Chap 8: Declaration & Payment of Dividend

Chapter8:
eclaration and
Payment of Dividend;
and Payment of
Read with Companies (Declaration
Dividend) Rules, 2014.

Types ofDividend &basis concepts

Why Provision is Made?
student shall be aware ot and it is Just
n huh author tmks that cvery
s A gCneralhscd coneept 123 tor better understanding
Ot tlhus sectton
hicndedwith the provISKON1
Applicability
To all companies.

Concept
Types of Dividend

Based on shares
Based on Declaration

Interim Dividend Preference Shares Equity Shares

Final Dividend

Difference in Meaning Cumulative Non

Final Dividend Interim Dividend
Proposedby: BOD-OR The Dividend will be pro- Cumulativve
Finalised by: GM-OR posed and finalised by
(In above situation if BOD them self through Only Finalor Interim dividend
BOD proposes max BM-OR for Current FY or Last audited
rate 25% then GM shall The rate of the dividend FY orfrom reserves.
finalise the Rate 25%) shall be subject to sec
123(3) 1. the dividend can be in arrears for
The dividend declared Thedividend declared be- anynumber ofyears. Andit shal
at AGM is final divi- tween 2 AGM is interim be paidfor all years on declara
dend dividend tion.
The Dividend declared The dividend declared out 2. If the arrears are for any of the
Outof last audited FY of current year's profit followingthe votingright will be
profit or reserveis final that is on going year is in- obtained.
dividend. terim dividend. a. For continuous last 2 FY.

O CA Darshan D. Khare's Wowclass.com

MAKE NOTES
Chap 8: Declaration 8& payment of Dividend
123()-(2):Declaration of Dividend
hc
Why Provision is Madc?
companm shall distrubute the
net protit amonp, the shatcholders As the divIdend.
But f.
r the
Avment of suh d dend theopan shall give cttect to all the espensCS and shall
rditons lhe sevtons provide the condtons tor the
comply wi n all
in adhton to this
sam
the sounes of the da uend shall also be stated trom which thc
vlan the company shall
dn dend lhe sectun also pron ules tor the sources of dividend
Applicability
lo all companes.

he
123(1):Sources for declaration of dividend.
cmpann can dolare the dividend out of
a ument vear
protit (L.e. profit of last FY aud1ted) derived after proViding depreciation, or

.Preious vear's profits (i.e. Accumulated profit) deriwed atter providing depreciation
ie
vears: or out of both; of respec.
Provided that in computing
profits any amount representing unrcaliscd gains, notional
revaluation of assets and gains or
any change in carrying anmount ot an asset or of a
ment of the asset or the lhability on
measure
lability fait value shall be excluded, or"|lnserted by
at
amendment act,2017 Companies
c.
Money provided by CG or SG for payment of dividend in accordance with the
gwen by respective Government. guatantee
In add1tion this
to
(even though
mentioned in bare text) the BOD ot the
not
the dividend out of
ongoing years company can declare
The dividend can be called as profit suo-moto based
on the financial
position of the company
interim dividend. For such dividend the
While computing BOD-OR is sufficient.
1. any amount
profit, following shall be excluded
2. notional
representing unrealised gains,
gains or revaluation of assets
5. any change in carry1ng amount ot an asset or ot
l1ab:hry at fair value.
a
luability on measurement ot the asset or the
For declaration of the
dividend the 2 elements are essential
tollows: as
Deduction of depreciation
a.
discussed above); &
b. Transfer to reserves of
(as
the company for the sake future.
In the old
Companies
Act 1956 there was
requirement to mandatorly transter the
amount to reserve in case
of declaration of dividend. But in new minimum
any such requirement. Companies Act 2013 there is no
If company wish to transter the
profit to the reserve the amount will be decide by BOD-OR
such anount will be transfered. And it BOD
does not wislh to and
transter to the reserve they can re
solve the same.
Ifcompany wishes to declare the davidend out of
accumulated proit then company do the
out of
following things: same
a. Profit and loss credit balance
(not mentioned in bate text). It is a
profit of the past year but
company did not transferred the same to the reserve. The
tion by GM-OR. profit is freely available for
distr1bu"
b. Out of General Reserve. Ths is the
profit which is accumulated and trans ferred from the
its of the company for
every Now if the year.
pror
company
declare the dividend out ot the
wants to
General Reserve the company need to comply with the
| 'The following ules for such declaration.
company shall not declare the dividend out ot any other reserve than the free
| The company shall not declare reserve.
dividend unless it set off past year losses or depreciation against

8.2 CA Darshan , Khare's WowClass.com

 Chap 8: Declaration & Payment of Dividend MAK
year.
Current

prohtot
oroht rther that where, Owing to inadequacy or absence of
protits in any financial year, any
declare
Provided

divsidend out ot the accumulated

onoses to pro fits earned by it in
Copa eed by the company to the free reserves], such declaration of dividendprevious
a n d I t r a n s f e r r e d
years
shall not be
ce with such rules as given below:
made
Rate of Dividends
Average rate of dividend of last 3 years.
1. In case f the company did:not declared any dividend in any of the last 3 FY then such FY shal
be counted for average. For e g. if the company declared dividend only for last 2 years the
not
ge rate only of 2 rears shall be derived. If company did not declared the dividend in the
average

last 3FY this condition will not be applicable in such case.

1he maximum withdrawal ie. W* from the reserve can be 1/10h of Paid up capital and Free
Reserves. 1.e.

W(PC + FR)/10
The amount withdrawn shall be utilized to set offthe currentyear losses first. As the dividend is
need to be declared from the accumulated profit then there might be chances that the company
have incuered the losses in the current year.
Reserve after such withdrawal (assume \W) shall be at least 15o of Paid up capital.
i.e. FR- W215% of PC
ie. W FR - 15°% of PC
In casc ofinadequate profitin the current yearthe Governmentcompany can declare div-
idend outof accumulated profit without following the above rules required to declare the
dividendout ofsuch accumulated profitL
123(2): Rate of Depreciation in accordance with the pro-
of sub-secthon (1), depreciation shall be provided
For the purposes of clause (a)
Schedule II.
vISIons of
Chart for Understanding
Sources of Dividend

Money Provided ##Out

Net Profit of
by CG/SG of Reserves
CFY or LFY

1. Rate s Average rate of

Calculation Company can directly last 3 FYs. (do not count
PBIDT
pay dividend by pass- the year in which divi-
GM-OR for
Less: Interest ing just a dend is not declared.)
Depreciation (sch I) the same.
2. Ws (PC+ FR)/10
Taxes As the amount is itself 3. FR-W215% of PC
PAT i.e. W's FR 15% of PC
provided by CG or SG
Less: Previous year's loss or there is no restriction 4. (w or W ) whichever is
depreciation lower- Current Year Loss
for the same.
Whichever is lower**
Profit after previous
Distributable amount.
loss/Depreciation
reserve as
Transfer to
Less:
Per BOD-OR
dividend.
distributable as
Amt

of previous year's loss or depreciation.

* Meaning of deduction

CA Darshan D Khare's WowClase eOn

 123(3): Interim Dividend
Why Provision is Made?
It is a general1sed concept which author thinks that every student shall be aware of and it is just
blended with the provision of this section 123 for lbetter understanding.

Applicability
To all companies.

Bare Text Vs Text for Understanding & Writing in Exam

123(3): Interim Dividend
The Board of Directors of a company may declare interim dividend during any financial year or at
any time durng the period from closure of financial year till holding of the annual general meeting
a) out of the surplus in the protit and loss account or
b) out of profits of the financíial year for which such interim dividend is sought to be declared ot
in the financinl year till the
)Out ofprofits generated
the interim dividend".
quarter preceding the date of declaration ot

Jf the company wants to declare dividend in during the ongong financial year and it the
cop the
has incurred loss tull the end of the last
quarter then the company can declare the dividennd Dut
ae
restricted rate.
then R average rate of dividend of last 3 financial year
Now question arises what is the company did not
declared rhe dividend in last 3 financial year
answer to the question
ambiguous
is and the
department has not wear anvthing till that but lo8
speaking the company should not be allowed to pay any rate of dividend in such a case . as tnc

B.4 CA Darshan D, Khare's

WowClass.com
 Chap 8: Declaration &Payment of Dividend
h thnlh nll lat
qmatte1 an a il
ha ot
de laned anny divdencl n last 3
MA
year
J n an ann i k t hav alu ulle ted lss nn la lmane al year s it will br Prudenial not

123(4)-(6): Transfer and Payment of Dividend

Why Provision is Made?
t N A 1
taledvet wlh h autho
tmks that every stulent shall be aware of and it 1s Just

Applicability
To all conpans
123(): 1ransfer of IDividend [*notapply to
l am
dee lard any kndl of divnend final or interm wholly owncd Govt company
the company shall transfer the d1vidend
tthe seAate Dank aecount withm the 5 days from the date declaration

123(5): Payment of IDividend to Specific person.

ThemAIN slhall always pay the divndcnd to:
A Repistcrcd sharehokler, or
An
erson on order of repistercd sharchokder; or
banker
of repisteted sharcholer.
Suh dovdend shall be
pail in the fom of cash and not in kind
he above sulbsecton
requires the payment of the divilend to registercd sharcholder by way of
Ash n l Which mght ead to creation of the
that whether
qucstuon Cannot
profit to the sharcholder m any other form?
company trans ter
The answer Is ves, transfer the profit to sharcholder
company can in other form follows:
as
In the om of bonus shares. And lor such purpose thc
o prot requircd to serves.
company can
capital1sc such amount

Such poft of the company can also be usced to make the

existing shares fully paid up.
The above subsccton requres the
paynent of the divicde nd in the form of cash only. Now it wil
be genctal assumption that d1vidend can be pand n the torm of Cheque, DD or any other electron-

123(6): Restriction on payment of dividend in case of default in any other sec-

tion of the Companies Act, 2013.
The company shall not pay dividend m case of default in the following
a company accepts deposit fom the public cven when it is proh1lbited trom accepting the same.
(sec 73)
l t company las to repay the deposit accepted on due dlate. (sec 74)

127: Dividend shall be paid in 30 days

Why Provision is Made?
The dividend once declard becomes dkebt for the company. So it is the duty ofthe company to pay
NUCch dividend as soon as possilble. In such situation company may delay the payment of dividend to
Save self from the liquidity crunches which ariscs after declaration of dividend.
In addition to this the dividend payment must inot be only a stunt to hike the price of the
Sharcs. It shall be executed in the fair manner. Thus the section is prepared to keep watch on the
payment of dividend as soon as possible. And in addition to this it suggests the consequences in
CAsc of failure of the same.

CA Darshan D. Khare's WowClass.com

MANE NOTEs Chap 8: Declaration &payment of Dividend

Structure.ofthe section
Section 127

Payment of dividend in 30 days and con Situation in which dividend can be paid
sequences of non payment thereof. after 30 days without any consequences,

Applicability
Thescction is applicable to the all companics.
127: Consequences for non payment of dividedwithin 30 days
The company shall pay the dividend n 30 days from declaration in the following manner.
a Pavment of dividend to shareholders bank account.
bDispatch ofdividend warrant in 30 days.

In such situation it the company kals to pay the dividend to any shareholder in the above manne.
er
then the consequences will be as follows.
a Even Director of the company who is knowingly party to default will be punishable with:
() Fine of Rs. 1000 per day.
) lail upto 2 years.
b. Company will be liable to pay the simple interest of 18°o per annum to the shareholder for de
layed payment. (eg. If the number of days of delay are 15 days then the interest will be (Divi
dend X 18°) X 15/365]

In add1tion to this if the default in payment of the dividend is subs1sting tor cont1nuous 1 year after
end of 30 days all the directors holding the position of the director will be disqualitied u/s 164/2
andneed to vacatethe oficeu/s167immediately afterend ofsuch1year.
127:Situation where payment of dividend is allowed after 30 days.
The company and the director will not be liable for the above
consequences it company tails to pay
dividend in 30 days because of following reasons.
a. Where dividend cannot be paid by operation of law. Jeg. revSIon of the tinancial statement
resulted in reduction of profit which lead to cancelation of
dividend]|
b. Shareholder requires the payment of the dividend in specific manner and company is unable
to comply with such requirements and such inability is communicated by company to share-|
holder in 30 days.
C. There 1s no that to whom the dividend shall be paid or there is
clarity dispute between the
right the dividend.
to receive
Je g, title of the shares is in dispute|
d. The company set off the dividend
against the dues from shareholders. [eg. Company set ott
dividend aganst calls n arrears
C.Where delay is not due to tault of the company. (e.g. natural calamity, bank strike, tault ot
post, ctc

124: Unpaid Dividend Account

Why Provision is Made?
There are lots of situation m the current corporate scenario where company dispatches the ve
dend warrant and the sharehokler docs not claims the dividend because of the following reasons:
a. The amount of dividend is so neglgilble to claim.
b. The cost to claim thc dividend practically exceeds the amount of dividend.

8.6 CA Darshan D. Khare's WowClass.com

 Chap 8:
Declaration &
The dividend warrant have mistake on it Payment
of Dividend MAKE NoTE
n the of
hardship for shareholder to claim it and sharcholdername something other which creates
d. Negigence to clam the dividlcnd. gives up
c. Any other reasons.
Dae fo above reasons thhe large amount of dividend
remains unclaimed. Now
Aend isthe income of the
not
company or director or any shareholder it is the
such amount of divi
lhareholder. And he shall have chance to claim the same
sha money belonging to
over the
sion is made in this case to transter the
amount of
period of time. Thus the
provi-
claimed unclaimed dividend to
specific
be over
period by rightful shareholder. account so it can

Applicability
To all
the
124(1): Transfer of dividend tocompanies.
1. If the dividend is unpaid/
declarcd by the company it shall be unclaimed account
2 If the dvidend remains paid in 30 days u/s 127.
shall transfer the same to
unpaid or unclaimed after 30 days, then in next 7
unpaid/ Unclaimed dividend account. days the company

124(2): Publication of the details of the Unpaid

The company shall
and the website
publish following details regarding unpaid dividend
shareholders
onwebsite ot the
approved by CG. company
a. Names of the shareholder who's
dividend is unpaid.
b. Their address.
(in case of change in address then last known
C. The amount of
unpaid dividend. address.)
The statement for the above
be published. particular shall be made un the manner
prescribed and the same shall
The details have to be
posted in 90 days after the transfer has been made to
124(3): Delay in transfer of dividend to account
1 The company needs to transter the
unclaimed / unpaid dividend to
unpaid account.
the time l1mit
specified above. unpaid dividend account in
2 If the company fails to
transter the same to
then the company shall transfer the unpaid account within the time spec1tied above
interest on the
num. delayed trans ter at the rate of 12 u per an-
Such amount of dividend shall be
trans fer do benetit of the
thedividend. shareholder at the time he claims
124(4): Claiming the dividend from the
The person who is unpaid dividend account.
eligible shareholder for the
same by pupose of receiving the dividend can receive the
apply1ng to the company.
The shareholder can also receive the dividend from
to the company.
even
unpaid account by mak1ng the
application
124 (5): Transfer of dividend
to IEPF and
After
transferring the unclaimed/ unpaid dividend to thepayment of interest.
Unpaid Dividend
account, it shall
remain in the same account for 7
years.
2Every shareholder of the company who's dividend is
the dividend can claim the remuning unpaid or who have unclaimed
same up to the end of such 7
vears when dividend is laying in the
unpaid account.
After expiry of the 7 years from the transfer to
nterest
unpaid account the dividend toge ther with the
as
per section 124(3) above (12o) shall be transferred to lnvestor
Education Protection
Fund (EPE) maintained in sec 125. (discussed in next section.)
Thecompany shall file the details of the trans fer to the
prescribed author1ty as per sec 125.
124(6): Transfer of shares on which the dividend is unpaid.
ne company shall transfer those shares to IEPF on which the dividend has not been paid or
laimed tor seven consecutive years or more shall be is uncla1med or unpaid.

O CA Darshan D. Khare's WowClass.com

8
 Declaration & payment
of Dividend
RENoTES Chap 8: to thc prescrited authority
sec 10
as per
125.
file the detals of the transfer
he compam shall 1246
shareholder arc
transferred to lEP as
per above subsection then he
t the shares of anv ident1fication documents
and proofs
rvlam the same on
sulmission of requircd
sharcholder to claim the unpaid
an

Sut this give the powver to any

section does not
cannot be claimed i n
unclaimened
dividend once transferred to IEPF Case
mdend trom the 11:P1. The
that in case any dividend is naid
planahon-or the removal of doubts, it is hereby clar1fied
not
years, the
share shall be transferred to
r
claimeded
tor anm vear dunng the said period of seven consecutive
Investor
Fducan n and l'rotection Fund.
and Consequences
124(7): Contravention
T he above be contravened by way of:
section can
or to IEPE.
. o t trans terring the dividend to unpaid account
account or to IEP.
trans te rring the interest on the same unpaid
D.ot to
/ uncla1med to IEPE.
transte rring the shares on which the dividend unpaid
C. Aot is

of
If a company fails to comply with any of the requirements this section, such company shall hebe
with further
liable to a penalty of one lakh rupees and in case of continuing talure, a
penalry of five
five
hundred rupees for each day after the first during which such tailure continues, subject to a mavi
mum of ten lakh rupees and every officer of the company who is 1n detault shall be liable to a pen.
alty of rwenty-five thousand rupees and in case of continuing ta1lure, with a further penalty of one
hundred rupees for each day after the first during which such falure continues, subject to a
maxi
mum ofrwolakh rupees.[Substituted by Companies Amendment Act.2020-28th Sept 20201
 Chap&8: Declaration & Payment of Dividend

Chart for Understanding

Declaration of Dividend Exception: Dividendcannot be paid due to:
1. Operation of law.
by Company u/s 123 2. The directions of the shareholder cannot bel
Complied with and the same is communi-
30 Days cated to him.
3 Dispute for title to dividend.
4. Dividend is set off against any other due.
Payment of Dividend in
5. Situation which is not under control of
30 days u/s 127
Company.

If not then Publish on the Website:

in Next 7 a. Names of the shareholder who's dividend
days is
unpaid
b. Their address. (in
Transfer of Dividendto
case of change in address
then last known address.)
Unpaid A/C u/s 124(1) C. The amount of unpaid dividend.
The company needs to pay the interest o f
12% for delayed transfer in unpaid divide nd
account.
7 years

he company shall transrcr those snares to

EP
Transfer of Dividend to on which the civicend has not been paid or claimed
IEPF u/s 124(5) tor seven
consecutive years or more

Ibut the
sharehocer can reclaim such shares on
S i n g specir e p r o o
 125: Investor Education & Protection Fund [IEPF]
Why Provision is Made?
in market of unlisted companies that the
It is beng observed n the securities or capital o r even case

the sharehokders remans unclamed by shareholders:

lots of amount pavable to

Unpaid dividend accounts of companies;

Applhcation mon«s receved for allotment of securities and due for re fund.
Matured deposits with companies,
Matured debentures with companes;
lnterest accrued in respect ofthe above amounts
Now if we consider the above amount the same does bclongs the sharcholders and these are not
to

the profit of the company Neither company nor BOD have any right on the same. The amount
belongs to investor of tlhe company and if the same is not claimed by investor it shall be used for
the benefit of the all investors lobby. And with such basic intention the IEPE is formed.
In addition to this the investor in the current market shall be aware of all risk of the securites mar-
ket and companies working. To make investor aware about the same the authoritics needs ro con-
duct the training and awareness session. Thus the expenses of such activity of education and pro-
tection of the investor are also incurred from suclh fund.
 Dividend
&paymentof
MAKE NOTEs Chap8:
Declaration

Applicability
To allcompates
Establishment of IEPF
125(1): lnves,r alut atufl
And l'n te
r uaikand
l'und to be called the
shall establish a
The Ccntral (Govemment

(hercin rcterred to as the Fund Fund

125(2): Deposit to
credited to the Fund- alter dur apprpnain n ade by .Par
There shal be Government by way of granis
(4) the given by the Central
amount f the Fund,
hament by law in this behalffor being
utilised for the purposes comnpaniss
to the Fund by the Cenral
Government, Stae GoyerumEDs, y
(6) donations given
for the purposes ofthe lund, the lund under sud
other nst1tution transterred , u

DividendAccount of companes
C)the anmount the Unpaid
in

Section (5) of section 124, ( o v e m n e n t i i c h haal Decn transterred

d
ofthe (entrd
(d) the amountinthe general revenue account 205.4 of the (mpanes ct, T750, 4
it strud u e d
tion
to
that acount under sub-secton (5) of sec (Amendment) Act, I79), 4nd remanling unpaud
atcly before the commencement of the (ompanies
unclamed on the commencement of this ict,
under secu9n 205Cf
lying_in the Investor Education and Protecuon Fund
the
()the amount

ompanies Act, 1956 (1 of 1956);

tron the I und,
() theinterest or other income received our of nvestments mi.ude
ot section 8, urrender ol seCuriues ACqUIred with
g) the amount received under sub-section4)
fraud duc
(h) the application money received by companies
tor
allk tmcent
ot uny e

unties 4icd tor refund

(1) matured deposits with companies other than banking mpuie,

) maured debentures with conpanies,
(k) interest accrued on the anounts referred o n lauses (h to y
1) sale proceedsof fractional shares arsing nutot ssu.auncc t bonus shares, inerger ad analyan atwm
for seven or more years,
(m) redemption amount of preterence sharcs rem.anng unpul or unclamed tor seven or oreyears,

and
(n) such otheramount as mayle prese nled
Provided that,lhe unclamed applcaton money or maturef deposit r tnaturcd debentures willtr
transferred to lEPlE o n l y a f t e r cxpiry o t 7 a r s trom the d a t e i t duc tor p a y n c n

125(3):Utilisation of Fund
The F'und shall be utilised for-
(a) the refund in respect of unclaimed dividends, matured deposits, matured debentures, the ap
plication money due for retund and nterest thereon,
b) promotionofinvestors' cducation, awarcness and prutcsuon
)distrbution of any disgorged anmount among cligible and identifiable applicants for shares
debentures, shareholders, debenture holters or depositrs who have suffered bnses due to wrung a
thons by any person, in accordance with the ordern made by the (ourt which had ordered disgporge
ment;
(d) reimbursement of legal expenses incurred n pursung class ac ton suits under sectons 37 and 2)
by members, debenture-holders or depositors as may be sanctoned by the Tribunal, and
(e) anv other purpose incidental thereto, n accordance with such rules as may be prescrted
The person whose amount re terred to un clauses (a) to (d) of sub -section (2) was cligible under ol0
law to claim the amount stated above trom the TEPF after the
expiry of the perod seven yeay
maintained u/s 205C underold Conmpanies Act, 1956.
125(4): Application to Authority to claim thefunds
The person can claum the hunds as stated above only if he makes the application to the authony
constituted u/s 125(5)as below.
125(5):Establishment of authority for Refund of claims
The CG can constitute theauthority with:

8.10 CA Darshan D, Khare's WowClass.com

 Chap 8: Declaration & Payment of Dividend
1 chairman, &
MAK
a.
b. 7 other members; &
c.C. CEO
1.e
he
plication for clanming unpaid amounts can be made to such authonty
125(6): The Management and Administration
CG have power to decde
The followimg tlhmgs by makmy ncw rules
a Admimistration of fund.
b. Appomtment ot chairman
Appomtmcnt of members.
d. Appomtnment of Ci:O
. Holdng the mectungs of authonty
125(7): Resources to Authority
The CG have power to
prOrIde rCsources to author1ty by mnakmg rules.
125(8): Administration and Accounts of Fund
The authority shall:
a. Administer the fund.
b Prepare and mamtan the records as nceded as per CAG.
125(9):Power of authority to expend the fund for specific object of sec
The authonty can expend the amount n fund or allocate the
125(3) cAL
same for mcet1ng the objecrs men-
tioned in sec
125(3) above.
125(10): Audit and Reporting LEV
1. The audit of the IEPF will be conducted by CAG.
CAG will decide the time, frequency and C
scope of audit.
3 The audited accounts and audit
report shall be forwarded by CAG or
authority to G an-
A
nuallv or on demand.

125(11): Reporting to CG
The authority and the CAG shall prepare in such form and
such time for each financial year and
at
present the same documents and reports before the parliament of India.
a. Annual report
b. Audit report by CAG.

The reports shall be first given to the CG and then CG will put the same before the parliament of
India