Every Company requires funds to operate its business successfully. Shareholders are an integral part of every company where they raise funds and in the process of same become its stakeholders. They have a control over the share of profits in proportion to the money they invest. This share of profit by shareholders is termed as dividend.
The word “Dividend” has origin from the Latin word “Dividendum”[i] Dividend refers to that portion of profit that is paid to the shareholders of the company. It is often paid in one financial year to the shareholders after the final accounts of profit are ready and the same has to be distributed. Section 2 of the Act defines that ‘includes any interim dividend’[ii].
The rights of shareholders on profits as dividends only arise after the declaration of dividends by the company done generally on the approval of board of directors[iii]. The amount paid of the dividend is in proportion to the amount paid on the share by the shareholder as provided in section 51 of the Act[iv].
There are two types of dividends: Interim dividends and Final dividends.
The Act defines Dividend in terms of interim dividends[v] which refer to the dividend declared by company’s board during any time of the year before official closing of financial year and calling of Annual General Meeting. According to the Act the company can declare interim dividend out of profits accumulated of current or previous financial years.[vi] The provisions of the Act which are generally for final dividend are applicable to interim dividends also.
Features of interim dividend
- It is declared by board of directors in one financial year out of surplus generated in profit and loss accounts and out of profits in which interim dividend is bound to be declared. [vii] It has been held in Judgments that mere declaration by the directors in a general meeting does not obligate them to pay dividends as the decision can be rescinded. [viii]
- If the company registers loss before the stipulated declaration of dividends, it has to be declared at an average rate calculated on the basis of dividends declared in previous 3 financial years.
- It is deposited in a scheduled bank account within five days of the declaration. [ix]The same is irrespective of intervening holidays.
The dividends declared by the company after closing of the financial year and approval of Board of Directors in AGM. The term Dividend used except in the definition in Companies Act, 2013 refers to final dividends only. Majority of the provisions for both Interim and Final are same but there are some differentiated provisions for the Interim dividends in the Act. The liability on default arises only in case of declaration of Final Dividend and not Interim dividend.
Declaration of dividends
Section 123[x] of Companies Act 2013 lays down guidelines for the conditions when the companies are permitted to declare or pay dividends in a financial year:
- Source of dividend: The dividends can be declared out of –
1. It can be paid after providing for depreciation fund out of the profits of the current or previous financial year.
2. It can also be paid out of the money which Central or State Governments provide against a guarantee for the payment of dividend.
- Transfer of reserves: The Company before declaring the dividends has to reserve the required amount of cash to run the affairs of the company. These are the appropriate reserves of the company to manage its affairs.
- Declaration of dividends: If the company decides to declare dividend on the basis of profit accumulated in the previous years, such declaration has to be made on the basis of prescribed rules and the dividend paid has to be from free reserves only. The dividends can be declared only after approval of board of directors generally done in a ‘general meeting’[xi]. There cannot be any declarationof dividend unless the same is approved by Board and by General body of the company.[xii]
- Separate account for dividends: The amount of dividends has to be kept in a separate bank account within 5 days from the date of declaration.
- To be paid only in cash: The dividend has to be paid only in cash (includes payment by cash or other electronic means) and is payable only to the registered shareholder himself or to his banker. The objective of specifying payment in cash is to necessitate that some assets of the company have flown out to the shareholder.[xiii]
- Failure of section 73&74: If a company fails to adhere to provisions in section 73 and 74 which are related to borrowings from public and repayment of deposits, such company cannot declare any dividend as long as failure continues.
Unpaid Dividend Account
Sometimes, there may arise a situation that after declaration of dividend, the dividends remain unpaid or unclaimed and the amount may be unused in the bank. The Act well defines provisions in case such situation arises[xiv]:
- Transfer of unclaimed dividend: When the dividend has been declared by the company but has not been claimed by the shareholder within thirty days, then within 7 days of expiry of period of 30 days (that is within 30-37 days of the declaration), the company has to transfer the unpaid amount to the special account in the bank known as Unpaid Dividend Account. If the company defaults on transferring the amount to unpaid dividend account within specified time period, the company has to pay a set interest on the sum unpaid at 12 %per annum.
- Notification of it on the website: After transferring money to unpaid dividend account, within the period of ninety days, the company is required to prepare a statement containing names of, addresses of (last known) and the amount of dividend to be paid to the shareholder and put the same on its website and on any other website provided by central government for the same. The person claiming the amount transferred has to apply to the company for payment of dividend. If such claim is not paid in required time (generally 7 years), than the company is ‘relieved of the responsibility of holding the shares or reflecting it in its list of shareholders’[xv]
- Transfer of unpaid dividend to Investor Education and Protection Fund: The Act[xvi] provides for a fund which has to be established by central government. If any amount remains unclaimed for more than 7 years has to be transferred to the company under this Investor Education and Protection Fund and the declaration of same has to be made to the authority maintaining the fund. Moreover the authority also has to issue a receipt as evidence of such transfer. But there has to be a condition that the claimant can obtain it back from the fund whenever required by him.
- Note – the fund also includes grants by governments, donations made to the company, matured debentures and various other funds in the requirements of the Act.
- Penalty in case of default: The Company is liable to be penalised with fine extending from 5 lakh to 25 lakh and every particular officer responsible for it is to be punished individually with a fine from one lakh to 5 lakhs.
Right to Dividend
Section 126[xvii] of the Act provides that if the instrument of shares has not been registered with the company, than the dividend against such shares is to be transferred to Unpaid Dividend Account under Section 124 of the Act. Those dividends have to be kept pending until specified by the registered holder of such shares to transfer as specified. ‘The dividend has to be paid by the company in the name of the registered shareholders and it is the registered shareholders alone who claim dividend’[xviii]
Failure to distribute dividends
There arises a penalty if the company fails to comply with the provisions of the Act[xix]:
- After the declaration of dividend the company has to pay it within 30 days from the date of declaration. ‘It becomes a debt against the company and it is deemed to be receivable by the members only in the year at which the members declared the dividend.’[xx]
- If there is default then the directors are liable to be punished with imprisonment which may extend to two years and with fine which won’t be less than Rs. 1000 per day which might continue till the default continues with a simple interest of 18%.
- Exceptions to default: no offence or default would have been committed in case of any of the following:
a. If the dividend could not be paid by reason of operation of law.
b. If the shareholder has given some special directions for payment of dividend which could not be complied and same has been communicated to him.
c. If there is a dispute regarding right to receive dividend and same delays it payment.
d. If the dividend has been adjusted against any due of shareholder that he had to pay to the company.
e. If the delay in payment was not due to the fault of the company.
Procedure of Declaration and Payment of Dividend
There has to be a well-defined procedure to be followed by companies to declare and pay dividends which is follows:
- Notification of Meeting of directors: Under section 173 of the Act, the matter related to dividends has to be declared in a meeting of Board of Directors. The same has to be notified to the directors concerned.
- Hold required meetings – All the resolutions related to dividends have to be discussed and passed in board meetings. The resolutions may include approving the annual accounts of loss and profit; deciding the final amount of dividend; determining the date of book closure and approving the notice of AGM as the same has to be discussed and approved in annual general meeting of the company.
- Declaration of dividends– After careful consideration and approval of resolutions, the company has to declare dividends after compulsorily abiding by provisions of section 123. It is not mandatory for companies to declare dividends every year and ‘the board of directors has a discretion to declare dividend…There is no company law…obliges a board of directors to use up all its profits by declaring dividend.[xxi]
- Open bank account – related to dividends a separate bank account has to be opened for making dividend payment and credit the total amount payable within five days of declaration.
- Payment of dividend– The dividend has to be paid to the shareholders in cash within 30 days of declaration. The company has to also comply with section 73 and 74 of the Act.
- Processing of unpaid dividend – the company has to transfer the amount left in the dividend account which has not been laimed to the unpaid dividend account under section 124? After 7 years same amount has to be transferred to Investor Education and Protection Fund if not claimed.
Frequently Asked Questions
Who can declare dividend?
All the companies registered under Companies Act 2013 can declare dividend except non-profit organizations registered under Section 8.
Whether it is compulsory to make provision for depreciation before payment of dividend?
As it has been laid down in section 123 of the act, no company can pay dividend without taking out reserves for depreciation of the current year.
Whether in a company, Board’s recommendation related to dividends can be withdrawn before communication to others?
Since the recommendation is only a resolution, which is just a proposal, it can be withdrawn by the board before it is approved to be discussed in AGM.
Whether a Company is required to take approval of shareholders for payment of dividends?
According to this provision of the Act all dividends declared by the Company has to be approved by the shareholders.
Edited by Shikhar Shrivastava
Approved & Published – Sakshi Raje
[i]CS DiveshGoyal, Dividend Under Companies Act, 2013, 4 Sep 2016,https://taxguru.in/company-law/dividend-companies-act-2013.html(last accessed on 26 Jan, 2019)
[ii] Section 2(35), Companies Act, 2013
[iii] Section 173, Companies Act, 2013
[iv] Section 51, Companies Act, 2013
[v]Supra, note 1
[vi]Companies (Declaration and Payment of Dividend) Rules, 2014
[vii] Section 123(3), Companies Act, 2013
[viii]J. Dalmiavs Commissioner Of Income-Tax, New, , AIR 1866, 1964 SCR (7) 579
[ix] Section 123(4), Companies Act, 2013
[x] Section 123, Companies Act, 2013
[xi] Section 102(2) , Companies Act, 2013
[xii]M/S. Nmdc Limited, Hyderabad vs Department Of Income Tax,  ITA No.293/Hyd/13
[xiii]Commissioner Of Income Tax vs Sri M.P. Viswanatha Rao,  AIR 1950 Mad 393, 18 ITR 68 Mad
[xiv] Section 124 , Companies Act, 2013
[xvi] Section 125, Companies Act, 2013
[xvii] Section 126 , Companies Act, 2013
[xviii]CIT v Aatur Holdings Pvt. Ltd. (2008) 146 Comp Cas 152 (Bom)
[xix] Section 127 , Companies Act, 2013
[xx]Tarajan Tea Co. (P) Ltd. v CIT (1994) 13 CLA 75 (Gau
[xxi]Maharani Lalita Rajya Lakshmi v Indian Motor Co. (Hazaribagh) Ltd. (1962) 32 Comp Cas 207