ICAI Notes: Declaration and Payment of Dividend | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


a    
 
 
CHAPTER 
8 
 
 
 
LEARNING OUTCOMES 
 
  
 
DECLARATION AND  
PAYMENT OF DIVIDEND 
  
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the legal provisions relating to declaration and 
payment of dividend  
?
Identify about the conditions which need to be fulfilled before 
declaring dividend out of accumulated reserves. 
?
Appreciate the manner in which unpaid and unclaimed 
dividend is to be dealt with. 
?
Identify the nature and framework of the Investor Education 
and Protection Fund (IEPF). 
? Appreciate the consequences for failure to distribute 
dividend. 
 
 
© The Institute of Chartered Accountants of India
Page 2


a    
 
 
CHAPTER 
8 
 
 
 
LEARNING OUTCOMES 
 
  
 
DECLARATION AND  
PAYMENT OF DIVIDEND 
  
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the legal provisions relating to declaration and 
payment of dividend  
?
Identify about the conditions which need to be fulfilled before 
declaring dividend out of accumulated reserves. 
?
Appreciate the manner in which unpaid and unclaimed 
dividend is to be dealt with. 
?
Identify the nature and framework of the Investor Education 
and Protection Fund (IEPF). 
? Appreciate the consequences for failure to distribute 
dividend. 
 
 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 
8.2 
 
 
 1. MEANING OF DIVIDEND 
Definition 
Section 2(35) of the Companies Act, 2013, while defining the term dividend simply 
states that “dividend” includes any interim dividend. In common parlance, 
“Dividend” implies a distribution of any sums to members out of profits and 
wherever permitted out of free reserves available for the purpose. 
Dividend is the shareholders return on their investment / capital in the company. 
Dividend is part of the distributable profits which has been paid out to them. In 
simple words, it is a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders whenever declared.  
 
Dividend
Meaning of 
Dividend 
[Sec. 2(35]
Types of 
Dividend
Interim 
Dividend
Final  
Dividend
Declaration of 
Dividend [Sec. 123 
& Companies 
(Declaration and 
Payment of 
Dividend) Rules, 
2014]
Current 
Year 
profits
Past Year 
profits
Reserves
Unpaid/ 
Unclaime
d 
Dividend 
[Sec. 124]
IEPF
[Sec. 125]
Establisment 
of Fund
Credits to 
the Fund 
and 
Utilization of 
Fund
Punishment 
for failure to 
distribute 
dividend 
within 30 
days [Sec. 
127]
Exemptions
 
© The Institute of Chartered Accountants of India
Page 3


a    
 
 
CHAPTER 
8 
 
 
 
LEARNING OUTCOMES 
 
  
 
DECLARATION AND  
PAYMENT OF DIVIDEND 
  
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the legal provisions relating to declaration and 
payment of dividend  
?
Identify about the conditions which need to be fulfilled before 
declaring dividend out of accumulated reserves. 
?
Appreciate the manner in which unpaid and unclaimed 
dividend is to be dealt with. 
?
Identify the nature and framework of the Investor Education 
and Protection Fund (IEPF). 
? Appreciate the consequences for failure to distribute 
dividend. 
 
 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 
8.2 
 
 
 1. MEANING OF DIVIDEND 
Definition 
Section 2(35) of the Companies Act, 2013, while defining the term dividend simply 
states that “dividend” includes any interim dividend. In common parlance, 
“Dividend” implies a distribution of any sums to members out of profits and 
wherever permitted out of free reserves available for the purpose. 
Dividend is the shareholders return on their investment / capital in the company. 
Dividend is part of the distributable profits which has been paid out to them. In 
simple words, it is a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders whenever declared.  
 
Dividend
Meaning of 
Dividend 
[Sec. 2(35]
Types of 
Dividend
Interim 
Dividend
Final  
Dividend
Declaration of 
Dividend [Sec. 123 
& Companies 
(Declaration and 
Payment of 
Dividend) Rules, 
2014]
Current 
Year 
profits
Past Year 
profits
Reserves
Unpaid/ 
Unclaime
d 
Dividend 
[Sec. 124]
IEPF
[Sec. 125]
Establisment 
of Fund
Credits to 
the Fund 
and 
Utilization of 
Fund
Punishment 
for failure to 
distribute 
dividend 
within 30 
days [Sec. 
127]
Exemptions
 
© The Institute of Chartered Accountants of India
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
a
    
 8.3 
The company in general meeting may declare dividends, but no dividend shall 
exceed the amount recommended by the Board. (Clause 80 of Table F in Schedule I) 
Dividend is recommended by Board of Directors in the Board’s Report
1
 and 
approved by Shareholders at the Annual General Meeting.  Dividend is not a 
liability unless it is declared by the shareholders at a validly constituted general 
meeting by passing an ordinary resolution
2
 at the rates recommended by the 
Board or such lower rates as they may decide.  
Declaration of dividend by the company at a rate higher than the rate 
recommended by the Board is not permitted. 
Dividend is Declared as a proportion of Nominal or Face Value of a share. 
Example 1: AB Ltd. has issued equity shares having face value of ` 10 per share. 
The shares are currently quoting on the NSE at ` 250/- per share. The Company at 
its AGM held on 27.7.20 has declared a dividend of 20%. Mr. Shekar owns 1000 
shares which he purchased at ` 300/- per share. What is the amount of dividend 
he will receive? 
The dividend is to be calculated on Face Value i.e. ` 10/-. So dividend per share is 
20% of ` 10/- = ` 2/- per share. So, Mr. Shekar will receive ` 2 * 1000 shares =  
` 2000/-. 
Example 2: The shareholders at an annual general meeting unanimously passed a 
resolution for payment of dividend at a rate higher than that recommended by 
the directors.  Discuss the validity of the resolution. 
Articles of Association companies usually contain provisions with regard to 
declaration of dividend on the pattern of regulations 80 to 85 of Table F to 
Schedule I of the Companies Act, 2013. Under regulation 80, although the power 
to declare a dividend vests with the shareholders however under no 
circumstances they can declare dividend exceeding the amount recommended by 
the Board of Directors. 
 
1
   As per Section 134 (3) (k). 
2
   As per section 102 (2) declaration of any dividend at the AGM is an ordinary business 
requiring ordinary resolution. At any other general meeting it will be special business. 
© The Institute of Chartered Accountants of India
Page 4


a    
 
 
CHAPTER 
8 
 
 
 
LEARNING OUTCOMES 
 
  
 
DECLARATION AND  
PAYMENT OF DIVIDEND 
  
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the legal provisions relating to declaration and 
payment of dividend  
?
Identify about the conditions which need to be fulfilled before 
declaring dividend out of accumulated reserves. 
?
Appreciate the manner in which unpaid and unclaimed 
dividend is to be dealt with. 
?
Identify the nature and framework of the Investor Education 
and Protection Fund (IEPF). 
? Appreciate the consequences for failure to distribute 
dividend. 
 
 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 
8.2 
 
 
 1. MEANING OF DIVIDEND 
Definition 
Section 2(35) of the Companies Act, 2013, while defining the term dividend simply 
states that “dividend” includes any interim dividend. In common parlance, 
“Dividend” implies a distribution of any sums to members out of profits and 
wherever permitted out of free reserves available for the purpose. 
Dividend is the shareholders return on their investment / capital in the company. 
Dividend is part of the distributable profits which has been paid out to them. In 
simple words, it is a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders whenever declared.  
 
Dividend
Meaning of 
Dividend 
[Sec. 2(35]
Types of 
Dividend
Interim 
Dividend
Final  
Dividend
Declaration of 
Dividend [Sec. 123 
& Companies 
(Declaration and 
Payment of 
Dividend) Rules, 
2014]
Current 
Year 
profits
Past Year 
profits
Reserves
Unpaid/ 
Unclaime
d 
Dividend 
[Sec. 124]
IEPF
[Sec. 125]
Establisment 
of Fund
Credits to 
the Fund 
and 
Utilization of 
Fund
Punishment 
for failure to 
distribute 
dividend 
within 30 
days [Sec. 
127]
Exemptions
 
© The Institute of Chartered Accountants of India
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
a
    
 8.3 
The company in general meeting may declare dividends, but no dividend shall 
exceed the amount recommended by the Board. (Clause 80 of Table F in Schedule I) 
Dividend is recommended by Board of Directors in the Board’s Report
1
 and 
approved by Shareholders at the Annual General Meeting.  Dividend is not a 
liability unless it is declared by the shareholders at a validly constituted general 
meeting by passing an ordinary resolution
2
 at the rates recommended by the 
Board or such lower rates as they may decide.  
Declaration of dividend by the company at a rate higher than the rate 
recommended by the Board is not permitted. 
Dividend is Declared as a proportion of Nominal or Face Value of a share. 
Example 1: AB Ltd. has issued equity shares having face value of ` 10 per share. 
The shares are currently quoting on the NSE at ` 250/- per share. The Company at 
its AGM held on 27.7.20 has declared a dividend of 20%. Mr. Shekar owns 1000 
shares which he purchased at ` 300/- per share. What is the amount of dividend 
he will receive? 
The dividend is to be calculated on Face Value i.e. ` 10/-. So dividend per share is 
20% of ` 10/- = ` 2/- per share. So, Mr. Shekar will receive ` 2 * 1000 shares =  
` 2000/-. 
Example 2: The shareholders at an annual general meeting unanimously passed a 
resolution for payment of dividend at a rate higher than that recommended by 
the directors.  Discuss the validity of the resolution. 
Articles of Association companies usually contain provisions with regard to 
declaration of dividend on the pattern of regulations 80 to 85 of Table F to 
Schedule I of the Companies Act, 2013. Under regulation 80, although the power 
to declare a dividend vests with the shareholders however under no 
circumstances they can declare dividend exceeding the amount recommended by 
the Board of Directors. 
 
1
   As per Section 134 (3) (k). 
2
   As per section 102 (2) declaration of any dividend at the AGM is an ordinary business 
requiring ordinary resolution. At any other general meeting it will be special business. 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 
8.4 
 2. TYPES OF DIVIDEND 
I. Classification based on time i.e. when declared 
 
Interim Dividend 
Section 123 (3) and also section 123 (4) contain provisions regarding interim 
dividend. Following points are noteworthy: 
? Interim dividend may be declared by the Board of Directors at any time 
during the period from closure of financial year till holding of the annual 
general meeting. 
The declaration of interim dividend is done out of profits before the final 
adoption of the accounts by the shareholders and therefore, interim 
dividend is said to be declared and paid between two AGMs. 
? The sources for declaring interim dividend include: 
• Surplus in the profit and loss account; or 
• Profits of the financial year in which such dividend is sought to be 
declared; or 
• Profits generated in the financial year till the quarter preceding the 
date of declaration of the interim dividend.  
? If 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 (rate of) dividend declared by the company during the 
immediately preceding three financial years.
Example 3: If a company declared dividend at the rate of 16% during the 
immediately preceding three financial years, then in case the company 
incurs loss in the current financial year, it is permitted to declare interim 
dividend at a rate which is not higher than 16%.    
Dividend
Interim Dividend Final Dividend
© The Institute of Chartered Accountants of India
Page 5


a    
 
 
CHAPTER 
8 
 
 
 
LEARNING OUTCOMES 
 
  
 
DECLARATION AND  
PAYMENT OF DIVIDEND 
  
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the legal provisions relating to declaration and 
payment of dividend  
?
Identify about the conditions which need to be fulfilled before 
declaring dividend out of accumulated reserves. 
?
Appreciate the manner in which unpaid and unclaimed 
dividend is to be dealt with. 
?
Identify the nature and framework of the Investor Education 
and Protection Fund (IEPF). 
? Appreciate the consequences for failure to distribute 
dividend. 
 
 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 
8.2 
 
 
 1. MEANING OF DIVIDEND 
Definition 
Section 2(35) of the Companies Act, 2013, while defining the term dividend simply 
states that “dividend” includes any interim dividend. In common parlance, 
“Dividend” implies a distribution of any sums to members out of profits and 
wherever permitted out of free reserves available for the purpose. 
Dividend is the shareholders return on their investment / capital in the company. 
Dividend is part of the distributable profits which has been paid out to them. In 
simple words, it is a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders whenever declared.  
 
Dividend
Meaning of 
Dividend 
[Sec. 2(35]
Types of 
Dividend
Interim 
Dividend
Final  
Dividend
Declaration of 
Dividend [Sec. 123 
& Companies 
(Declaration and 
Payment of 
Dividend) Rules, 
2014]
Current 
Year 
profits
Past Year 
profits
Reserves
Unpaid/ 
Unclaime
d 
Dividend 
[Sec. 124]
IEPF
[Sec. 125]
Establisment 
of Fund
Credits to 
the Fund 
and 
Utilization of 
Fund
Punishment 
for failure to 
distribute 
dividend 
within 30 
days [Sec. 
127]
Exemptions
 
© The Institute of Chartered Accountants of India
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
a
    
 8.3 
The company in general meeting may declare dividends, but no dividend shall 
exceed the amount recommended by the Board. (Clause 80 of Table F in Schedule I) 
Dividend is recommended by Board of Directors in the Board’s Report
1
 and 
approved by Shareholders at the Annual General Meeting.  Dividend is not a 
liability unless it is declared by the shareholders at a validly constituted general 
meeting by passing an ordinary resolution
2
 at the rates recommended by the 
Board or such lower rates as they may decide.  
Declaration of dividend by the company at a rate higher than the rate 
recommended by the Board is not permitted. 
Dividend is Declared as a proportion of Nominal or Face Value of a share. 
Example 1: AB Ltd. has issued equity shares having face value of ` 10 per share. 
The shares are currently quoting on the NSE at ` 250/- per share. The Company at 
its AGM held on 27.7.20 has declared a dividend of 20%. Mr. Shekar owns 1000 
shares which he purchased at ` 300/- per share. What is the amount of dividend 
he will receive? 
The dividend is to be calculated on Face Value i.e. ` 10/-. So dividend per share is 
20% of ` 10/- = ` 2/- per share. So, Mr. Shekar will receive ` 2 * 1000 shares =  
` 2000/-. 
Example 2: The shareholders at an annual general meeting unanimously passed a 
resolution for payment of dividend at a rate higher than that recommended by 
the directors.  Discuss the validity of the resolution. 
Articles of Association companies usually contain provisions with regard to 
declaration of dividend on the pattern of regulations 80 to 85 of Table F to 
Schedule I of the Companies Act, 2013. Under regulation 80, although the power 
to declare a dividend vests with the shareholders however under no 
circumstances they can declare dividend exceeding the amount recommended by 
the Board of Directors. 
 
1
   As per Section 134 (3) (k). 
2
   As per section 102 (2) declaration of any dividend at the AGM is an ordinary business 
requiring ordinary resolution. At any other general meeting it will be special business. 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 
8.4 
 2. TYPES OF DIVIDEND 
I. Classification based on time i.e. when declared 
 
Interim Dividend 
Section 123 (3) and also section 123 (4) contain provisions regarding interim 
dividend. Following points are noteworthy: 
? Interim dividend may be declared by the Board of Directors at any time 
during the period from closure of financial year till holding of the annual 
general meeting. 
The declaration of interim dividend is done out of profits before the final 
adoption of the accounts by the shareholders and therefore, interim 
dividend is said to be declared and paid between two AGMs. 
? The sources for declaring interim dividend include: 
• Surplus in the profit and loss account; or 
• Profits of the financial year in which such dividend is sought to be 
declared; or 
• Profits generated in the financial year till the quarter preceding the 
date of declaration of the interim dividend.  
? If 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 (rate of) dividend declared by the company during the 
immediately preceding three financial years.
Example 3: If a company declared dividend at the rate of 16% during the 
immediately preceding three financial years, then in case the company 
incurs loss in the current financial year, it is permitted to declare interim 
dividend at a rate which is not higher than 16%.    
Dividend
Interim Dividend Final Dividend
© The Institute of Chartered Accountants of India
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
a
    
 8.5 
? The amount of the dividend, including interim dividend, shall be deposited 
in a separate account maintained with a scheduled bank within five days 
from the date of declaration.  
? All provisions which are applicable to the payment of dividend shall also 
apply in case of interim dividend.    
Final Dividend  
? When the dividend is declared at the Annual General Meeting of the 
company, it is known as ‘final dividend’. 
? The rate of dividend recommended by the Board cannot be increased by the 
members. 
The table given below provides a quick summary of the above concepts of Interim 
Dividend and Final Dividend. 
BASIS FOR 
COMPARISON 
INTERIM DIVIDEND FINAL DIVIDEND 
Definition Interim dividend is declared 
and paid during an accounting 
year, i.e. before the finalization 
of accounts for the year. 
Final dividend is the 
dividend recommended by 
the board of directors, and 
approved by shareholders 
at the company's Annual 
General Meeting, after the 
close of financial year. 
Announcement Announced by Board of 
Directors. 
Recommended by Board of 
Directors and approved by 
shareholders. 
Time of 
Declaration 
Before preparation of financial 
statements. 
After preparation of 
financial statements. 
Revocation It can be revoked with the 
consent of all shareholders. 
It cannot be revoked. 
  
© The Institute of Chartered Accountants of India