by Declaration and payment of dividend under Companies Act 2013
Dividend: Sec 2(35) provides the definition of dividend which states that dividend includes any “interim dividend”. Where in simple terms, dividend can be defined as the sum of money paid by a company, to its shareholders, out of the profits made by a company, in the proportion to the amount paid-up on the shares held by them (Sec-51).
Note: Preference shareholders are always paid dividend in preference to the equity shareholders.
Well, subject to the provisions of Companies Act, 2013, All Companies, except those companies which are registered under sec-8 (i.e. Non-profit organizations) can declare dividend.
Under Companies Act 2013, Chapter VIII containing sections, which deals with the provisions related to declaration and payment of dividend. Section 123 to 127 deals with the provisions related to the declaration and payment of dividend.
Conditions required to be satisfied for declaration of dividend
1) Depreciation: Before the declaration of dividend, a company shall provide depreciation to all its depreciable assets, in accordance with the rates or useful life, as the case may be provided in Schedule – II of Companies Act -2013.
2) Transfer to Reserves: A company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year, as it may consider appropriate to the reserves of the company.
3) Set off of previous year losses and depreciation: A company shall not declare dividend unless carried over previous losses and depreciation not provided in previous year or years, are set off against profit of the company for the current year.
4) Free Reserves: A company shall not declare or pay dividend out of its reserves, other than free reserves.
Payment of Dividend
According to the provisions of Companies Act 2013, No dividend shall be payable except by way of cash, where dividend payable in cash can also be paid through cheque, warrant or in any electronic mode, to the shareholder who is entitled to the dividend.
Condition: A company who has committed any default in compliance with the provisions of sec 73 and 74 relating to the acceptance and repayment of deposits would be barred to declare dividend.
Interim Dividend
According to the provisions of section 123(3), Board of directors of a company may declare interim dividend during any financial year, out of the profits made by the company during such financial year or out of previous year undistributed profits (subject to Companies (Declaration and Payment of Dividend) Rules, 2014).
As per Section 2(35) “dividend includes interim dividend” signifies that the provisions of Companies Act 2013, applicable to the final dividend to the extent possible, shall also applicable on interim dividend.
Unpaid Dividend Account (Sec 124)
There are some cases wherein, dividend declared by the company has not been paid or claimed and in case where such dividend remained unpaid or unclaimed within 30 days from the date of declaration; company shall take the following necessary steps:
(a) Open a special account with a scheduled bank to be called “Unpaid dividend account of …………………….(Company Limited/Company( Private) Limited”
(b) Transfer the unpaid or unclaimed amount of dividend within a period of 7 days from the expiry of such 30 days, to the special account.
In case of default: If the company committed any default, in transferring such amount to the special account with in the specified time, company shall be liable to pay interest @ 12% p.a. from the date of such default.
Punishment for failure to distribute dividend (Sec 127)
According to the provisions of sec- 127 of the companies act – 2013, if a company fails to pay the dividend, within a period of 30 days from the date of its declaration, to the shareholders who are entitled to the dividend then-
| Liability of | Imprisonment | Fine |
| Company | NA | Interest @ 18% p.a. for the period of default |
| Every director of Company | May extend to 2 years | Rs. 1000/- for every day, during which such failure continues. |
Exceptions to sec- 127: Following are the situation under which, no offence shall be deemed to have been committed, namely:
(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
(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.
