INTRODUCTION

Dividend is the part of net profit which is payable as

return on equity and preference shares. The payment of
dividend is not obligatory on the part of the Company but
once it is declared by the shareholders, it is like a debt to
the Company.
This chapter broadly covers the transfer of profits to
reserves, maximum dividend that can be declared, in case
of inadequacy of profits, maintenance of separate bank
account for distribution of dividend, transfer of Unpaid
Dividend to IEPF.
DIVIDEND
Dividend means a portion of net profit payable to the members of the Company. In other words,
dividend is a return on the paid-up share capital and payable to the members of a company.
Section 2(35) of the Companies Act, 2013: "Dividend includes any interim dividend".
The dividend is the liability to the company after its declaration by the shareholders of the company
On other side, the shareholders have the Right to claim dividend only after a dividend is declared by
the company in general meeting.
Note: Until and unless dividend is declared, the shareholder has no claim against the company.
TYPE OF DIVIDEND
(a) Final dividend: Dividend is said to be a final dividend if it is declared at the annual general
meeting of the company. Final dividend once declared becomes a debt enforceable against
the company. Final Dividend can be declared only if it is recommended by the Board of
Directors of the Company.
Note: Board of Directors must mention about the amount of dividend in the Directors Report
(b) Interim dividend: Dividend is said to be an interim dividend if it is declared by the Board of
Directors between two annual general meetings of the company.
Note: All the provisions relating to the payment of dividend except the declaration of dividend by the
shareholders shall be applicable on the interim dividend also.
The Board may declare Interim dividend during any financial year out of the estimated surplus in
the and loss account. In case, the company has incurred loss during the current financial year up
end of the quarter immediately preceding the date of declaration of Interim dividend, such dividend
shall not be declared at a rate higher than the average dividend declared by the y during the
immediately preceding 3 financial years,
A dividend including Interim dividend once declared becomes a debt and cannot revoked, except
with the consent of the shareholders.

PROVISION RELATING TO DECLATION OF DIVIDEND

Payment of dividend to be authorised by the articles: As per section 51 of the Companies Act,2013
a company may. If so authorized by its articles, pay dividend in proportion to the amount payable
on each share. If not, the Articles have to be amended accordingly.
Sources for payment of dividend Section 123 of Companies Act, 2013
No dividend shall be declared or paid for any financial year except current and previous year or
money provided by the Central Govt. or State Govt.
(A) Current & Previous Year Profits: The dividend shall be payable
(i) out of the current year profits of the company as arrived after providing depreciation,
or
(ii) out of the previous year profits of the company arrived at after providing for
depreciation and remaining undistributed, or
(iii) out of both; or
The Company (Amendment) Act, 2015: A Company shall not declare dividend unless carried over
previous losses and depreciation not provided in previous year or years are set off against profits of
Company for the current year.
(B) Money Provided by CG or SG: The dividend shall also be payable out of the money provided
by the Central Government or a State Government for the payment of dividend by the
company in pursuance of a guarantee given by that Government.

Provisions for Depreciation Section 123 of the Companies Act, 2013

Depreciation must be provided before any dividend (including interim and final dividend) can be
declared out of current and previous year profits of any financial year and the depreciation must be
as per Schedule II of the Companies Act, 2013.

Transfer of profits to reserves

A company may transfer some specified of its profits percentage to the reserves of the company
before the declaration of any dividend in any financial year.

DIVIDEND IN CASE OF ABSENCE OR INADEQUACY OF PROFITS

In case of inadequacy or absence of profits in any financial year, any company may declare dividend
out of the previous year's accumulated profits.
Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014
In the event of inadequacy or absence of profits in any year, a company may declare the dividend of
previous year surplus subject to the fulfillment of the following conditions:
(a) Rate of dividend: The rate of dividend declared shall not exceed the average of the which
dividend was declared by it in the 3 years immediately preceding that year.
Note: This rule shall not apply to a company which has not declared any dividend in immediately preceding 3
financial years.
(b) Total withdrawal from accumulated profits: The total amount to be drawn from such
accumulated profits shall not exceed 1/10 of the sum of its paid-up share capital and free
reserves as per the latest audited financial statement.
(c) Setting off the losses: The amount so drawn shall first be utilized to set off the losses
incurred in the financial year in which dividend is declared before any dividend in respect
of equity shares is declared.
(d) To maintain reserve: The balance of reserves after withdrawal shall not fall below 15% of
its paid-up share capital as per the latest audited financial statement.
 (e) Dividend to be declared only from free reserves: No dividend shall be declared or paid by a
company from its reserves other than free reserves.

COMPLETE PROCESS FOR APPROVAL & PAYMENT OF DIVIDEND

DIVIDEND

Interim Dividend (pass a Board Final Dividend (Pass a Ordinary

Resolution) Resolution)

Payment within 30 days from

declaration Only once in a year

Transfer all unpaid dividend to a spl

account (with 7 days)

Keep unpaid dividend

for 7 years

After 7 years
Transfer to IEPF

(a) Recommendation by the Board of Directors: The Board of Directors recommend the rate of
dividend to be declared by the shareholders in their meeting.
(b) Approval by shareholders: The shareholders in their meeting (i.e. AGM) shall declare/approve
the rate of dividend as recommended by the Board of Directors and authorises board of
directors for payment of dividend.
(c) Payment of Dividend: After declaration of dividend, the company has to pay the within 30 days
from the date of declaration.
Note: The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate
account within 5 days from the date of declaration of dividend.
The dividend shall only be in cheque or warrant or in any electronic mode to the shareholder are entitled for the
dividend.
(d) Transfer of dividend to a Special Account: In any reason, the dividend has not been paid the
members, the company has to open a special account “unpaid dividend account of ABC Ltd.” and
transfer the unpaid or unclaimed dividend amount to the special account. The unpaid or
unclaimed dividend amount shall be kept in this account for 7 years from the date of transfer.
Note: In case of any default in transfer of the unpaid or unclaimed dividend within 7 days from the expiry of 30 days
of declaration, the company shall be liable to pay interest at the rate of 12% on remaining unpaid amount.
(e) Transfer to Investors Education and Protection Fund (IEPF): After 7 years, the company has to
transfer the entire unpaid or unclaimed amount to the Investors Education and Protection fund.
No shareholder can claim his dividend from the IEPF.
 Special Note: No company shall pay dividend in case of failure of repayment of deposits and its interest.
(f) Details of unpaid dividend to be placed at the website: The Company shall prepare a statement
containing the names, their last known addresses and the unpaid dividend to be paid to each
person on the website of the company within 90 days after making transfer of the amount to
the Unpaid Dividend Account.

TRANSFER TO INVESTOR EDUCATION AND PROTECTION FUND

Any money transferred to the Unpaid Dividend Account which remains unpaid or unclaimed for 7
years from the date of such transfer, such amount along with interest shall be transferred to the
Fund (i.e. IEPE).
The company shall send a statement of the details of such transfer to the authority which
administers the said Fund and that authority shall issue a receipt to the company as evidence such
transfer.
Offence & Penalty: For Company: Fine - Minimum Rs. 5 lakh & Maximum Rs. 25 lakh, for Officer:
Fine – Minimum Rs.1 lakh & Maximum Rs. 5 lakh

INVESTOR EDUCATION AND PROTECTION FUND (LEPF): The Central Government has
established an Investor Education and Protection Fund for the purpose to educate investors and to
protect the interest of investors.
The following amount is being credited to this fund:
(a) amounts in the unpaid dividend accounts of companies;
(b) unpaid or unclaimed application moneys received by companies for allotment of any
securities and due for refund;
(c) unpaid or unclaimed amount of matured deposits with companies;
(d) unpaid or unclaimed amount of matured debentures with companies;
(e) the interest accrued on the account referred to in clauses (a) to (d):
(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; and
(g) the interest or other income received out of the investments made from the Fund.

Utilisation of investor education and protection fund

The amount of IEPF shall be utilised for:
(a) The refund in respect of unclaimed dividends, matured deposits, matured debentures, the
application money due for refund and interest thereon:
(b) Promotion of Investors' education, awareness and protection;
(c) Distribution of any disgorged amount among eligible and identifiable applicants for shares
or debentures, shareholders, debenture-holders or depositors who have suffered losses due
to wrong actions by any person, in accordance with the orders made by the Court which had
ordered disgorgement;
 (d) Reimbursement of legal expenses incurred in pursuing class action suits by members
debenture-holders or depositors as sanctioned by the NCLT, and any other purpose.
Note: The Statement of amounts to be credited to IEPF shall be filed in Form DIV 5.
DIVIDEND ON PREFRENCE SHARES
A Preference share carries a preferential right with regard to dividend in accordance with the term
of issue and the articles of association subject to the availability of distributable profits. Preference
shares can carry dividend of a fixed amount, before any dividend is paid on the equity shares.
where there are two or more classes of preference shares, the shareholders of the class which has
priority are similarly entitled to their preferential dividend before any dividend is paid in respect of
the other class but these rights are subject to three conditions:
1. Preference shares are part of the company's share capital.
2. A dividend becomes payable to the shareholders only when it is declared by the
shareholders.
3. There should have been a formal declaration. Preference shareholders are not entitled to
treat the preference dividend as a debt and sue for its payment.
Note: If the articles specify that the company's profit shall be applied, by way of payment of the preference end, the
preference shareholder can sue for it even though it has not been declared.

DIVIDEND DURING REGISTRATION OF TRANSFER OF SHARES

Section 126 of the Companies Act, 2013
When any instrument of transfer of shares has been delivered to any company for registration and
the transfer of such shares has not been registered by the company, it shall, notwithstanding
anything contained in any other provision of this Act:
(a) Transfer such fund to unpaid dividend account: Transfer the dividend in relation such
shares to the Unpaid Dividend Account unless the company is authorised by the registered
holder of such shares in writing to pay such dividend to the transferee specified in such
instrument of transfer; and
(b) Keep in abeyance: Keep in abeyance in relation to such shares, any offer of rights shares
and any issue of fully paid-up bonus shares.

PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS Section 127 of Companies Act 2013
When a dividend has been declared by a company but has not been paid within 30 days from the
date of declaration to any shareholder entitled to the payment of the dividend, every director of the
company shall, if he is knowingly a party to the default, be punishable with imprisonment which
may extend to 2 years and with fine which shall not be less than Rs.1000/- for every day during
which such default continues and the company shall be liable to pay simple interest at the rate of
18% per annum during the period for which such default continues.
Exceptions
Proviso to section 127 has provided a list where no offence under this section shall be deemed to
have been committed:-
(a) where the dividend could not be paid by reason of the operation of any law;
 (b) where a shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with and the same has been
communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant within
the period under this section was not due to any default on the part of the company.

SELF-TEST QUESTIONS
Q1. DESCRIPTIVE QUESTIONS:
(1) Define the term 'Dividend'. State briefly the provisions.
(2) Distinguish between ‘Dividend' and ‘Interest'
(3) State the procedure for transfer of unpaid or unclaimed dividend to the Investor Education
and Protection Fund.
(4) Explain the law relating to declaration and payment of final dividend.
(5) Define Interim Dividend. Distinguish between 'Interim Dividend' and 'Final Dividend’.
(6) Write short notes on the following: -
(a) Investor Education and Protection Fund (IEPF).
(b) Punishment for failure to distribute dividend and exceptions.

Q2. PRACTICAL QUESTIONS:

1. A company for the financial year 2011-12 declared dividend on 19th September, 2012 but failed
to distribute the same within the prescribed period. A case was filed against a director in this
regard. The director has contended that he had resigned before the declaration of dividend.
Decide fate of the director in the light of the relevant provisions of the Companies Act, 2013.
2013 - Dec (4 marks)
Hint: As per section 127 of Companies Act, 2013, if dividend is not paid within 30 days or
dividend warrant not posted within 30 days, the Company shall be liable to pay simple interest
@ 18% P.A. untill the default continues. Every director is liable for punishment upto 2 years in
addition to fine of Rs. 1000/- per day (till default continues) if he has committed the default
knowingly.
Case Law: N. Kumar v. M. O. Roy, Assistant Director S.E.I.O.
Facts: A company for the financial year 1995-96, declared the dividend but failed to distribute same
Within the prescribed period (i.e. 30 days). A complaint has been filed against the company and its
directors for the contravention under section 127.
Judgement: In this case, the Court held that the director was not a whole-time director at the time
of declaration of dividend. Therefore, he shall not be liable for default under section 127 of the
Companies Act, 2013.
2. The Board of directors of a company in a meeting held on 30th April, 2013 declared interim
dividend. In another meeting held on 18th May, 2013, the Board revoked the interim dividend
declared without assigning any reason. Advise the company in the matter. Dec, 2013 (4 marks)
Hint: Section 2(35) of the Companies Act, 2013: Dividend includes any interim dividend The
dividend is the liability to the company after its declaration by the shareholders of the company. On
other side, the shareholders have the Right to claim dividend only after a dividend is declared by
the company in general meeting.

In case of interim dividend, the decision of the Board shall be treated as a declaration of dividend
and once declared dividend becomes a debt to the company. Once declared, it cannot be revoked
except with consent of the shareholders. In case, dividend has declared illegally, then the Board can
revoke the declared dividend.
2. Due to inadequacy of profits, the Board of directors of Rise Ltd. decided not to recommend any
dividend for the financial year ended 31st March, 2015.
Certain shareholders of the company complained to the Company Law Board/Tribunal
regarding mismanagement of the affairs of the company, since the Board of the company did
not recommend any dividend. Explaining the provisions of the Companies Act, 2013, examine
whether the contention of the shareholders is tenable.
Hint: The Board of director may keep the entire profit for the purpose of expansion/growth of the
company and it is not an obligation on the Board to recommend dividend to the shareholders.
Therefore, the contentions of shareholders are not tenable.