DECLARATION AND PAYMENT OF DIVIDEND

Section 123
1. The dividends of a company can only be paid-
a) Out of current year profit (after dep); or
Out of Accumulated profits (after dep); or
Out of Both of the above
Provided that in above profits following are not included
 Notional profit
 Unrealised gains
 Revaluation reserve
b) Out of money provided by the CG or SG to the company due to any guarantee provided
by the government

Provided that the company may transfer a percentage of profit before declaring dividend to
the reserves of the company. (transfer not mandatory)
These reserves are created for any future loss.

Provided further that in inadequacy of funds or loss in the current year, the company can
still declare dividend out of accumulated profits transferred to the free reserve in
accordance to the prescribed rules (rule 3).

RULE 3: DIVIDEND IN CASE OF LOSS/INADEQUECY

The company can declare dividend in case of loss or inadequacy if the company fulfils the following
conditions.

I. The rate of dividend should not be greater than the average rate of dividends declared in the
preceding 3 financial years
Provided that if the company has not declared dividend in any of the preceding 3 years than
this subrule is not applicable.
II. The dividend declared should not be greater than 10% of total paid up share capital and free
reserves.
III. The current year losses should be set off before declaring dividends.
IV. The balance left in reserves after declaring dividends should be more than 15 % of paid-up
share capital.

NOTE- if the company does not transfer the funds in free reserves and distribute dividend
from surplus than the above conditions are not applicable.
Provided also that dividend can be declared only out of free reserves.
Provided also that dividend cannot be distributed until losses and depreciation of the current
year are set off.

2. The depreciation mentioned above should be according to Schedule 2.

3. A company can declare interim dividend in-
 The current financial year; or
 From the period between closure of a financial year end till the happening of an
AGM.
 The company can declare interim dividend -
 Out of surplus
 Out of current year profit
 Out of profit generated till the quarter end preceding the declaration of interim
dividend.

Provided that in case the company incurred loss in the current financial year up to the
end of the quarter preceding the date of declaration, the company can still declare
dividend. Such dividend should not be greater than the average dividend of the company
in the preceding 3 financial years.
(if the company does not transfer the funds in free reserves and distribute dividend from
surplus than the above conditions are not applicable).

4. The company should transfer the amount of dividend into a separate bank account in a
scheduled bank within 5 days from declaration of dividend.
5. The dividend is distributed only to
 the registered shareholders; or
 to his order; or
 to his banker
only in cash.
Dividend cannot be distributed in kind.

Provided that payment of dividend is not compulsory. The company can use this
amount for capitalization of profits and reserves for bonus share or bonus call.

Provided further that cash includes cheque, warrants and any electronic mode of
payment.
6. This section does not apply on a company which does not comply with the provisions of
section 73 & 74 (deposits)

NOTE- This section does not apply to section 8 companies.

EXCLUSION- Subsection 1 and 4 will not apply to such company where 100% paid up capital is
owned by government.

Section 124
1. When the company has declared dividend but the amount is unpaid or unclaimed within 30
days from the date of declaration, then such amount should be transferred within 7 days
from the expiry of 30 days to a separate account in a scheduled bank called the ‘Unclaimed
Dividend Account’.

2. The company within 90 days from making such transfer in the UDA will prepare a statement
showing
 Names
 Addresses
 Unclaimed dividend amount

And post on the website of the company and the website of IEPF.
 3. If the company makes any default in transferring the money in to the UDA, then the
company should also deposit an interest on 12 % p.a. additionally into the account for the
welfare of the shareholders

4. Any person can claim there share of dividend from the UDA.
5. If the amounted dividend remains unpaid or unclaimed for 7 consecutive years, then such
amount including the interest shall be transferred to IEPF. The company shall also transfer
the statement including prescribed details and IEPF will issue a receipt.

6. All the shares on which dividend has not been paid or claimed for 7 consecutive years, such
shares shall be transferred to IEPF along with the prescribed statement of details.
Provided that the claimant can claim the shares and dividend form IEPF.
If the dividend is paid or claimed anytime during the 7 years then the share will not be
transferred.

7. Penalty- continuing default

Company Rs 1,00,000 Rs 500/day max to 10 lakhs

OID Rs 25,000 Rs 200/day max to 2 lakhs

Section 127
When the dividend has not been paid by the company after the declaration of the dividend within 30
days then-

Every director (knowingly) Imprisonment up to 2 years Fine-Minimum 1000/day (no max cap)
Additionally, the company will be liable to pay an 18% for whole of the default period.

Provided that penalty will not be applicable on following cases-

a) Not paid due to operation of any law

b) When the shareholder has given some direction and that directions cannot be compiled
with and has been communicated to them
c) In case of dispute of recipient of dividend
d) When the dividend has been adjusted with any amount due from the shareholder
e) When the company proves that it is not in default.

EXEMPTION- If the dividend declared by a Nidhi Company is <= Rs 100, then distribution of dividend
individually is not required. The company can circulate the declaration in 1 newspaper and display
the same on the notice board of the Nidhi company for at least 3 months.

Section 125

1. IEPF is created by central government.

2. Composition of IEPF-
a) CG by way of grant
b) Donation by institutions and companies
c) From UDA
d) From IEPF under old companies act
e) Interest income received out of investment made from this Fund
f) Amt received u/s 38
 g) Application money received and due for refund
h) Matured deposit
If amount
i) Matured debentures
unclaimed for 7
j) Amt from fractional shares
years or more
k) Redemption amount of preference shares
l) Any interest on h to j
3. Uses of funds-
a) Refund of dividend, deposit, debentures, application money and its interest
b) Investor education
c) For distribution of money on disposal of securities
d) Reimbursement of legal expenses
e) Any other purpose.

Section 126
When the shares, transfer deed are delivered to the company but the transfer has not been
registered by the company,
a) then the amount of dividend should be transferred to the UDA unless authorised by the
transferer to transfer to transferee.
b) Similarly applicable on right issue and bonus issue also.