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SARV December 2024

Distribution of Profit
Dividend

Dividend Latin Word

Secretarial Regulatory
Standard 3 Framework
Dividendum

Co. (Declaration &

Section 123 to Section Thing to be
payment of Dividend)
127 Distributed
Rules 2014

Equity Share

Part of Net Profit

Dividend Preference Share
of the Company

But if once it is declared then it

Not obligation of the Company becomes liability of Co. to pay
Dividend

Section 2(35)

Dividend as per SS3

•Includes Interim Dividend. Dividend means distribution of any amount out of profits & whenever
permitted out of free Reserves. Available for the same.
•Return of investment given out of profits of the Co. to Eq. Share & Pref. Share.
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Types of Dividend

Types of Dividend

On basis of Person to whom it is paid On basis of time when it is paid

Equity Dividend Preference Dividend Final Dividend Interim Dividend

1. Declared & paid to Equity Share.

2. It is not mandatory to give dividend to Equity Share.

Equity Dividend

3. It is not fixed, as it depends on Board of Directors.

4. It is a dividend being declared & paid after Preference Share.

1. Declared & paid to Preference Share.

Preference Dividend 2. It may be fixed & mandatory depends on terms of issue.

3. It shall be declared & paid before any dividend being declared to Equity
Share as Preference Share has Preference Rights.
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1. Rate of final dividend shall be more than interim dividend.

2. Declared by Co. once in a year.

Final Dividend

3. It is a part of ordinary business of Co. ∴ it is transacted in AGM.

4. SS-3: Recommended by BOD & declared by shareholders.

5. Final Dividend is paid after finalization of Accounts.

6. Final Dividend cannot be revoked in any circumstances.

Interim Dividend

1. Interim dividend is declared between two AGM.

2. All provisions of payment of Dividend shall be applicable on Interim Dividend also.

3. SS-3: Interim Dividend declared by BOD.

4. It is paid before finalization of Accounts.

5. It can be revoked with the consent of all shareholders.

Source of Dividend

Source of Dividend

Current year profits of the Past years profits forming part of Out of funds provided/guaranteed
Company. FR. by Govt. for payment of dividend.
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Free Reserves

1. P & L A/c

Included 2. General Reserves

3. Dividend Equity Reserves

Free Reserves
1. SP A/c

2. CRR
Exclude
3. DRR A/c

4. Capital Reserve

1. Means reserve which is as per latest Audit Balance Sheet of Co. & which is available for
Distribution of Dividend.

2. As per Co. Amendment Act 2017 while calculating profits following shall be excluded:

• Amt representing unrealised Gain, National Gain, Revaluation of Assets change in carry amount of
Asset or liability on measurement of Assets & Liability at fair value.

Manner of Declaration of Dividend

Manner of Declaration of Dividend

If dividend is paid out of past

If dividend being declared out of
profits forming part of Free
current years profits.
Reserves.

Co. need to comply Rule 3 of Co.

Before declaration of dividend following
(declaration & payment of dividend)
Amount shall be adjusted against NP.
Rules 2014.

2. Transaction of Profit
1. Depreciation as per
to reserve as decide by 3. Past Losses.
SCH-II.
BOD(%).
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Rule 3

1. Maximum Rate of Dividend = Average Rate of Dividend declared by the company during last 3 Pre Years.

• Note: If Co. has not declared dividend during 3 FY. Then above condition is not applicable.

2. Total amount that can be drawn from free reserves: maximum →10% (paid up share capital + FR).

3. Balance of reserve left after such withdrawal for the purpose of dividend shall not fall below 15%. (paid up Share
Capital)

4. Amount withdrawn from FR for purpose of dividend should be first towards settling losses incurred in FY in which
dividend is proposed to be given.

Summary of Rule 3

1. Max Rate of Dividend

∴ Maximum Dividend
= Max Rate of Dividend × Paid up Share Capital a
WEL
2. Max Amount of Dividend
c
= 10% (Paid up Share Capital + FR) – CY Loss x
3. Max Amount of Dividend b
= Total FR – 15% (Paid up Share Capital) – CY Loss y WEL
Max Actual Rate of Dividend which Co. can declare out of FR Max Amount of
Dividend which can
be declared out of FR

Important Points

1. Dividend shall be declared out of FR & No other reserves.

2. Depreciation shall be calculated as per SCH-II.

3. Amount of dividend including interim dividend shall be deposited in a separate account i.e.
escrow account within 5 days from the date of its declaration.

4. No dividend shall be paid by the company in respect of any shares therein except to registered
share of such share or to his order or to his banker & Amount shall not be paid in cash but
Cheque, Dividend Warrant etc.

5. Declaration of dividend & issuance of bonus shares are two different corporate actions
∴ Statutory provisions applicable on declaration of dividend is not applicable in case of bonus
shares.
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6. If Co. has made default in acceptance of deposits or repayment of deposit, such Co. shall not
declare dividend on its Equity Shares till such default continues.

7. Interim dividend:

1. BOD may declare Interim dividend as per SS-3. It means a dividend declared by bod.
2. when? declared by BOD during AGM FY or at the end of FY but before AGM.

8. Source of Interim dividend:

1. Declared out of surplus in P&L A/c or

2. Out of profits of FY for which such dividend is proposed to be declared or
3. Profits generated in FY till the Quarter pre date of declaration of interim dividend.

9. Max Rate of Dividend: If declared out of Past Profits Forming Part of FR:

Past Profits

If Company has incurred loss during Current FY upto the end of Quarter immediately Pre date of declaration of interim
dividend such dividend shall not be declared at the Rate Higher than average dividend declared by Co. during pre 3 FYs.

Y1 +Y2 +Y3
Max Rate of Dividend =
3

Note: If Co. has not declared dividend in 3 FYs Co. cannot declare any dividend out of past profits.

Types of Dividend
Basis Final Dividend Interim Dividend
Meaning The Dividend recommended by the Board of Dividend paid by the Company between two
Directors and declared by the Members at an annual general meetings
Annual General Meeting
Power to Recommended by the Board at the board Declared by the Company's Board of Directors
declare meeting and declared by the Members of the
Dividend Company
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Meetings Declared in Annual General Meeting of Declared at the Meeting of the Board
Members

Time of It is declared after the end of the financial year It is declared on the basis of provincial financial
Declaration after the amount of distributable profit has statements or estimates
been computed
Frequency of It can be paid only once in a financial year It can be paid more than once in a financial year
payment
Source of Paid out of profit earned in the previous Paid:-
Payment financial year (i) out of surplus in the profit and loss account
(ii) out of profit of the financial year in which
such interim dividend is sought to be declared
(iii) profits generated by the Company till the
quarter preceding the date of declaration of
interim dividend
Quantum of Members cannot declare dividend over and It shall not be declared at a rate higher than the
Dividend above the amount recommended by the Board average dividends declared by the Company during
the immediately preceding three financial years

#Q. XYZ Ltd., which has inadequacy of profits, proposes to declare Dividend out of general reserves.
Following are the facts of the case:
• 17,500 preference shares of Rs. 100 each fully paid; (Dividend @ 9%)
• 7,00,000 equity shares of Rs. 10 each
• General reserves: Rs. 21,00,000
• Capital reserves: Rs. 3,50,000
• Securities premium: Rs. 3,50,000
• Surplus (P&L): Rs. 63,000
• Net profit for the year: Rs. 3,57,000
• Average rate of Dividend during the last three years: 15%
• Board of directors of the company wishes to declare 10% Dividend.
• Maximum amount that can be withdrawn: Rs. 10,91,300 [1/10 of (Rs. 17,50,000 + Rs. 70,00,000 + Rs.
21,00,000 + 63,000]
• Permissible withdrawal from the balance of Reserves: Rs. 8,50,500.

Calculation:
• 15% of total capital Rs. 87,50,000 to be retained in the Reserves i.e. Rs. 13,12,500
• General Reserves: [Rs. 21,00,000 + 63000 (Surplus-P&L)]
• Maximum amount that can be taken from Reserves: Rs. 8,50,500 (Rs. 21,63,000 – Rs. 13,12,500)
• Available profits: Rs. 2,62,500 (Rs. 63,000 + Rs. 3,57,000 – Rs. 1,57,500); [Rs. 1,57,500 is 9% preference
Dividend on 17,500 preference shares of Rs. 100 each]
• Dividend desired to be declared by the Board of the company: Rs. 7,00,000
• Profit available for declaration of Dividend: Rs. 2,62,500
• Balance amount that can be withdrawn from Reserves: Rs. 4,37,500 (Rs. 7,00,000 – Rs. 2,62,500).
Hence, company can declare Dividend @ 10%.
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#Q. The profits of X Ltd. for F.Y. 2021-22 are inadequate and considering the different scenarios the declaration of
dividend may be as under:
FY Dividend paid during the year
Case 1 Case 2 Case 3
2018-19 10% Nil Nil
2019-20 Nil Nil 12%
2020-21 5% Nil Nil
Maximum Average rate of *The stipulation regarding average rate of Average of Dividend
rate of dividend 15/3 = 5% Dividend is not applicable as no Dividend is 12/3 = 4%
dividend for [The Company can declared in any of the three preceding [The Company can
the year declare Dividend financial years. Accordingly, the dividend declare Dividend
2021-22 upto 5% subject to for 2021-22 may be declared at any rate, upto 4% subject to
the compliance of subject to the compliance of other conditions the compliance of
other conditions prescribed under the Rules. (*Proviso to other conditions
prescribed under the Rule 3(1) of Companies (Declaration and prescribed under the
Rules]. Payment of Dividend) Rules, 2014 shall not rules.
apply to a company, which has not declared
any Dividend in each of the three preceding
financial year.)
Section 126

Company

Shares are in
Physical Form
Duration
(Transferor)
 New Shareholder
If Co. declares any cash benefit i.e. Dividend (Transferee)
or non cash benefit i.e. Bonus shares/Right
Shares.

Such benefit shall be neither given to
transferor & transferee. It shall be kept aside
& Given to transferee after Tr. Is Reg.
Section 127
Payment of Dividend

1. Payment need to be made within 30 days from date of declaration.

2. If div. is declared & not paid within 30 days, then it stall be considered as default & penalty shall be imposed. [interest @
18%. p.a. till default continues] & Every officer in default: Imprisonment upto 2 years + Fine not less than 1000/day till
default continues.
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Expectation: Circumstance where Dividend is not paid within 30 days:

1. When div. could not be paid by Co.
Reason: Operation of law. E.g. Non receipt of statutory approval.

2. Where share has given direction to Co. regarding payment of dividend & those directions cannot be complied with &
same has been communicated to the share.

3. When there is a dispute regarding payment of dividend i.e. right to receive dividend.

4. Where dividend is lawfully adjusted by the Co. against any sum due to the Co. from the share.

Section 124
Unpaid Dividend Account
If not
paid in Deposited
Deposit 30 days Unpaid/
Date of Dec Sep. A/c Unclaimed
Payment Deposit Within
Dividend IEPF
5 days 30 days 7 days 90 days
Account
 
Co, makes default in Co. make statement
such Tr. • list of members
 7 years • Amount of div.
Penalty interest unpaid/ unclaimed
@12% on 
unpaid/unclaimed Disclose on website of
div. amount Co. & also on other
website by CG.
Transfer of Amount to IEPF

Tr. Unpaid amount/ unclaimed

After 7 Years Co. amount dividend
IEPF

Co. shall send statement of details of each & every member to the Authority which
administers said fund & authority shall issue receipt as evidence of transfer.

If Co. falls penalty

Co. Officer in Default

Fine: 5 Lacs to 25 lacs Fine: 1 Lacs to 5 lacs
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Section 125 Investor Education & Protection Fund

By CG for Education & Protection of Investors.

Permissible credits in IEPF:

1. Donation from CG or SG
2. Amt in general reserve A/c of CG which has been Tr. u/s 205A of Co. Act 1956.
3. Amt lying in IEPF u/s 205C of Co. Act 1956.
4. Application money received by the Co. for allotment of securities due for Refund.
5. Matured Deposits with Co. except banking Co.
6. Redemption amount of pref. shares.
7. Unpaid/Unclaimed dividend Amount
Note: Above amount mentioned from 4th point onwards shall be deposited to IEPF after 7 years.

Permissible Debits in IEPF

Refund of application money due for refund, unclaimed dividend amount, unpaid dividend, matured deposits, matured
debentures & interest.

Promotion of education of investors awareness & protection.

Reimbursement of legal expenses incurred for pursuing class action suits u/s 245.

Such other as prescribed.

Mode of Payment of Dividend (Section 123(5))

Mode of payment of Dividend

Cash Cheque Warrant Electronic Mode

Dividend can be paid in cash and not in kind.

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No dividend to be declared/paid in case of failure of repayment of deposits

Section 123(6) of the Companies Act, 2013 provides that a company which fails to comply with the provisions of
sections 73 (prohibition of acceptance of deposits except in the manner provided) and 74 (Repayment of deposits etc.
accepted before commencement of the Companies Act 2013) shall not, so long as such failure continues, declare any
dividend on its equity shares.

The Board of Directors of Peculiar Ltd. proposes to recommend a final dividend of Rs. 25 each to all
the equity shareholders of the company. The company seeks your opinion on the following:

1) The company wants to deposit the dividend amount to co-operative bank.

2) The company is a defaulter in the repayment of deposits and proposes to repay its all deposit after the
payment of dividend within 10 days.
3) Dividend will be declared out of the capital reserves of the company.

The Peculiar Ltd has to follow below procedure for recommending final dividend:

1) Referring to section 123(4) of Companies Act, 2013, the amount of the dividend has to be deposited in
a scheduled bank. The company should first ensure that said co-operative bank is scheduled bank from
the list of scheduled bank available at RBI website, and then it may deposit the dividend amount in the
scheduled Co-operative Bank.
2) Referring to section 123(6) of Companies Act, 2013 a company which fails to comply with the
provisions relating to acceptance and repayment of deposits shall not, so long as such failure continues,
declare any dividend on its equity shares. Hence Peculiar ltd. cannot declare dividend till the failure
persists.
3) Referring to third proviso to Section 123(1) no dividend shall be declared or paid by a company from
its reserves other than free reserves.

Free reserves, as per Section 2(43), means such reserves which, as per the latest audited balance
sheet of a company, are available for distribution as dividend:

Provided that–

i. any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a
reserve or otherwise, or
ii. any change in carrying amount of an asset or of a liability recognised in equity, including surplus in
profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as
free reserves;

Hence dividend cannot be declared out of the capital reserves of the company.
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Procedure for Transfer of shares u/s 90(9) to The Investor Education & Protection Fund

Rule 6A, which provides the manner of transfer of shares as per sub-section (9) of Section 90 to the IEPF authority.

The shares shall be credited to DEMAT Account of the IEPF Authority within a period of 30 days of such shares due to be
transferred to the IEPF Authority with the following important conditions:

Transfer of shares by the companies to the IEPF Authority shall be deemed to be transmission of shares.

Such shares shall be transferred to the IEPF Authority without any restrictions and no application shall be filed for claiming
back such shares from the IEPF Authority.

The voting rights on shares transferred to the IEPF Fund shall remain frozen.

Refund to Claimant from Investor Education and Protection Fund

The shares in respect of which dividend has not been paid or claimed for a period of seven consecutive years or more,
are required to be transferred by the Company to the IEPF Authority.

Preservation of Dividend Cheques, Warrants and Dividend Registers

Where the company has given an undertaking to the Bank for preservation or safe keeping of paid Dividend cheques
or warrants for a specified period, the said instruments shall be preserved for such specified period or eight years
from the date of the instrument, whichever is longer.
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Disclosures

Prior intimation in case of a listed company

•As per regulation 29 of SEBI (LODR) Regulations, 2015, the listed entity shall give two working
(excluding the date of intimation and date of the meeting) days prior intimation to stock exchange about
the meeting of the board of directors in which declaration/ recommendation of dividend is to be
considered.
•As per regulation 42 of SEBI (LODR) Regulations, 2015, the listed entity shall intimate the record date to
all the stock exchange(s) where it is listed at least seven working days (excluding the date of intimation
and the record date) in advance for the purpose of declaration of dividend.

Notes to Accounts forming part of the financial statements of the Company shall disclose the
aggregate amount of Dividend proposed to be distributed to equity and Preference Shareholders for
the financial year and the related amount of Dividend per share.

Disclosure in Board’s report

#Q. Board of directors of Charming Entertainment Ltd. in its meeting held on 16th August, 2022 declared an interim
dividend on its paid-up equity share capital. Now, the Board wants to revoke the said declaration in its next Board
meeting scheduled on 3rd November, 2022. You as a Company Secretary of the company, advise the Board with the
relevant provisions of the Companies Act, 2013, whether the Board of directors can do so?
Ans. Dividend which includes interim dividend as per Section 2 (35) of Companies Act, 2013, is a due from the company
once it is properly declared. Interim dividend is declared by the Board of Directors and once it is declared, it thus
becomes due from the company. Section 123(4) further provides that the amount of the dividend, including interim
dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration
of such dividend. If the articles of the company do not authorize so, it has to be amended accordingly.
Section 127 of the Companies Act, 2013 provides for penalty to directors for any default in not paying dividend
within 30 days from the date of declaration. However, no offence under this section shall be deemed to have been
committed:
• Where the dividend could not be paid by reason of the operation of any law;
• 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;
• Where there is a dispute regarding the right to receive the dividend;
• Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder;
or
• 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.
In the given case, interim dividend has to be paid and cannot be revoked once it is declared as the exceptions given
above do not apply in the given case.

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