1. The word dividend is derived from the Latin world “DIVIDENDUM”.
2. Dividend means-
- i) In accounting terms – the profit distributed to shareholders.
- ii) In financial terms – the return on investments.
3. Dividend is generally paid on two types of instruments viz.
- i) Preference shares – at fixed percentage
- ii) Equity shares – at the rate decided by the board
4. In pursuant to Section 2(35) of Companies Act, 2013, dividend is defined as “dividend includes any interim dividend”.
In pursuant to subsection 3 of section 123 of Companies Act, 2013 and relevant rules made thereunder, a dividend is said to be an Interim dividend, if it is declared by the board of directors during any financial year or at any time during the period from the closure of financial year till holding of the annual general meeting.
The interim dividend is to be paid out of any one of the following:
i) out of surplus in the profit and loss account or
ii)out of profits of the financial year in which such interim dividend is sought to be declared
iii)out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend
Conditions for Declaration of Interim Dividend:
- No company can pay the dividend in any year without charging depreciation in the profit and loss account for the current year and that there is no balance of unprovided depreciation of any earlier year or years.
- Company which has failed to comply with the requirements of section 73 and 74 of Companies Act,2013 related to prohibition and repayment of Deposits accepted from the public shall not declare any dividend on its equity shares.
- Company shall be authorized by its articles for payment of dividends.
- Opening of a separate bank account in a scheduled bank for making payment of dividends and deposit the amount of dividends into the account within 5 days of its declaration.
- Ratification of members at the general meeting for Interim dividend.
- In case the company has incurred loss during the current financial year 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 higher than the average dividends declared by the company during the immediately preceding three financial years.
- Dividend should be paid by a company 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, cheque or warrant or in any electronic mode to the shareholder.
Declaration of Interim Dividend in case of inadequacy of profits or absence of profit (Rule-3):
In the event of inadequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the fulfillment of the following conditions, namely:-
- The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year, this will not be applicable if not declared any dividend in each of the three preceding financial years.
- The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
- The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.
- The balance of reserves after such withdrawal shall not fall below fifteen percent of its paid-up share capital as appearing in the latest audited financial statement.
Procedure for Declaration of Interim Dividend :
1.The Articles must provide the power to pay Interim dividend and Board must be authorized to declare Interim dividend.
2. Convening of a Board Meeting by issuing a notice and rate at which dividend is payable must be specifically stated in the resolution passed. It must state time, date and venue of the meeting and details of the business to be transacted thereat and be sent to all the directors for the time being in India and to all other directors, at their usual address in India.
3. At the Board meeting, the following matters must be considered:
i) It is required to have a proforma profit and loss account and balance sheet of the company prepared till the quarter preceding the date of declaration of interim dividend and provision must be made for all the working expenses and depreciation as per Schedule II of Companies Act, 2013 for the whole year.
ii) Closure of register of members for declaration of the record date for payment of interim dividend.
iii) Printing of dividend warrants [or] directly making the payment to the shareholder account.
iv) The Dividend warrant must be accompanied by a statement in writing showing the amount of Dividend paid and the amount of tax deducted at source if any.
4. Open the “Interim Dividend Account of …………. Ltd.” with the bank and payment must be made within 5 days of the declaration by the Board. The amount so transferred shall not be utilized for any other purpose. The same shall be paid within 30 days of the declaration by the Board.
5. Pass Board meeting resolution for payment of Interim dividend
6. Prepare a statement of dividend in respect of each shareholder containing the following details:
i) Name and address of the shareholder with ledger Folio No.
ii) of shares held.
iii) Dividend payable
7. Ensure that the DIVIDEND DISTRIBUTION TAX, if applicable is paid to the tax authorities within the prescribed time.
8. It shall be payable in cash and may be paid by cheque or warrant or sent through the post direct to the registered address of the shareholder within 30 days of the declaration of dividend. In the case of joint shareholders, dispatch the dividend warrant to the first-named shareholder or as directed by them.
9. Take note of the dividend paid in the next Annual General meeting.
Unpaid Dividend Account (Section-124)
1. If the Dividend declared is not paid or claimed within 30 days from the date of the declaration to any shareholder, the company shall, within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.
2. Within ninety days of making any transfer of an amount to the Unpaid Dividend Account, the company shall prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other web-site approved by the Central Government for this purpose, in such form, manner, and other particulars as may be prescribed.
3. An interest of 12% on the amount which has not been transferred to the Unpaid Dividend Account shall be paid by the company if there is any default made in transferring the total amount in Unpaid Dividend Account or any part thereof from the date of such default, 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.
4. Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply in form IEPF-5 to the company for payment of the money claimed.
5. Any money transferred to the Unpaid Dividend Account of a company which remains unpaid or unclaimed for seven years from the date of such transfer shall be transferred by the company along with interest accrued, if any, thereon to the Fund established under sub-section (1) of section 125 of Companies Act,2013 and the company shall send a statement as prescribed under Rule 5 of Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 of the details of such transfer to the authority which administers the said Fund and that authority shall issue a receipt to the company as evidence of such transfer.
6. All shares in respect of which dividend has not been paid or claimed for seven consecutive years or more shall be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed under Rule 6 of Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016.
Punishment for failure to distribute dividends (Section 127)
The company has declared a dividend but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of the declaration to any shareholder who is entitled to the payment of the dividend then:
i) every director of the company shall if he is knowingly a party to the default, be punishable with imprisonment which may extend to 2 years and with fine which shall not be less than Rs. 1000/- for every day during which such default continues and
ii) the company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.
An offence under this section shall be deemed not have been committed
(a) if the dividend is not paid due to reason of the operation of any law;
(b) if there are any directions of the shareholders regarding payment of dividend which cannot be complied with and the same has been communicated to him;
(c) if there is a dispute regarding the right to receive the dividend;
(d) if the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
(e) for any other reason if the failure to pay the dividend or to post the warrant within the period under the provisions of Companies Act,2013 was not due to any default on the part of the company.
Interim Dividend is a distribution that has been declared and paid by a company before determining its full-year earnings, to its shareholders. Such dividends are frequently distributed to the holders of a company’s equity shares on either a quarterly or semi-annual basis.
Interim dividend, like final dividend, shall constitute a debt, once it is declared and shall not be recoverable. Therefore, before declaring an interim dividend, the directors must satisfy themselves that the financial position of the company allows the payment of such dividends out of its attributable profits. The interim dividend should be declared only when the company has made substantial profits during a portion of the year and there exist good anticipated prospects in the remaining part of the year.
Disclaimer: The entire contents of this document have been developed based on relevant provisions and are purely the views of the authors. Though the author has made utmost efforts to provide authentic information, however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.