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Chapter 8 – Declaration and Payment of Dividend

[Section 123 to 127]

Basics Provisions Funds related to Dividend Punishment for Non-

Compliance
 Definition u/s  Sec. 123: Declaration  Sec. 125: IEPF  Sec. 127: Punishment
2(35) of Dividends  Establishment for failure to
 Types (Final/  Sec 124: Unpaid/  Credits to the Fund distribute dividend
Interim) Unclaimed Dividend  Utilization within 30 days

Definition:
Section 2(35) “dividend” includes any interim dividend.

Important points relating to dividend:

 It is a distribution of profits
 Final dividend is declared and approved by shareholders (by OR at AGM) on recommendation of Board
 The rate of dividend declared by SH shall not exceed the amount recommended by BOD
 Dividend % is a proportion of nominal value or face value

Concept clarity check:

1. Board recommended 10% dividend. Can SH, by passing unanimous resolution, declare 12% dividend? - No!
2. Calculate the amount of dividend in following case:
No. of shares held = 50
Face Value = Rs. 10; Market Value (in stock exchange) – Rs. 200; Purchase price – Rs. 190
SH approved and declared dividend = 10%
Amount of dividend = No. of shares * Dividend * Face Value i.e., 50 shares * 10% * Rs. 10 = Rs. 50 (total)

Note – Market value or purchase price is irrelevant for the calculation of amt. of dividend

Types of dividend:
Classification based on time
Particulars Interim Dividend Final Dividend
Announcement Announced and declared by SH BOD at any time Recommended by BoD and declared by
during the FY or from closure of FY till the AGM shareholders at the AGM of the co.
Provision in Declared only when the AOA permits the Does not require any specific
AOA declaration. provision in the articles
Source Out of profits before final adoption of accounts --
Sources for interim dividend = Surplus in PL or CY
profit or Prior Profits
Ratification Shall be ratified at the AGM by the members Not applicable
Rate of If the company has incurred loss during the CY upto The rate recommended by the Board
Dividend preceding quarter cannot be increased by the members
 dividend not to be declared at a rate higher
 than Avg rate of dividend declared by Co
 during the immediately preceding 3 FYs.
Revocation Can be revoked with consent of ALL shareholders Once declared - cannot be revoked.
The Dividend shall be deposited in a separate A/c of a scheduled bank within 5 days from the date of declaration

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Classification of Dividend based on Nature of Shares

Preference Shares (Sec 43) Equity Shares
Cumulative Non-Cumulative (Default)
Dividend gets accumulated Dividend is payable only in a year of Equity shares holder do not enjoy
profit. No accumulation of profit any preferential rights for
dividends or repayment of capital
Arrears due to insufficiency of Holder not entitled to be paid Rate of dividend depends upon the
profits payable from future arrears of dividend out of future dividend policy and availability of
profits. years i.e., right to receive dividend profits after satisfying Pref. SH
Unless this dividend is paid in full expires if not declared in any year. rights
(incl. arrears) , no dividend is
payable to equity shareholders

Section 123: Declaration of Dividend

(1) Source: Dividend shall be declared or paid by a company for any FY out of:
Money provided by
Profits* for that FY Undistributed profits* of any previous Both (a) and
CG/SG for payment
(current) arrived at FYs arrived at after providing for (b) [Current
of div. in pursuance
after providing for depreciation as per Sch II (i.e., credit + Past
of guarantee given
depreciation (Sch II) balance in P&L and free reserves) Profits]
by the Govt
*Provided that – While calculating profits – exclude:
 unrealised gains, notional gains or revaluation of assets AND
 any change in carrying amount of an asset/liability on measurement at fair value

Transfer to Reserves – A company MAY, before declaration of dividend in any FY, transfer such % of its
profits for that FY as it may consider appropriate to reserves of the company.

Conceptual Clarity Check:

1. Can capital reserve be used for payment of dividend? – No! Only free reserves can be used for dividend
2. Carried over previous losses and depreciation not provided in PY has to be set off against CY profits
before declaration of dividend
3. Capital profits are not earned in normal course of biz. Hence, not available for distribution as dividend
4. Is it okay if a company decides not to transfer any amount to reserves before dividend? – Yes! Whether
or not to transfer and what % to be trf to reserve is left to the discretion of the company.

(2) For the purposes of clause (a) of Sec 123(1) depreciation shall be provided in accordance with Sch II

(3) Rate of Dividend – Interim Dividend in case of loss in recent quarter (not Final Dividend):
Board may declare interim dividend during any FY or at any time from closure of FY till holding of AGM out of:
 Surplus in the P&L account or
 Profits of the FY for which such interim dividend is sought to be declared (past FY), or
 Profits generated in the FY till the quarter preceding the date of declaration of interim dividend

Provided that - In case the co. has incurred loss during the current FY 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 > Average dividends declared by the company during the immediately preceding 3 FY

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Concept clarity check:

Is the upper limit on rate of dividend (i.e., not > Avg of preceding 3 FY) also applicable in case if there is
profit in the current FY till preceding quarter? – No. In case of profit, the % of dividend can be higher?

Rule 3 Declaration of Dividend out of Reserves: [Very imp]

In the event of inadequacy or absence of profits in any year, a co. may declare dividend out of free
reserves subject to the fulfilment of the following 3 conditions, namely:-

Total amount drawn from accumulated profits <= Balance in reserve

Rate shall not exceed
1/10th of [PUSC + FR] as per latest audited FS after such drawal
Average of dividend of
not < 15% of PUSC as
3 immediately Amount drawn shall first be utilised to set off per latest audited
preceeding FY* losses of current FY FS

* This sub-rule(1) shall not apply if a co. has not declared any dividend in each of the 3 preceding FY.

(4) Dividend amt (incl. interim) – Deposit in separate account with scheduled bank within 5 days from declaration

(5) No dividend shall be paid by a co. in respect of any share therein except to the registered shareholder of
such share or to his order or to his banker and shall not be payable except in cash.

Provided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or reserves
of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being
unpaid on any shares held by the members of the company.

Concept clarity check:

1. Mr. Singh has purchased shares of Burraaah Ltd. from Mr. Jai by making full payment. However, the
transfer of shares is not yet registered with the company. Meanwhile, the co. announces dividend. Is
the company allowed to pay the dividend to Mr. Singh? – No. In such case, the company will keep the
dividend till the registration is pending (Discussed in detail in sec 126)

2. Can a company issue bonus shares in lieu of dividend – No. Dividend can only be paid in cash.
3. Can a company pay dividend via bank? – Absolutely Yes. Cash doesn’t mean hard cash. It means – Cash,
cheque, dividend warrant or via any e-mode.

(6) A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure
continues, declare any dividend on its equity shares.

Note: Section 8 companies are prohibited from paying any dividend to its members. Its profits are intended to
be applied only in promoting the objects for which it is formed. [Sec 8]

Bonus Point
What is record date?
Record date is the date announced by the company for determining members who are entitled to dividend. All
person whose name is included in the register of members on the record date shall be entitled to dividend.

Section 124: Unpaid Dividend Account

(1) Where a dividend is declared but not paid or claimed within 30 days from the date of declaration,
 the company shall, within 7 days from the expiry of the said 30 days,

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 transfer the total unpaid/unclaimed amount of dividend to a special account (with scheduled bank) called
the Unpaid Dividend Account (UDA)

(2) Preparing of Statement of the Unpaid Dividend

 Within 90 days of transferring any amount to the Unpaid Dividend Account
 prepare a statement containing the following:
Name Last known address Unpaid dividend amount
 and place it on website and on any other website approved by CG for this purpose.

(3) Payment of Interest on default

If default is made in transferring the total amount u/ss (1) to UDA, company shall:
 Pay interest @12% p.a. from the date of such default
 Interest accruing on such amount shall ensure to benefit of members of the co. in proportion to amt.
remaining unpaid to them
 Furnish details of shares and unpaid dividend in Form IEPF 3 within 30 days from end of FY.

(4) Claimant to apply for payment of Claimed Amount apply to the Co concerned for payment of the money claimed

(5) Transfer of Unclaimed or unpaid amount to Investor Education and Protection Fund (IEPF)
 If remains unpaid or unclaimed for 7 years from the date of such transfer
 It shall be transferred by the company along with interest to the IEPF, and
 A prescribed statement containing details of such transfer shall be sent to IEPF Authority and
 Authority to issue receipt as an evidence of such transfer

(6) Transfer of Shares to IEPF

All shares in respect of which dividend has not been paid/claimed for >= 7 consecutive years shall be
transferred by the company in the name of IEPF along with a statement containing such details.

Author’s Note – Note that this section is talking about transfer of the “shares” itself and not the unpaid
amount of dividend. The trf. of unpaid amount is already discussed u/ss (5)

Provided that any claimant of shares trfd. above shall be entitled to claim the transfer of shares from IEPF
with such procedure and on submission of such documents as may be prescribed.

Explanation:
In case any dividend is paid or claimed for any year during the said period of 7 consecutive years, the share
shall not be transferred to Investor Education and Protection Fund.

(7) Punishment for Contravention of this section:

Company Officer in default
Penalty Rs. 1 lakh + Rs. 500/day after first Rs. 25,000 + Rs. 100/day
Max penalty Rs. 10 lakhs Rs. 2 lakhs

Section 125: Investor Education and Protection Fund (Read with IEPF Authority (Accounting, auditing,
transfer and refund) Rules 2016)

(1) The CG shall establish a Fund to be called the Investor Education and Protection Fund (IEPF)

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(2) There shall be credited to the Fund—

a) the amount given by the CG by way of grants after due appropriation made by Parliament by law in this
behalf for being utilised for the purposes of the Fund;
b) donations given to the Fund by the Central Government, State Governments, companies or any other
institution for the purposes of the Fund;
c) the amount in the Unpaid Dividend Account of companies transferred to the Fund u/s 124(5)
d) the amount in general revenue account of the CG which had been transferred to that account u/s 205A
(5) of Companies Act, 1956 and remaining unpaid or unclaimed on the commencement of this Act;
e) the amount lying in IEPF u/s 205C of the Companies Act, 1956;
f) the interest or other income received out of investments made from the Fund
g) the amount received under section 38(4);
h) the application money received by companies for allotment of any securities and due for refund;
i) matured deposits with companies other than banking companies;
j) matured debentures with companies;
k) interest accrued on the amounts referred to in clauses (h) to (j);
l) sale proceeds of fractional shares arising out of bonus shares, merger and amalgamation for >=7 yrs
m) redemption amount of preference shares remaining unpaid or unclaimed for >=7 yrs; and
n) such other amount as may be prescribed

Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such amount
has remained unclaimed and unpaid for 7 years from the date it became due for payment.

Summary:

Other income
Donation by Amt. of UDA General IEPF in Co. Act
CG grants from
CG/SG/Cos. u/s 124 Revenue A/C 1956
investment

Matured sale proceeds

Amount Redemption of
Application deposit or of fractional
disgorged u/s pref. shares Other amount
money debenture or shares (>=7
38(4) (>=7 yrs)
intt thereon yrs)

(3) The Fund 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 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 u/s
37 and 245 by members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
e) any other purpose incidental thereto, in accordance with such rules as may be prescribed:

Provided that the person whose amounts referred to in clauses (a) to (d) of sub-section (2) of section 205C
transferred to IEPF, after the expiry of the period of 7 yrs shall be entitled to get refund out of the Fund in
respect of such claims in accordance with rules made under this section.

(4) Any person claiming to be entitled to the amount referred in sub-section (2) may apply to the authority
constituted under sub-section (5) for the payment of the money claimed.

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(5) The CG shall constitute, by notification, an authority for administration of the Fund consisting of a
chairperson and such other members, not > 7 and a CEO, as the CG may appoint [IEFPA]

(6) The manner of administration of the Fund, appointment of chairperson, members and CEO, holding of
meetings of the authority shall be in accordance with such rules as may be prescribed.

(7) The CG may provide to the authority such offices, officers, employees and other resources in accordance with
such rules as may be prescribed.

(8) The authority shall administer the Fund and maintain separate accounts and other relevant records in relation
to the Fund in such form as may be prescribed after consultation with the C&AG of India.

(9) It shall be competent for the authority constituted under sub-section (5) to spend money out of the Fund for
carrying out the objects specified in sub-section (3).

(10)The accounts of the Fund shall be audited by the C&AG of India at such intervals as may be specified by him
and such audited accounts together with audit report shall be forwarded annually by the authority to the CG.

(11) Annual Report:

 IEPFA to prepare its annual report (prescribed form and time for each FY)
 Giving full account of its activities during the FY and
 Forward a copy thereof to the CG and
 CG shall cause annual report + audit report (by C&AG) to be laid before each House of Parliament

126. Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of
transfer of shares
Where 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 the dividend in relation to 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 in relation to such shares, any offer of rights shares under clause (a) of sub-section (1)
of section 62 and any issue of fully paid-up bonus shares in pursuance of first proviso to section 123(5)

127. Punishment for failure to distribute dividends.

 Where a dividend has been declared by a company but not been paid or the warrant has not been posted
 within thirty 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 two years and
 with fine not < Rs. 1,000 for every day during which such default continues and
 the company shall be liable to pay simple interest at 18% p.a during the period of default

Provided that no offence under this section shall be deemed to have been committed where: —
(a) where the dividend could not be paid by reason of the operation of any law

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(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 right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due from 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 default on part of company.

NOTE : Applicability of Section 127 to Nidhis

In terms of Notification No. GSR 465 (E), dated 05-06-2015, Section 127 dealing with punishment shall apply to
the Nidhis, subject to the following modification:
 In case the dividend payable to a member is Rs 100 or less
 it shall be sufficient compliance of the provisions of the section 127,
 declaration of the dividend is announced in the local language in one local newspaper of wide circulation
announcement is also displayed on the notice board of the Nidhis for at least 3 months.

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