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

 Page 1


                                 
   
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
 
•   MEANING AND TYPES 
 
Meaning A dividend is a payment made by a company to its shareholders, 
usually as a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders yearly or whenever declared. 
Section 2(35) of the Companies Act, 2013, simply states that “dividend” 
includes any interim dividend. 
Types I. Dividend payable on the basis of Time (When declared)  
1. Interim Dividend: When the Board of Directors declare dividend 
between two annual general meetings of the company, such 
dividend is known as Interim dividend.  
2. Final Dividend: When the dividend is declared at the annual 
general meeting of the company, it is known as Final dividend. 
All the provisions applicable on dividend are also applicable on 
interim dividend. 
II. Dividend payable on the basis of Nature of shares 
1.      Equity Shares – as per the dividend policy of the company 
and availability of profits.  
2.      Preference shares  
a) Cumulative Preference shares  
b) Non – Cumulative Preference Shares  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page 2


                                 
   
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
 
•   MEANING AND TYPES 
 
Meaning A dividend is a payment made by a company to its shareholders, 
usually as a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders yearly or whenever declared. 
Section 2(35) of the Companies Act, 2013, simply states that “dividend” 
includes any interim dividend. 
Types I. Dividend payable on the basis of Time (When declared)  
1. Interim Dividend: When the Board of Directors declare dividend 
between two annual general meetings of the company, such 
dividend is known as Interim dividend.  
2. Final Dividend: When the dividend is declared at the annual 
general meeting of the company, it is known as Final dividend. 
All the provisions applicable on dividend are also applicable on 
interim dividend. 
II. Dividend payable on the basis of Nature of shares 
1.      Equity Shares – as per the dividend policy of the company 
and availability of profits.  
2.      Preference shares  
a) Cumulative Preference shares  
b) Non – Cumulative Preference Shares  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
• DECLARATION OF DIVIDEND [SECTION 123] 
Dividend 
shall be 
declared or 
paid by a 
company for 
any 
financial 
year — 
 
(a) Out of the profits of the company for that year arrived at after 
providing for depreciation in accordance with the provisions of 
section 123(2),                       Or 
 (b) Out of the profits of the company for any previous financial year 
or years arrived at after providing for depreciation in accordance 
with the provisions of that sub-section and remaining 
undistributed,  
Or 
(c) Out of both (a) and (b);  
Or 
(d) Out of money provided by the Central Government or a State 
Government for the payment of dividend by the company in 
pursuance of a guarantee given by that Government.  
? Provided that in computing profits any amount representing 
unrealised gains, notional gains or revaluation of assets and any 
change in carrying amount of an asset or of a liability on 
measurement of the asset or the liability at fair value shall be 
excluded (Amended as per Notification dated 3
rd
 Jan,2018) 
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 free 
reserves of the company. Therefore, the company may transfer 
such percentage of profit to reserves before declaration of dividend 
as it may consider necessary. Such transfer is not mandatory and 
the percentage to be transferred to reserves is to be decided at 
the discretion of the company. 
Declaration 
of dividend 
from free 
reserves 
Dividend shall be declared or paid by a company only from its free 
reserves. No other reserve can be utilized for the purposes of 
declaration of such dividend. 
Declaration 
of dividend 
out of 
accumulate
d profits : 
Where a company, owing to inadequacy or absence of profits in any 
financial year, proposes to declare dividend out of the accumulated 
profits earned by it in previous years and transferred by the company 
to the reserves, such declaration of dividend shall be made only 
in accordance with following prescribed rules. 
Exemption: The above shall not apply to a Government Company. 
Declaration 
of dividend 
by set off of 
previous 
losses and 
depreciation 
against the 
profit of the 
company for 
the current 
year 
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. 
The following conditions shall be fulfilled before declaring dividend 
out of reserves:  
(a) The rate of dividend declared shall not exceed the average of 
the rates at which dividend was declared by it in the 3 years 
immediately preceding that year 
      However, this rule will not apply if a company has not declared 
any dividend in each of the 3 preceding financial years. 
(b) The total amount to be drawn from such accumulated profits 
Page 3


                                 
   
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
 
•   MEANING AND TYPES 
 
Meaning A dividend is a payment made by a company to its shareholders, 
usually as a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders yearly or whenever declared. 
Section 2(35) of the Companies Act, 2013, simply states that “dividend” 
includes any interim dividend. 
Types I. Dividend payable on the basis of Time (When declared)  
1. Interim Dividend: When the Board of Directors declare dividend 
between two annual general meetings of the company, such 
dividend is known as Interim dividend.  
2. Final Dividend: When the dividend is declared at the annual 
general meeting of the company, it is known as Final dividend. 
All the provisions applicable on dividend are also applicable on 
interim dividend. 
II. Dividend payable on the basis of Nature of shares 
1.      Equity Shares – as per the dividend policy of the company 
and availability of profits.  
2.      Preference shares  
a) Cumulative Preference shares  
b) Non – Cumulative Preference Shares  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
• DECLARATION OF DIVIDEND [SECTION 123] 
Dividend 
shall be 
declared or 
paid by a 
company for 
any 
financial 
year — 
 
(a) Out of the profits of the company for that year arrived at after 
providing for depreciation in accordance with the provisions of 
section 123(2),                       Or 
 (b) Out of the profits of the company for any previous financial year 
or years arrived at after providing for depreciation in accordance 
with the provisions of that sub-section and remaining 
undistributed,  
Or 
(c) Out of both (a) and (b);  
Or 
(d) Out of money provided by the Central Government or a State 
Government for the payment of dividend by the company in 
pursuance of a guarantee given by that Government.  
? Provided that in computing profits any amount representing 
unrealised gains, notional gains or revaluation of assets and any 
change in carrying amount of an asset or of a liability on 
measurement of the asset or the liability at fair value shall be 
excluded (Amended as per Notification dated 3
rd
 Jan,2018) 
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 free 
reserves of the company. Therefore, the company may transfer 
such percentage of profit to reserves before declaration of dividend 
as it may consider necessary. Such transfer is not mandatory and 
the percentage to be transferred to reserves is to be decided at 
the discretion of the company. 
Declaration 
of dividend 
from free 
reserves 
Dividend shall be declared or paid by a company only from its free 
reserves. No other reserve can be utilized for the purposes of 
declaration of such dividend. 
Declaration 
of dividend 
out of 
accumulate
d profits : 
Where a company, owing to inadequacy or absence of profits in any 
financial year, proposes to declare dividend out of the accumulated 
profits earned by it in previous years and transferred by the company 
to the reserves, such declaration of dividend shall be made only 
in accordance with following prescribed rules. 
Exemption: The above shall not apply to a Government Company. 
Declaration 
of dividend 
by set off of 
previous 
losses and 
depreciation 
against the 
profit of the 
company for 
the current 
year 
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. 
The following conditions shall be fulfilled before declaring dividend 
out of reserves:  
(a) The rate of dividend declared shall not exceed the average of 
the rates at which dividend was declared by it in the 3 years 
immediately preceding that year 
      However, this rule will not apply if a company has not declared 
any dividend in each of the 3 preceding financial years. 
(b) 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.  
(c) The amount so drawn shall first be utilised 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.  
(d) The balance of reserves after such withdrawal shall not fall 
below 15% of its paid up share capital as appearing in the 
latest audited financial statement. 
Depositing 
of amount 
of dividend 
The amount of the dividend, including interim dividend, shall be 
deposited in a scheduled bank in a separate account within 5 
days from the date of declaration of such dividend.  
This sub-section shall not apply to a Government Company 
Payment of 
dividend 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prohibition 
on 
declaration 
of dividend 
A company which fails to comply with the provisions of section 73 
(Prohibition on acceptance of deposits from public) and section 74 
(Repayment of deposits, etc., accepted before the commencement of 
this Act) shall not, so long as such failure continues, declare any 
dividend on its equity shares. 
Prohibition 
on section 8 
companies 
Companies having licence under Section 8 (Formation of companies 
with Charitable Objects, etc.] of the Act are prohibited from paying 
any dividend to its members. Their profits are intended to be applied 
only in promoting the objects of the company. 
 
 
 
 
 
 
 
 
 
Page 4


                                 
   
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
 
•   MEANING AND TYPES 
 
Meaning A dividend is a payment made by a company to its shareholders, 
usually as a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders yearly or whenever declared. 
Section 2(35) of the Companies Act, 2013, simply states that “dividend” 
includes any interim dividend. 
Types I. Dividend payable on the basis of Time (When declared)  
1. Interim Dividend: When the Board of Directors declare dividend 
between two annual general meetings of the company, such 
dividend is known as Interim dividend.  
2. Final Dividend: When the dividend is declared at the annual 
general meeting of the company, it is known as Final dividend. 
All the provisions applicable on dividend are also applicable on 
interim dividend. 
II. Dividend payable on the basis of Nature of shares 
1.      Equity Shares – as per the dividend policy of the company 
and availability of profits.  
2.      Preference shares  
a) Cumulative Preference shares  
b) Non – Cumulative Preference Shares  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
• DECLARATION OF DIVIDEND [SECTION 123] 
Dividend 
shall be 
declared or 
paid by a 
company for 
any 
financial 
year — 
 
(a) Out of the profits of the company for that year arrived at after 
providing for depreciation in accordance with the provisions of 
section 123(2),                       Or 
 (b) Out of the profits of the company for any previous financial year 
or years arrived at after providing for depreciation in accordance 
with the provisions of that sub-section and remaining 
undistributed,  
Or 
(c) Out of both (a) and (b);  
Or 
(d) Out of money provided by the Central Government or a State 
Government for the payment of dividend by the company in 
pursuance of a guarantee given by that Government.  
? Provided that in computing profits any amount representing 
unrealised gains, notional gains or revaluation of assets and any 
change in carrying amount of an asset or of a liability on 
measurement of the asset or the liability at fair value shall be 
excluded (Amended as per Notification dated 3
rd
 Jan,2018) 
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 free 
reserves of the company. Therefore, the company may transfer 
such percentage of profit to reserves before declaration of dividend 
as it may consider necessary. Such transfer is not mandatory and 
the percentage to be transferred to reserves is to be decided at 
the discretion of the company. 
Declaration 
of dividend 
from free 
reserves 
Dividend shall be declared or paid by a company only from its free 
reserves. No other reserve can be utilized for the purposes of 
declaration of such dividend. 
Declaration 
of dividend 
out of 
accumulate
d profits : 
Where a company, owing to inadequacy or absence of profits in any 
financial year, proposes to declare dividend out of the accumulated 
profits earned by it in previous years and transferred by the company 
to the reserves, such declaration of dividend shall be made only 
in accordance with following prescribed rules. 
Exemption: The above shall not apply to a Government Company. 
Declaration 
of dividend 
by set off of 
previous 
losses and 
depreciation 
against the 
profit of the 
company for 
the current 
year 
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. 
The following conditions shall be fulfilled before declaring dividend 
out of reserves:  
(a) The rate of dividend declared shall not exceed the average of 
the rates at which dividend was declared by it in the 3 years 
immediately preceding that year 
      However, this rule will not apply if a company has not declared 
any dividend in each of the 3 preceding financial years. 
(b) 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.  
(c) The amount so drawn shall first be utilised 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.  
(d) The balance of reserves after such withdrawal shall not fall 
below 15% of its paid up share capital as appearing in the 
latest audited financial statement. 
Depositing 
of amount 
of dividend 
The amount of the dividend, including interim dividend, shall be 
deposited in a scheduled bank in a separate account within 5 
days from the date of declaration of such dividend.  
This sub-section shall not apply to a Government Company 
Payment of 
dividend 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prohibition 
on 
declaration 
of dividend 
A company which fails to comply with the provisions of section 73 
(Prohibition on acceptance of deposits from public) and section 74 
(Repayment of deposits, etc., accepted before the commencement of 
this Act) shall not, so long as such failure continues, declare any 
dividend on its equity shares. 
Prohibition 
on section 8 
companies 
Companies having licence under Section 8 (Formation of companies 
with Charitable Objects, etc.] of the Act are prohibited from paying 
any dividend to its members. Their profits are intended to be applied 
only in promoting the objects of the company. 
 
 
 
 
 
 
 
 
 
                                 
• UNPAID DIVIDEND ACCOUNT [SECTION 124] 
  
 
• INVESTOR EDUCATION AND PROTECTION FUND [SECTION 125] 
The Central Government shall establish a Fund to be called the Investor Education 
and Protection Fund (herein referred to as the Fund). 
• There shall be credited to the Fund— 
(a)   The amount given by the Central Government by way of grants after due 
appropriation made by Parliament by law in this behalf for being utilised for 
the purposes of the Fund; 
(b)  Donations given to the Fund by the Central Government, State 
Governments, companies or any other institution for the purposes of the 
Fund; 
(c)   The amount in the Unpaid Dividend Account of companies transferred to 
the Fund under sub-section (5) of section 124; 
(d)   The amount in the general revenue account of the Central Government 
which had been transferred to that account under sub-section (5) of section 
205A of the Companies Act, 1956 (1 of 1956), as it stood immediately 
before the commencement of the Companies (Amendment) Act, 1999 (21 
of 1999), and remaining unpaid or unclaimed on the commencement of this 
Act; 
(e)  The amount lying in the Investor Education and Protection Fund 
under section 205C of the Companies Act, 1956; 
(Section 125) 
Page 5


                                 
   
 
 
DECLARATION AND PAYMENT OF DIVIDEND 
 
•   MEANING AND TYPES 
 
Meaning A dividend is a payment made by a company to its shareholders, 
usually as a distribution of profits i.e. a portion of profits earned and 
allocated as payable to the shareholders yearly or whenever declared. 
Section 2(35) of the Companies Act, 2013, simply states that “dividend” 
includes any interim dividend. 
Types I. Dividend payable on the basis of Time (When declared)  
1. Interim Dividend: When the Board of Directors declare dividend 
between two annual general meetings of the company, such 
dividend is known as Interim dividend.  
2. Final Dividend: When the dividend is declared at the annual 
general meeting of the company, it is known as Final dividend. 
All the provisions applicable on dividend are also applicable on 
interim dividend. 
II. Dividend payable on the basis of Nature of shares 
1.      Equity Shares – as per the dividend policy of the company 
and availability of profits.  
2.      Preference shares  
a) Cumulative Preference shares  
b) Non – Cumulative Preference Shares  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
• DECLARATION OF DIVIDEND [SECTION 123] 
Dividend 
shall be 
declared or 
paid by a 
company for 
any 
financial 
year — 
 
(a) Out of the profits of the company for that year arrived at after 
providing for depreciation in accordance with the provisions of 
section 123(2),                       Or 
 (b) Out of the profits of the company for any previous financial year 
or years arrived at after providing for depreciation in accordance 
with the provisions of that sub-section and remaining 
undistributed,  
Or 
(c) Out of both (a) and (b);  
Or 
(d) Out of money provided by the Central Government or a State 
Government for the payment of dividend by the company in 
pursuance of a guarantee given by that Government.  
? Provided that in computing profits any amount representing 
unrealised gains, notional gains or revaluation of assets and any 
change in carrying amount of an asset or of a liability on 
measurement of the asset or the liability at fair value shall be 
excluded (Amended as per Notification dated 3
rd
 Jan,2018) 
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 free 
reserves of the company. Therefore, the company may transfer 
such percentage of profit to reserves before declaration of dividend 
as it may consider necessary. Such transfer is not mandatory and 
the percentage to be transferred to reserves is to be decided at 
the discretion of the company. 
Declaration 
of dividend 
from free 
reserves 
Dividend shall be declared or paid by a company only from its free 
reserves. No other reserve can be utilized for the purposes of 
declaration of such dividend. 
Declaration 
of dividend 
out of 
accumulate
d profits : 
Where a company, owing to inadequacy or absence of profits in any 
financial year, proposes to declare dividend out of the accumulated 
profits earned by it in previous years and transferred by the company 
to the reserves, such declaration of dividend shall be made only 
in accordance with following prescribed rules. 
Exemption: The above shall not apply to a Government Company. 
Declaration 
of dividend 
by set off of 
previous 
losses and 
depreciation 
against the 
profit of the 
company for 
the current 
year 
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. 
The following conditions shall be fulfilled before declaring dividend 
out of reserves:  
(a) The rate of dividend declared shall not exceed the average of 
the rates at which dividend was declared by it in the 3 years 
immediately preceding that year 
      However, this rule will not apply if a company has not declared 
any dividend in each of the 3 preceding financial years. 
(b) 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.  
(c) The amount so drawn shall first be utilised 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.  
(d) The balance of reserves after such withdrawal shall not fall 
below 15% of its paid up share capital as appearing in the 
latest audited financial statement. 
Depositing 
of amount 
of dividend 
The amount of the dividend, including interim dividend, shall be 
deposited in a scheduled bank in a separate account within 5 
days from the date of declaration of such dividend.  
This sub-section shall not apply to a Government Company 
Payment of 
dividend 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prohibition 
on 
declaration 
of dividend 
A company which fails to comply with the provisions of section 73 
(Prohibition on acceptance of deposits from public) and section 74 
(Repayment of deposits, etc., accepted before the commencement of 
this Act) shall not, so long as such failure continues, declare any 
dividend on its equity shares. 
Prohibition 
on section 8 
companies 
Companies having licence under Section 8 (Formation of companies 
with Charitable Objects, etc.] of the Act are prohibited from paying 
any dividend to its members. Their profits are intended to be applied 
only in promoting the objects of the company. 
 
 
 
 
 
 
 
 
 
                                 
• UNPAID DIVIDEND ACCOUNT [SECTION 124] 
  
 
• INVESTOR EDUCATION AND PROTECTION FUND [SECTION 125] 
The Central Government shall establish a Fund to be called the Investor Education 
and Protection Fund (herein referred to as the Fund). 
• There shall be credited to the Fund— 
(a)   The amount given by the Central Government by way of grants after due 
appropriation made by Parliament by law in this behalf for being utilised for 
the purposes of the Fund; 
(b)  Donations given to the Fund by the Central Government, State 
Governments, companies or any other institution for the purposes of the 
Fund; 
(c)   The amount in the Unpaid Dividend Account of companies transferred to 
the Fund under sub-section (5) of section 124; 
(d)   The amount in the general revenue account of the Central Government 
which had been transferred to that account under sub-section (5) of section 
205A of the Companies Act, 1956 (1 of 1956), as it stood immediately 
before the commencement of the Companies (Amendment) Act, 1999 (21 
of 1999), and remaining unpaid or unclaimed on the commencement of this 
Act; 
(e)  The amount lying in the Investor Education and Protection Fund 
under section 205C of the Companies Act, 1956; 
(Section 125) 
                                 
(f)   The interest or other income received out of investments made from the 
Fund; 
(g)   The amount received under sub-section (4) of section 38; 
(h)  The application money received by companies for allotment of any 
securities and due for refund; 
(i)   Matured deposits with companies other than banking companies; 
(j)  Matured debentures with companies; 
(k)   Interest accrued on the amounts referred to in clauses (h) to (j); 
(l)   Sale proceeds of fractional shares arising out of issuance of bonus shares, 
merger and amalgamation for seven or more years; 
(m)  Redemption amount of preference shares remaining unpaid or unclaimed 
for seven or more years; and 
(n)   Such other amount as may be prescribed: 
Provided that no such amount referred to in clauses (h) to (j) shall form part of 
the Fund unless such amount has remained unclaimed and unpaid for a period of 
seven years from the date it became due for payment. 
 
• The Fund shall be utilised for— 
(a)   The refund in respect of unclaimed dividends, matured deposits, matured 
debentures, the application money due for refund and interest thereon; 
(b)   Promotion of investors' education, awareness and protection; 
(c)   Distribution of any disgorged amount among eligible and identifiable 
applicants for shares or debentures, shareholders, debenture-holders or 
depositors who have suffered losses due to wrong actions by any person, in 
accordance with the orders made by the Court which had ordered 
disgorgement (The disgorged amount refers to the amount received through 
disgorgement or disposal of securities); 
(d)   Reimbursement of legal expenses incurred in pursuing class action suits 
under sections 37 and 245 by members, debenture-holders or depositors as 
may be sanctioned by the Tribunal; and 
(e)   Any other purpose incidental thereto,in accordance with such rules as may 
be prescribed: 

   Provided that the person whose amounts referred to in clauses (a) to (d) of 
sub-section (2) of section 205C transferred to Investor Education and 
Protection Fund, after the expiry of the period of seven years as per 
provisions of the Companies Act, 1956 (1 of 1956), shall be entitled to get 
refund out of the fund in respect of such claims in accordance with rules 
made under this section. 
 
 Constitution of IEPF  
•   The Central Government shall constitute, by notification, an authority for 
administration of the Fund consisting of a chairperson and such other members, 
not exceeding seven and a chief executive officer, as the Central Government 
may appoint. 
•   The manner of administration of the Fund, appointment of chairperson, members 
and chief executive officer, holding of meetings of the authority shall be in 
accordance with such rules as may be prescribed. 
•   The Central Government may provide to the authority such offices, officers, 
employees and other resources in accordance with such rules as may be 
prescribed.