Legal and Procedural

Aspects for Payment

of Dividend
1. Source of declaring dividend

Dividend can be paid out of the following :

1 Out of current profit 2 Out of past profit 3 Out of money by Government

Dividend can be declared Dividend can be paid from Dividend can be paid out of
out of current profit after undistributed profits of the the money provided by
providing depriciation past financial year after central government
providing depreciation
 No dividend can be declared or paid by a company unless

1. Depreciation has been provided for in respect of the current financial year.

2. Arrears of depreciation in respect of the previous years falling after the

commencement of the companies (Amendment) Act, 1960 have been set off
against profits of the company.

3. Losses, if any incurred by the company in previous years falling after 28th
December, 1960) have been written off against profits of the company for
which dividend is proposed to bedeclared.
2. Transfer to Reserves
The companies (Transfer of Profits to Reserves) Rules, 1975 require a company providing more than 10 % dividend
to transfer a certain percentage of the current year's profits to reserves as specified below:

• Where the dividend proposed exceeds 10 % but does not exceed 12.5 % of the paid up
capital, the amount to be transferred to the reserves shall not be less than 2.5 %
• Where the dividend proposed exceeds 12.5 % but does not exceed 15% of the paid up
capital, the amount to be transferred to reserves shall not be less than 5%
• Where the dividend proposed exceeds 15 % but does not exceed 20% of the paid up
capital, the amount to be transferred to reserves shall not be less than 7.5%
• Where the proposed dividend exceeds 20 % of the paid up capital, the amount to be
transferred to reserves shall not be less than 10 % of the current year's profits.
 The following table represents all the imperative legal provisions in relation to dividends:

Sec. of the Companies Act, 2013 Matters Dealt with

The section states about payment of dividend in proportion with the amount of
Section 51 each share.

The companies have the authority to close its register of Members, Debenture
Section 91 holder or any other security holders.

Section 123 (a) The section states the announcement and the declaration of dividends.

(b)(5) The dividend shall only be paid to the person himself, or his or her bank, or
his or her order.

Section 124 The section states the account to be maintained for Unpaid Dividend.

The section lays emphasis on the rights of shareholders to dividend, bonus

Section 126 shares, etc.

Section 127 The section explains the punishment in case of non-payment of dividend.
Legal and procedural aspects of payment of dividend

1 Source of dividend

Out of current year profit or past profit or

money paid by government
Record Date 2
The date on which a stockholder must own
shares to be entitled to the dividend.
3 Ex-Dividend Date

The date on which a stock trades without

Payment Date 4 the dividend.

The date on which the dividend amount is

paid to the shareholders on record.
Types of Dividends

Cash Dividend Stock Dividend

The payment of cash to shareholders, funded by the A distribution of additional shares of stock. It does not
company's profits or cash reserves. provide immediate cash payouts.