lakshmi v. Indian Motor Co. Ltd (1962) 32 Com Cases 207.

The persons entitled to dividends are prima facie the person registered as shareholder in the
register of members. Great complications would arise if it were held by reason of private
arrangement between the vendor and vendee of certain shares, a company is liable to apportion
dividend between the two. It is for this reason the most companies provide in their articles that
the company would recognize only the claim of the person whose name us there on the register.
Scientific & Chemical Works Ltd v. Jotiprasad (1945) 15 Com Cases 45, 46.

A dividend when proposed does not become a debt but only becomes a debt when declared and a
share holder is entitled to sue at law for recovery of the same after the expiry of the period
prescribed by Section. 207.

Even if the company declares a dividend it does not become the trustee of the shareholders.
Hanuman Prasad Gupta v. Hiralal (1966) 2 Comp LJ 136 (All).

Declaration of Dividend in winding up:

Dividend means a payment made by a company out of profits to its shareholders while it is a
going concern. The dividends which are paid in winding up are in fact a distribution of the
company’s assets and not profits even in those assets include some profits earned by the
liquidator during the winding up. CIT v. Murugappan (1970) 40 Com cases 994, 996.(SC).

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Sections 205 & 217 (Report of Board of directors) are not applicable to companies during
winding up. They do not, therefore restrict or affect the right of preference share-holders to
payment of arrears of dividend during winding up. Globe Motors ltd v. Globe United Engg &
Foundry Com cases 429 (Delhi).

Note, however that when a company goes into liquidation a declared dividend, though remaining
due as an arrear or debt will not with other debts due to creditors, but will only be taken into
account for adjustment of the rights of shareholders as contributories. Sec 421 (1) (g)

Though normally a dividend, when declared, is only an ordinary unsecured debt of the company
to its shareholders, where a special fund for the satisfaction of dividend claims of shareholders is
established, it would appear that, if the company becomes insolvent the shareholders will have
preferential claim over the fund amount. There are some American decisions to this affect.

Declaration of Interim Dividend:

Interim Dividend, if declared, is payable out of estimated profit for the period for which Interim
Dividend is to be declared, after taking into account depreciation for the full year and arrears of
depreciation, Dividend at the contracted rate on preference shares, if any, appropriations and
transfers to statutory reserves, taxation, and the provisions of the Companies (Transfer of Profits
to Reserves) Rules, 1975.

Interim Dividend may be declared after the Board has considered the interim financial
statements for the period for which Interim Dividend is to be declared and is satisfied that the
financial position of the company justifies and can support such declaration. The interim
financial statements so prepared should take into account depreciation for the full year, taxation
including deferred tax and other anticipated losses for the year.

The interim financial statements should also take into account the Dividend that would have to
be paid at the contracted rate on preference shares.

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 The Board should also take into account the specified percentage required to be transferred
to reserves before declaration of Interim Dividend. Such transfer should be affected while
preparing final accounts for the year.

Where a company has issued equity shares with differential rights as to Dividend, Interim
Dividend may, at the option of the Board, be declared on all or any one or more of the classes of
such shares in accordance with the terms of issue.

In case Interim Dividend is declared on only one class of equity shares, the Directors should
ensure that the profit as shown in the interim financial statements is adequate to meet the
Dividend that would have to be paid on the other classes of equity shares apart from the
depreciation for the full year and arrears of depreciation, taxation including deferred tax, transfer
to reserves, Dividend on preference shares issued, if any, and other anticipated losses for the
year.

Where a company has issued equity shares with differential rights as to voting, no
differentiation should be made in the declaration of Interim Dividend on equity shares.

Dividend on preference shares:

Preference Shareholders should be paid Dividend before Dividend is paid to the equity
Shareholders of the company. Preference shares carry a preferential right as to Dividend in
accordance with the terms of issue and the Articles. However, this right is subject to the
availability of distributable profits. If there are two or more classes of preference shares, the
holders of the class which has priority are entitled to their preference Dividend before any
Dividend is paid in respect of the other class, if the terms of issue so provide. If the terms of
issue are silent, Dividend should be distributed on pro-rata basis.

In the case of Interim Dividend, while Preference Shareholders need not necessarily be paid
Dividend before Interim Dividend is paid to equity shareholders, the Board should set aside such
sum as would be necessary to pay Dividend to Preference Shareholders at the contracted rate.

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 Arrears of Dividend on cumulative preference shares should be paid before payment of any
Dividend on equity shares.

Preference shares may be cumulative or non-cumulative. Dividend in arrears on cumulative

preference shares can be paid in a later year where there are profits to justify such payment.

In the case of non-cumulative preference shares, if no Dividend can be paid in a year, there is no
right to receive it in future years.

After paying the preference Dividend and any arrears of Dividend on cumulative preference
shares, residual profit may be utilized for payment of Dividend to equity Shareholders. However,
where participating preference shares have been issued, the holders thereof also have the right to
participate in such residual profit. Dividend on equity shares should be paid in accordance with
the rights of the respective classes, if any, of such shares.

Where a company issues equity shares with differential rights as to Dividend, the terms of
issue of such shares will govern the rights of each such class of holders as to receipt of Dividend.

Payment of Dividend in kind:

Under Sub-section (3) dividend can be paid only in cash and not in kind.

Articles of a company may provide that any meeting of the company declaring a dividend may
resolve that the dividend be paid wholly or partly by the distribution of specific assets such as
paid-up shares or debentures in that or any other company 4. It may also be provided that any
undivided profits available for dividend may be capitalized and distributed among the share
holders on the footing that they become entitled to the profits as capital, and that any undivided
profits distributed may be applied in paying up in full unissued shares of debentures of the
company or towards payment of the amount unpaid on any issued shares or debentures 5. In the
absence of such express authority dividends may not be paid otherwise than in cash and although
profits may to extent some capitalized without any such provisions in the articles, the question
which comes here is whether it should be regarded as capital or income.

Dividend Fund:
4
Pool v. Guardian Investments Trust Co, (1922) 1 KB 347.
5
IRC v. Fishers executors (1926) Ac 395 (HL).

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As dividends can be declared out of surplus earnings, there must be an exact method of
determining whether surplus earnings for that purpose actually exist 6. But the act provides no
guidance. “There is nothing at all in the Act how dividends are to be paid, or how profits are to
be reckoned; all that is left and very judiciously and properly left, to the commercial world.

This was reflected in the case of Hariprasad v. Amalgamated Commercial Traders by

Ramchandra Ayyar CJ of Madras high court:

“Section 205 of the act provides that dividend shall be paid only out of profits of the company. It
does not say further how these profits have to be ascertained. Profits of a year under the
mercantile system of accounting only means the excess of receipts for the year over expenses
and outgoings during the same year. It is not necessary that such excess should be in the form of
cash in the till of the company. It will be open to a company to declare a dividend on the basis of
its accounts…. where it is based on the estimated profit, which had not actually come in the form
of cash to the company; it will be open to it to pay such dividends from out of other cash in their
hands or perhaps even to borrow and pay them off. That will not amount to paying dividend out
of capital”.

Separate Bank Account for Dividend:

Three sub- sections have been added to sub section (1) of section 205 by the Amendment Act of
2000. Sub-Section (1-A) provides that the board of directors may declare an interim dividend.
The amount of dividend including interim dividend has to be deposited in a separate bank
account within 5 days from the date of declaration of such dividend. Sub-section (1-B) provides
that the amount of dividend including interim dividend so deposited shall be used for payment of
interim dividend. Sub- section (3) declares that the provisions contained in Sections 205, 205-A,
205-C 206, 206-A and 207 shall apply to the extent possible.

Payment of Dividend:

6
SHAH J in CIT v. Standard Vacuum oil (1966) 1 Comp LJ 187: AIR 1966 SC 1393, 1396.

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Dividend should be paid within thirty days of declaration. The amount of Dividend after
deducting tax at source, if applicable, should be deposited in a separate bank account within five
days from the date of declaration of Dividend. Dividend should be paid out of such bank account
within thirty days of declaration. Dividend should be paid in cash, not in kind. Dividend payable
in cash may be paid by cheque or warrant or demand draft or pay order or may be credited to the
bank account of the Member in terms of a mandate given by the Member. The cheque or warrant
or demand draft or pay order should be sent to the registered address of the Member and, in the
case of joint holders, to the registered address of the person named first in the register of
members or to such person or to such address as the Member or the joint holders have directed,
in writing.

Initial validity of the Dividend warrant should be for three months. A cheque or warrant for
payment of Dividend should be valid for three months from the date thereof and, where such
cheque or warrant remains unpaid after this initial period of validity, it should be revalidated for
not more than three months or a fresh instrument should be issued which should have a validity
of three months. The company should revalidate the Dividend warrant or issue a fresh Dividend
warrant or a demand draft or pay order in lieu thereof, within fifteen days of the receipt of a
request for revalidation. Particulars of every revalidated Dividend warrant should be entered in a
Register of Revalidated Dividend Warrant indicating the name of the person to whom the
Dividend warrant is issued, the number and amount of the Dividend warrant and the date of
revalidation.

A duplicate Dividend warrant should be issued only after the expiry of the validity of the
Dividend warrant and the reconciliation of the paid amounts thereof. In case the original
instrument is not tendered to the company, a duplicate warrant should be issued only after
obtaining requisite indemnity/ declaration from the Shareholder.

In the case of defaced, torn or decrepit Dividend warrants, a duplicate warrant may be issued
before the expiry of the validity period of the Dividend warrant on surrender to the company of
such defaced, torn or decrepit warrant. Particulars of every Dividend warrant issued as aforesaid

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should be entered in a Register of Duplicate Dividend Warrants, indicating the name of the
person to whom the Dividend warrant is issued, the number and amount of the Dividend warrant
in lieu of which the duplicate warrant is issued and the date of issue of such duplicate warrant.

The Dividend warrant must be accompanied by a statement in writing showing the amount of
Dividend paid and the amount of tax deducted at source, if any. Where a tax on distribution of
Dividend is not levied on the company but income tax is required to be deducted at source from
Dividend payable to Members, a tax deduction certificate, in the prescribed form, should be
issued to the Members to whom Dividend has been paid after deduction of income tax at source
at the applicable rates.

Even where payment of Dividend is made by electronic mode directly to the credit of the bank
account of the Member, the company should send to the Member a statement in writing showing
the amount of Dividend paid and the amount of tax deducted at source, if any.

Dividend should be paid proportionately on the paid-up value of shares. Unless the Articles
provide otherwise, Dividend should be paid in proportion to the amount paid-up on the shares
and for the portion of the period of the financial year in respect of which it is paid. If any shares
are issued on terms providing that they shall rank for Dividend as from a particular date,
Dividend on such shares should be paid accordingly.

Calls in arrears and any other sum due from a Member may be adjusted against Dividend
payable to the Member. In the case of listed companies, calls in arrears or any other sum due
from a Member in the capacity of a Member may be adjusted against the Dividend payable to
him after giving such notice, as may be required. In the case of other companies, unless the
Articles provide otherwise, any other sums due from a Member, in a capacity other than as a
Member, may also be adjusted against the Dividend payable to him.

Dividend in Abeyance S. 206 A:

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The amount of Dividend in respect of shares for which an instrument of transfer has been
tendered to the company but which have not been registered for any valid reason should be
transferred to Unpaid Dividend Account.

If a Member authorizes the company in writing to pay the Dividend to the transferee specified in
the instrument of transfer, the company should act upon such authorization.

However, in the case of shares which have not been transferred because the ownership thereof is
in dispute, or where attachment/prohibitory orders have been passed by a court or statutory
authority, Dividend should be held in abeyance by transferring to the Unpaid Dividend Account.

Unpaid Dividend S. 205 A:

The amount of Dividend which remains unpaid or unclaimed after thirty days from the date of
declaration should be transferred to a special Dividend account, to be called ‘Unpaid Dividend
Account’ of the company within seven days from the date of expiry of the thirty days period
provided for payment of Dividend.

The company should maintain the details of unpaid or unclaimed Dividend and reconcile the
amounts thereof with the concerned bankers, periodically. Any amount in the Unpaid Dividend
Account of the company which remains unclaimed and unpaid for a period of seven years from
the date of transfer of such amount to the Unpaid Dividend Account should be transferred to the
Investor Education and Protection Fund.

Any transfer to the Investor Education and Protection Fund should be made within thirty days of
the expiry of seven years from the date of transfer to the Unpaid/Unclaimed

Unpaid Dividend Account to be transferred to a Special Account S. 205 A:

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Before transferring any amount to the Investor Education and Protection Fund, the company
should give individual intimation to the Members in respect of whose unclaimed Dividend the
amount is being transferred, at least six months before the due date of such transfer.

After the expiry of the period of seven years from the date from which unclaimed and unpaid
Dividends were transferred to the Unpaid Dividend Account, no claims shall lie against the Fund
or the company in respect of any such amounts. Hence, the company should intimate the
concerned Members individually of the amount of Dividend remaining unclaimed which is liable
to be transferred to the Investor Education and Protection Fund and advising the Member to
claim such amount of Dividend from the company before such transfer.

Any interest earned on the Unpaid Dividend Account should be transferred to the Investor
Education and Protection Fund.

If the Unpaid Dividend Account is kept as a fixed deposit or in any account on which interest is
earned, the interest earned should be transferred to the Investor Education and Protection Fund.

Preservation of Dividend Warrants and Dividend Registers:

Dividend warrants returned by the Bank, after payment thereof, and the Dividend Registers
should be preserved for a period of eight years. Where the company has given an undertaking to
the Bank for preservation or safe keeping of paid Dividend warrants for a specified period, the
warrants should be preserved for such period or eight years from the date of the warrant,
whichever is longer.

Disclosure:

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 The Balance Sheet of the company should disclose under the head ‘current liabilities and
provisions’, the amount lying in the Unpaid Dividend Account together with interest accrued
thereon, if any.

The Annual Report of the company should disclose the total amount lying in the Unpaid
Dividend Account of the company in respect of the last seven years. The amount of Dividend, if
any, transferred by the company to the Investor Education and Protection Fund during the year
should also be disclosed.

The amounts lying in the Unpaid Dividend Account and the amounts transferred to the Investor
Education and Protection Fund should be disclosed in the Directors’ Report.

The Annual Return of the company should mention that the amount of Dividend remaining
unpaid or unclaimed for a period of seven years from the date such Dividend became payable by
the company, together with interest accrued thereon, if any, has been credited to the Investor
Education and Protection Fund.

Circumstances under which Dividend need not be paid:

 Where it could not be paid because of operation of any law; 

 Where a shareholder has given direction to the company regarding payment of dividend
and those directions could not be complied with; 
 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 from
the shareholders;
 Where the dividend could not be paid not due to any default on part of the company.

Investor Education and Protection Fund S. 205 C:

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The following amounts shall be credited to the Fund

(a) Amounts in the unpaid dividend accounts of companies

(b) The application moneys received by companies for allotment of any securities and due for
refund

(c) Matured deposits with companies

(d) Matured debentures with companies

(e) The interest accrued on the amounts referred to in (a) to (d) as above

(f) grants and donations given to the Fund by the Central Government, State Governments,
companies or any other institutions for the purposes of the Fund

(g) The interest or other income received out of the investments made from the Fund

No such amounts referred to in clauses (a) to (d) shall form part of the Fund unless such amounts
have remained unclaimed and unpaid for a period of seven years from the date they became due
for payment.

The Fund shall be utilized for promotion of investors’ awareness and protection of the interests
of investors in accordance with such rules as may be prescribed.

The Central Government shall, by notification in the Official Gazette, specify an authority or
committee, with such members as the Central Government may appoint, to administer the Fund,
and maintain separate accounts and other relevant records in relation to the Fund in such form as
may be prescribed in consultation with the Comptroller and Auditor-General of India.

It shall be competent for the authority or committee appointed as above to spend moneys out of
the Fund for carrying out the objects for which the Fund has been established

Penalty S. 207:

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If 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
who is entitled for the payment of the dividend then every director of the company if he
knowingly a party to the default then he will be punishable with a simple imprisonment for a
term extend to three years and also shall be liable to a fine of 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 shall default continues.

Dividend: What does it mean to investor?

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Dividend is an important fruit that you get from the tree called investments. Several aspects of
this concept need to be understood so that you not only get your dividend dues on time but also
understand its importance in investment strategies. Dividends are income tax free in the hands of
the recipient and hence are an important component of returns that you get from your
investments.

The profit earned by the Company (after payment of Corporate Income-tax) can either be
retained in the Company for its future financial needs or distributed to shareholders in the form
of dividend. According to the Companies Act, 1956, after satisfying the rights of preference
shares, the equity shares shall be entitled to share in the remaining amount of distributable profits
of the company. Companies have to currently pay a tax of 12.5% on the amount that it distributes
as dividend.

Surcharge and education cess are charged separately. Therefore the shareholder does not pay any
tax. Sometimes when a company announces dividends, some investors find it difficult to
understand the amount of money that will be received as dividends. Dividend is always
calculated on the face value of the share. In the case of stock certificates, face value is the par
value of the share. If company declares 300% dividend it means company is going to pay 300
times the face value of one equity shares.

For example, if TCS declares to distribute 300% as dividend, share holder will get Rs.3 per share
for every share, as face value of the TCS share is Rs.1.Nowadays, since the face values of
companies are often different, companies only declare a dividend as Rupees per share. In that
case one gets that amount per equity share irrespective of its face value or market value. So it is
important to note whether the sum declared is Rupees per share or percentage of face value. A
declaration of Rs. 3 per Re 1 per share and Rs.3 per Rs 10 face value share is quite different!

Other Important point’s investors must know regarding There is no legal binding on companies
to dividends. Declare and distribute dividends. Decisions regarding the amount and frequency of

16
dividends are solely at the discretion of the board of directors. A shareholder does not have a say
in the decision making process of declaring dividend, amount of dividend, etc. The dividend on
equity shares is not fixed and may vary from year to year depending on the amount of profits
available. Generally, dividends are paid annually. The dividend paid so is known as final
dividend.

Final dividend is distributed to share holders after the annual general meeting. However, there
are companies which announce interim dividend with announcement of its interim results.
During 2004-05 Indian companies distributed Rs. 33,583 crores as dividend to its share holders.
Amount so distributed for 2005-06 increased by 18.5% to Rs. 39,785 crores. In India, most
public sector undertakings, banks and FMCG companies distribute generous dividend to its share
holders. Over the last three years, all information technology players have also been generous in
paying dividends. Reliance Industries is the largest private sector company in India in terms of
total amount of dividend payment while in PSUs ONGC is the largest company in dividend
payments.

The day on which the Board of Director’s announces their intention to pay a dividend is known
as Declaration Date. On this day, the company creates a liability on its books; it now owes the
money to the shareholders. On the declaration date, the Board will also announce a date of record
and a payment date. Shareholders who are beneficial owners of the shares on a particular date are
only entitled to dividends. This is known as record date. The list of beneficial owners is given by
the Depositories to the Registrar of shares of the company in case the shares are dematerialized.

Shareholders who are not registered as of this date will not receive the dividend. The "ex
dividend" date is set by the exchange where the stock is traded, several days before the date of
record, so that all trades made on previous dates can be properly settled and the shareholder list
on the date of record will accurately reflect the current owners. Purchasers buying before the ex-
dividend date will receive the dividend. The stock is said to trade "cum dividend" (meaning
"with dividend") on these dates.

BIBILOGRAPHY:

17
1. Ramaiah- Company Law,
2. Avatar singh- Company Law- Eastern Law book,
3. Www. Nucleusindia.com,
4. www.asitmehtahinvestments.com

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