Declaration And Payment Of Dividend

1. Meaning of Dividend:The term ‘dividend’ has been defined under Section 2(35) of the Companies Act, 2013. The term “Dividend” includes any interim dividend. It is an inclusive and not an exhaustive definition. According to the generally accepted definition, “Dividend” means the profit of a Company, which is not retained in the business and is distributed among the Shareholders in proportion to the amount paid-up on the shares held by them.Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is available. Dividend for a financial year of the company (which is called ‘final dividend’) are payable only if it is declared by the Company at its Annual General Meeting (AGM) on the recommendation of the Board of Directors. Sometimes dividends are also paid by the Board of Directors between two AGMs without declaring them at an AGM (which is called ‘interim dividend’).
2. Source of Dividend:The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared.
3. Dividend under the Companies Act, 2013:The Companies Act, 2013 lays down certain provisions for declaration of dividend, which are:
   1. Section 51 permits Companies to pay dividends proportionately, i.e. in proportion to the amount paid-up on each share when all shares are not uniformly paid up, i.e. pro rata. Pro rata means in proportion or proportionately, according to a certain rate. The Board of Directors of a company may decide to pay dividends on pro rata basis if all the equity shares of the company are not equally paid- up.The permission given by this section is, however, conditional upon the Company’s Articles of Association (AOA) expressly authorizing the Company in this regard.
   2. Final Dividend is generally declared at an AGM [Section 102(2))] at a rate not more than what is recommended by the Directors in accordance with the AOA of a Company.
   3. In accordance with Section 134(3)(k), Board of Directors must state in the Directors’ Report the amount of dividend, if any, which it recommends to be paid.The dividend recommended by the Board of Directors in the Board’s Report must be ‘declared’ at the AGM of the Company. This constitutes an item of Ordinary Business to be transacted at every AGM.
   4. No dividend shall be declared or paid by a Company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with section 123(2) of the Act or out of profits of the Company for any previous financial year/years arrived at after providing for depreciation in accordance with the provisions of above sub section and remaining undistributed or out of both [Section 123(1)].
   5. 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.
   6. If owing to inadequacy or absence of profits in any year, a Company proposes to declare dividend out of the accumulated profits earned by it in any previous financial years and transferred to reserves, such declaration of dividend shall not be made except in accordance with the Companies (Declaration and Payment of Dividend) Rules, 2014.
   7. Depreciation, as required under Section 123(1) of the Companies Act has to be provided in accordance with the provisions of Schedule II to the Act.
   8. The amount of dividend (final as well as interim) shall be deposited in a separate bank account within 5 days from the date of declaration. [Section 123(4)]
   9. Dividend has to be paid within 30 days from the date of declaration.
   10. If dividend has not been paid or claimed within the 30 days from the date of its declaration, the Company is required to transfer the total amount of dividend which remains unpaid or unclaimed, to a special account to be opened by the Company in a scheduled bank to be called “Unpaid Dividend Account”. Such transfer shall be made within 7 days from the date of expiry of the said period of 30 days.
   11. Any money transferred to the unpaid dividend account of a Company in pursuance of section 124 which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the Company to the Investor Education and Protection Fund and the company shall file a statement in “Form DIV-5” to the Authority constituted under the Act to administer the fund and such authority shall issue a receipt to the company as evidence of such transfer. [Section 124(5)]
   12. Where a dividend has not been paid by the Company within 30 days from the date of declaration, every Director shall, if he is knowingly a party to the default, be punishable with imprisonment for a term which may extend to 2 years and shall also be liable to a fine of rupees 1000 for every day during which default continues and the Company shall be liable to pay simple interest @ 18% per annum during the period for which such default continues. [Section 127]
   13. If the Company delays the transfer of the unpaid/unclaimed dividend amount to the unpaid dividend account, it shall pay interest @ 12% p.a. till it transfers the same and the interest accruing on such amount shall ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them. [Section 124(3)]
   14. Any dividend payable in cash may be paid by cheque or warrant through post directed to the registered address of the shareholder who is entitled to the payment of the dividend or to his order or in any electronic mode sent to his banker. [Section 123(5)].
4. Procedure for declaration and payment of Final DividendThe following steps are required to be taken by a Company in respect of declaration and payment of final dividend:
   1. Issue notice for holding a meeting of the Board of Directors of the Company to consider the matter.
   2. Hold Board meeting for the purpose of passing the following resolutions:
      1. Approving the Annual Accounts (Balance Sheet and Statement of Profit and Loss of the Company for the year ended);
      2. Recommending the quantum of final dividend to be declared at the ensuing AGM and the source of funds for the payment thereof and amount to be transferred from the current Profits to Reserves as the board may deem appropriate.
   3. Open a separate Bank account for making dividend payment and credit the said Bank account with the total amount of dividend payable within five days of declaration of dividend.
   4. Fixing time, date and venue for holding the ensuing AGM of the Company, inter alia, for declaration of dividend recommended by the Board;
   5. Ensure that the required percentage of profits as decided by the Board is transferred to Company’s Reserves.
   6. The amount of dividend as recommended by the Board of directors shall be shown in the Directors’ Report.
   7. Hold the AGM and pass an Ordinary Resolution declaring the payment of dividend to the Shareholders of the Company as per recommendation of the Board. The Shareholders cannot declare the final dividend at a rate higher than the one recommended by the Board. However, they may declare the final dividend at a rate lower than the one recommended by the Board.
   8. Prepare a statement of dividend in respect of each shareholder.
   9. Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
   10. Make arrangements with the bank and in collaboration with other banks if required, for payment of the Dividend.
   11. No RBI approval is required for payment of dividend to shareholders abroad, in case of investment made on repatriation basis.
   12. Pay dividend within 30 days from the date of declaration.
5. Failure to Comply:Where a dividend has been declared by a company but has not been paid 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 which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent per annum during the period for which such default continues:

*Note: Dividend, once declared, becomes a debt and should not be revoked.