CHAPTER

DIVIDEND PROUISIONS
12

> Legal Provisions

> Investor Education and Protection Fund
> Interim Dividend

Meaning of Dividend
TAXMANN®
The term 'dividend' is derived from the Latin word 'dividendum' which means
that which is to be divided'. Dividend is that part of the profits of the company
which is distributed amongst its shareholders. It differs from interest in the
sense that it does not arise out of contractual obligations. Dividend implies
two things-()payment out of profits, and () actual release of some assets.
Issue of bonus shares or right shares to the existing members is not considered
as dividend because the former does not involve release of any
assets and the
latter has no relation with the profits of the company. Every trading
has an implied inherent power to- distribute its net earnings or profitscompany
to the
shareholders in the shape of dividends. Power to declare dividends, therefore,
need not expressly be given by the Memorandum or Articles of Association.
Articles may, however, regulate the manner in which the dividends are to be paid.
As per section 2(35) of the Companies Act, dividend includes 'interim
dividend.
Legal Provisions regarding Dividend
1. Decaration of dividend to be out of the Profits
As per section 123, dividend bya company for any
paid or financial year can be
declared only out of:
(a) Profits of the company of that year arrived at after
providing for
depreciation in accordance with the provisions of the Act, or
(b) Profits of the company for any previous financial
year or yeas
after providing for depreciation as per the provisions of the Acu
or

242
 DIVIDEND PROVISIONS
() Out of both, Or
243
() Money provided by the
ment of dividends in Central or State
Government.
: Provision for Depreciation
pursuance ofthe Governments for the pay-
guarantee given that by
Betore any dividendcan be paid out
company is required to of
provide profits of any
Schedule I| the
of
: Unrealised Gains
Companies Act, 2013. depreciation as per the financial
provisions
year,
of the
a

In computing protits any amount

gains on revaluation of assets representing unrealized
and any change in gains,
measurement at fair value
shall be excluded. asset or liabilitynotional
due to
Transfer of Profits to Reserves
company may, before the declaration of any dividend in any
2r transfer such financial
consider
percentage of its profits for that
financial year as it
may appropriate to the reserves of the
1 Declaration of Dividend out of Reserves company.
Acompany can pay dividend out of its 'reserve
funds' created out ofTANMAN
undistributed profits of the company for any previous financial yeartheorANN®
years (arrived at after providing for depreciation as required).
Asper the Companies (Payment and Declaration of Dividend) Rules, 2014,
in the event of inadequacy or absence of profits in any year, a company
may declare dividend out of free reserves subject to the fulflment of the
following conditions, namely:
(a) The rate of dividend declared shall not exceed the average of the
rates at which dividend was declared by it in the three years im
mediately preceding that year:
Provided that this rule shall not apply to a company, which has
preceding financial
not declared any dividend in each of the three
year.
such accumulated profits shall
Tne total amount to bedrawn from paid-up share capital and
not exceed one-tenth of the sum of its
audited financial statement.
free reserves as appearing in the latest
to set off the losses
(c) The amount so drawn shall first be utilised declared before
in which dividend is
incurred in the financial yearequityshares is declared.
any dividend in respect of shall not fall
below
withdrawal
(d) The balance of reserves after such capital as appearing in the
share
fifteen per cent of its paid-up
statement.
latest audited financial
 DIVIDEND PROVISIONS
244

unless carried over previous lossee

(e) No company shall declare dividend year or years are set off
and depreciation not provided in previous
against profitof the company of the current year.
6. Payment of Dividend out of Capital Profits
assets is termed as
Profit arising out of the sale or revaluation of capital
purposes of decla
capital profit. Capital profits may be utilised for the
ration of dividend provided:
(a) these have been realised in cash,
and lia
(b) these remain as profits after revaluation of all the assets
bilities, and
(c) there is nothing in the Articles of Association of the company pro
hibiting their distribution amongst the shareholders in the shape
of cash dividends.!

Revocation of Declared Dividend

Dividend declared with the approval of the shareholders creates a debt due to
TAXMANN®
the shareholders. Generally, dividend declared cannot be revoked except with
the approval of the shareholders in the event:
of the intervening circumstances after the declaration, such as the out
break of a war, massive fire destroying the properties of the company,
imposition of hard taxes, or other causes diminishing the assets of the
company.
where a dividend has been declared illegally or violating the requirements
of the law, the board of directors would be justified in revoking the div
idend.

Entitlement of Dividend
Equity Shareholders
A company can pay dividend only to the shareholders of that company:
() In respect of shares held in electronic form, to those
persons whose
names appear as beneficial owners in the statement(s) furnished by the
Depository(ies) as on the close of the market day prior to book closure
or, in the case of Interim Dividend, on the record date: or
(i) In respect of shares held in physical form, to those shareholders whose
names appear on the company's Register of Members after giving eftect
to all valid share transfers in physical form lodged with the
company

1, A
Ramaiya AGuide to the Companies Act, 17th Ed.2010.
 DIVIDEND PROVISIONS
before the date of book
the record date;
and closure o, in the case of 245

Preferenceshareholders Interim Dividend, on

Preference shares carry a
(a)
withthe terms of the preferent
issue and ithe
al right as to dividend in
shareholders are paid Articles, and
shareholders of the dividend before the dividend is hence
accordance
preference
company.
Preference shares may be
paid to the equity
(b) rears On cumulative cumulative or
preference shares cannon-cumul ativae.laterDividend in ar-
there are profits to justify such be paid in
year where
preference shares, if no dividend payment. In the case of
can
oceive it in future yearS. Atter payingbe the non-cumulative
paid in a year, there is no right
arrears of dividend on
cumulative preference dividend and any
utilized for payment of dividend topreference shares, residual profit may be
equity shareholders. However, where
narticipating preference shares have been issued, the holders thereof also
have the right to participate in such residual profit.

Equity Shares with Differential Rights

Where a company issues equity shares with differential rights as to dividend,
TAXMANNR
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 inproportion to amount paid-up on Shares

Acompany may, if so authorised by its articles, pay dividends in proportion to
the amount paid-up on each share where a larger amount is paid-up on some
shares than on others. (Section 51)

Adjustment of Calls in arrearsagainst Dividend Payable

Institute of Company
Secretarial Standard-3 (SS-3), issued by the Council of the
Secretaries of India provides:
arrears or any other sum due
(a) In the case of listed Companies, calls in against the
of a member may be adjusted
from a member in the capacity such notice, as may be required.
dividend payable to him after giving Articles provide otherwise, any
(b) In the case of other companies, unless the other than as a
member,
in a capacity
other sums due from a member, him.
payable to
may also be adjusted against the dividend

Prohi
A bition
on Payment of Dividend
deposit or part
thereof or any
interest
long
which has failed to repay the sections 73and 74) shall not, so
thercompany
eon within the stipulated time (under
 DIVIDEND PROVISIONS
246

equity Snres. (Section

as such failure continues, declare any dividend on its
123(6)]

Dividend in Abeyance
the dividend to tho
If amember authorises the company in writing to pay
transferee specified in the instrument of transfer lodged with the company, the
of sharee
company should act upon such authorisation. However, in the case
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.

Procedure for Declaration of Dividend

A company which intends to declare and pay dividend should adopt the
following procedures. Further, in case the company's shares are listed on the
Stock Exchanges, additional requirements relating to Listing Agreements are
to be followed.

NNVINXVI 1. Recommendation by Board of Directors

Dividend can be declared only on the recommendation of the Board of
Directors of the Company. The shareholders do not have any power to de
clare any dividend. The Board of Directors after considering and approving
the financial statementsof the company, determines the rate of dividend
to be declared and then recommends the same to the shareholders. For
this purpose, a Board Meeting shall be convened to pass the resolution
for purposes of:
- rate of dividend and the amount of dividend to be paid
- book closure date for dividend
date of annual general meeting
Bank with which the account shall be opened for the remittance
of dividend.
2. Approval by the Shareholders
The dividend recommended by the Board of Directors is declared by a
resolution passed at the Annual General Meeting by the shareholders. The
declaration of dividend should form part of an ordinary business item to
be transacted in the notice of the Annual General Meeting. While approving
the rate of dividend at the Annual General Meeting, the shareholders have
power to declare a lower rate of dividend than what is recommended Dy
the Board but they have no power to increase the amount or the rale
dividend so recommended. Dividend when declared becomes debt agalns
the company.
 bIVIDEND PROVI SIONS
Usually,dividend is
declared at the atannual
which has not declared
247

SOat subsequent general

a dividend an general meeting. But acompany
annual general
company which has meeting, meeting may o
A
mitted to declare declared
dividend for thedividend general
at a
pividend includes
Interim Dividend second meeting is
time in that year. not per-
rthe Companies. Act, 2013,
Aspert
2(35)].Interim dividend can be dideclared
have authority to do so. Further, the
videndincluthedesBoard
by interim dividend [Section
of
Directors they
if
contained in sections 123, provisions
124 and 127 shall on payment of dividend
also. apply to interim
Dividend to be
dividend
deposited in a Separate
Bank Account
must
The conpany deposit the dividend
dividend) within 5 days of its declaration inamount (including interim
the separate
opened for this purpose. The interim dividend will bank account
bank account within 5 days of the Board have to be deposited
Meeting
idend will have to be deposited within 5 days from whereas final diy
the date
General Meeting in which it was approved by the shareholders.of Annual
5 Dividend to be paid by cheque or warrant TAXMANN®
Section 123(5) of the Companies Act, 2013 provides that the dividend
payable in cash may be paid either by cheque or warrant or in any elec
tronic mode to the shareholder entitled to the payment of dividend.
6. Time frame for payment of Dividend
As per section 127 of the Companies Act, 2013, the dividend is to be paid
or the warrants in respect thereof shall be posted within 30 days from
the date of declaration of dividend.
7. Transfer of Unpaid Dividend
dividend has been declared by a
AS per section 124 of the Act, where a the date
company but has not been paid (or claimed) within 30 days from
of the
within 7 days from the expiryremains
Or declaration, the company shall amount of dividend which
period of 30 davs transfer the total
special account to be opened by the company
unpaid or unclaimed to a which is called "Unpaid Dividend
in that behalf with any Scheduled Bank
12% p.a. is payable by the company for
Account". Interest at the rate of
delay in making the above transfer. dividendtothe Investor Education
8. unclaimed
Transfer of unpaid or
and Protection Fund
unpaid or unclaimedfor a period
transferred
Any amount of dividend which remains for payment shall be
of 7 years from the date it became due
 248 DIVIDEND PROVISIONS

by the company to the Investor Education and Protection Fund [Sectio

124(5)]. When making a transfer to the Fund, the company shall furnisk
to the authority appointed by the Central Government, the details a
prescribed in this respect. The said fund shall be utilised for promotion
of investor awareness and protection of the interests of investors.
In case of any default in complying with these provisions, the company
and every officer of the company who is in default shall be punishabla
with the fine as prescribed.

Penalty for failure to Pay Dividends within 30 Days

Where a dividend has been declared by a companybut has not been paid, or the
warrant in respect thereof has not been posted, within 30 days from the date of
the declaration, to any shareholder entitled to the payment of the dividend, every
director of the company knowingly a party to the default, shall be punishable
with simple imprisonment for a term which may extend to 2 years and shall also
be liable to a fine of 1000 for every day during which such default
continues.
The company shall also be liable to pay simple interest at the rate of 18% per
TAXMANN®
annum during the period for which such default continues (Sec. 127).
However, no offence shall be deemed to have been committed in the following
cases:

(1) where a dividend is not legally declared or a declaration of dividend is

legally untenable (Reference Case: Amalgamated Commercial Traders Pvt.
Ltd. v. ACK Krishna swami);
(2) where the dividend could not be paid by reason of
the operation of any
law;
(3) where a shareholder has given directions to the
company regarding the
payment of the dividend and those directions cannot be complied with;
(4) where there is a dispute regarding the right to
receive the dividend;
(5) where the dividend has been lavwfully
any sum due to it from the
adjusted by thecompany against
shareholder: or
(6) where, for any other reason, the failure to pay the
warrant within the period aforesaid was not due todividend or post the
any default on the
part of the company.

Investor Education and Protection Fund

The Central Government has
established a fund called the Investor Educatio
and Protection Fund under section 125. Thefollowing amounts are credited t0
the fund:
 DIVIDEND PROVISIONS
249
amount given by the
Central
(a)thhe
appropriation
forthe
purposes
made by
of the Fund; ParliamentGovernment
by law in
by way of
this behalf forgrants after due
being utilised
to the
donationsgiven Fund by the Central
companles or
any
institution for theGovernment,
other State
purposes of the Governments,
Fund;
amountinthe Unpaid Dividend Account of
the
theFund under section 124(5); companies transferred
to
the general revenue
amount in
the acCount of the Central Government
which had been transferred to that account
mencement of immediately
the Companies (Amendment) before the com-
Act, 1999, and remaining
unpaid or unclaimed on the commencement of this Act;
(e)theamount lying in the Investor Education and Protection Fund under
section 205C of the Companies Act, 1956;
0theinterest or other income received out of investments made from the
Fund;
the amount received through disposal of securities allotted in the fictitious
names under section 38;
() the application money received by companies for allotment of anyTAXMANNB
secu
rities and due for refund which has remained unclaimed for a period of
seven years from the date it became due for payment;
deben
() the amount remaining unpaid on account of matured deposits or
tures with companies and interest accrued on that:
) redemption amount of preference shares remaining
unpaid or unclaimed
for 7 or more years;
(k) any other amount as be prescribed.
Uilisation of Fund
investors, awareness and protection
Ine Fund can be utilised for promotion of
of investors in accordance with the prescribed rules. As per
einterests utilized tor:
shall be
l0n 125(3)of the Companies Act. the Fund
respect of unclaimed dividends, matured deposits, matured
1) ne refund in thereon;
application money due for refund and interest
debentures, the protection;
(b) promotion of investors' education,awareness and eligible and identifiable
(c) amount among debenture-holders or
distribution of any disgorged shareholders,
applicants for shares or debentures, to wrong actions by any person,
due
depositors who have suffered losses the Court which had ordered
by
in
accordance with the orders made
disgorgement;
 250 DIVIDEND PROVISIONS

(d) reimbursement of legal expenses incurred in pursuing class action suits

under sections 37 and 245 by members, debenture-holders or depositors
as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto.
Interim Dividend
Dividend declared by the board of directors of a company between two annual
general meetings is called interim dividend. As per section 2(35) of theCompanies
Act dividend includes interim dividend also. The Board of directors has the
power to declare interim dividend.
The board may from time to time pav to the members such interim dividends as
appear to it to be justified by the profits of the company. An interim dividend is
only a payment on account of the whole dividend for the year. If the working of
the whole year results in loss, payment of interim dividend willamount tothe
payment of dividend out of capital and the directors willbe personally liable to
make good to the company the amount of interim dividend improperly disbursed.
It isprudent
TAXMANN® to prepare interim financial statements to ascertain the amount of
profits earned and to see whether the profits for the accounting period up-to
date sufficiently justify the payment of an interim dividend. It is essential for a
company to provide depreciation for the whole of the year and not proportionately
for any fraction of the year before declaring interim dividend. This is because
provision for depreciation is a condition precedent for declaration or payment of
any dividend. While final dividend may be paid out of free reserves, no interim
dividend should be paid by transfers out of any reserves. The Board should take
into account the specified percentage required to be transferred to reserves
before declaration of interim dividend.

As per section 123(3) of the Companies Act, 2013, the Board of Directors of
acompany may declare interim dividend during any financial year out of the
surplus in the profit and loss account and out of profits of the financial year in
which such interim dividend is. sought to be declared:
Provided that in case the company has incurred loss during the current financial
year up to the end of the quarter immediately preceding the date of declaration
of interim dividend, such interim dividend shall not be declared at a
rate higher
than the average dividends declared by the company during the immediately
preceding three financial years.
Theamount of interim dividend is required to be deposited in a
separate bank
account within five days from the date of declaration of such dividend [section
123(4)1. The amount of interim dividend so deposited shall be used for payment
of interim dividend. The provisions of the Act applicable to dividend are also
applicable to interim dividend.
mooduuetodedae Interim Dividend
Aoblin

) Mri,

) lonl.
duinge ntein dividoyd

date of dedaratio) of dividend,

i
Mike the payment oriue dividend Warrant yithin 0 da frn*e
date ofledwatioD,
wansler the unpaidorunelaimeddividendtothe'Unpaid Dividendksnt
within 7days oft e expiry of period of 30 day, fros the delarata.
Revocation of IInterim dividend Interim dividend is to he paid witthin 0
he provisions applicable to dividend applytninteimn
daysof( decdration. Snee declared. Thus,
liletd also, the interimdividend becomes debt due once it is where dividend
circumstances
interin dividend can be revoked under the same
canbe revoked.

IMPORTANT CASES
TradersPve. Dividend Paynent
" AmalgamatedCommercial
Ltd. v. ACK Krishna Swami
Lake Dividend Payment out of Capital Protits
loster v. The New Trinidud
Asphalt Co. Ltd.

REVIEW GUESTIONS regarding payment

dividend. What are the rules
1. Explain the meaning of
of dividends? of dividends on
regarding payment against the
2. What are the provisions of the law adjust calls in arrears
partly paid-up shares? Can a company general meeting
3
dividend payable? declared only at the
annual
(a) Dividend can be
explain thecircum-
Discuss. Ifso
declaredberevoked?
(b) Can a dividend once be done.