Dividend | Company Law - CLAT PG PDF Download

Introduction

• A dividend is the share of profits that a company pays to its shareholders. Shareholders are individuals or entities that own shares in the company and provide funds for its operations. The dividend represents the portion of profit allocated to each shareholder based on their investment.
• The term "dividend" comes from the Latin word "dividendum," which means "to be divided." In the context of a company, it refers to the distribution of profits to shareholders after the company's final accounts are prepared.
• Dividends can be categorized into two types: interim dividends and final dividends.

Interim Dividends

• Interim dividends are paid to shareholders before the final accounts of the company are prepared. These dividends are typically declared and approved by the board of directors during the financial year.
• The rights of shareholders to receive dividends arise only after the company declares them, usually with the approval of the board of directors.
• The amount of dividend paid to each shareholder is proportional to the amount paid on their shares, as outlined in Section 51 of the Companies Act.

Final Dividends

• Final dividends are distributed to shareholders after the company's final accounts are prepared and approved. These dividends are based on the profits of the entire financial year.
• Section 2 of the Companies Act defines dividends to include both interim and final dividends, ensuring that shareholders receive their rightful share of profits.

Interim Dividend

Definition of Interim Dividend

• Interim dividend refers to the dividend declared by a company's board at any time during the financial year, before the official closing of the financial year and the calling of the Annual General Meeting (AGM).

Provisions for Interim Dividend

• The company can declare interim dividend from profits accumulated in the current or previous financial years.
• The provisions of the Act applicable to final dividends also apply to interim dividends.

Features of Interim Dividend

• Declaration by Board: Interim dividends are declared by the board of directors within a financial year from the surplus generated in the profit and loss accounts.
• Rescindable Decision: The decision to declare dividends by the directors in a general meeting can be rescinded, meaning it is not obligatory until paid.
• Loss Consideration: If the company incurs a loss before the dividend declaration, it must be declared at an average rate based on dividends declared in the previous three financial years.
• Deposit Requirement: Declared interim dividends must be deposited in a scheduled bank account within five days, regardless of any intervening holidays.

Final Dividends

Final dividends are declared by a company after the financial year ends and are approved by the Board of Directors during the Annual General Meeting (AGM). The term "dividend," except as defined in the Companies Act, 2013, refers specifically to final dividends. While most provisions for interim and final dividends are similar, there are some distinctions in the Act regarding interim dividends. The liability for default arises only in the case of declaring a final dividend, not an interim dividend.

Declaration of Dividends

Section 123 of the Companies Act 2013 outlines the conditions under which companies are allowed to declare or pay dividends in a financial year:

• Source of Dividend: Dividends can be declared out of profits from the current or previous financial year, after providing for depreciation. They can also be paid from funds provided by the Central or State Governments against a guarantee for dividend payment.
• Transfer of Reserves: Before declaring dividends, the company must reserve the necessary amount of cash to manage its affairs.
• Declaration of Dividends: If a dividend is declared based on profits from previous years, it must be from free reserves only and approved by the Board of Directors, typically in a general meeting.
• Separate Account for Dividends: Dividend amounts must be kept in a separate bank account within five days of declaration.
• Payment in Cash: Dividends must be paid in cash (including electronic means) only to the registered shareholder or their banker.
• Failure of Sections 73 & 74: If a company fails to comply with provisions related to public borrowings and deposit repayments, it cannot declare dividends until compliance is restored.

Unpaid Dividend Account

In cases where dividends remain unpaid or unclaimed after declaration, the Act provides specific provisions:

• Transfer of Unclaimed Dividend: If a declared dividend is not claimed within thirty days, the company must transfer the unpaid amount to a special account called the Unpaid Dividend Account within 7 days after the 30-day period. Failure to do so incurs interest at 12% per annum on the unpaid sum.
• Notification on Website: After transferring money to the Unpaid Dividend Account, the company must prepare a statement with details of unclaimed dividends and publish it on its website and any other website specified by the central government within ninety days.
• Transfer to Investor Education and Protection Fund: Amounts unclaimed for over 7 years must be transferred to the Investor Education and Protection Fund established by the central government, with the claimant having the right to reclaim the amount.
• Penalty for Default: Companies failing to comply may face fines ranging from 5 lakh to 25 lakh, and responsible officers may be fined between one lakh to five lakhs individually.

Right to Dividend

• According to Section 126 of the Act, if the instrument of shares is not registered with the company, the dividend for such shares is to be transferred to the Unpaid Dividend Account as per Section 124 of the Act.
• These pending dividends should be held until the registered holder of the shares specifies the transfer instructions.
• The company is obligated to pay the dividend in the name of the registered shareholders, who are the only ones entitled to claim the dividend.

Failure to Distribute Dividends

• Penalty for Non-Compliance: When a company fails to adhere to the legal requirements regarding dividend distribution, penalties may apply.
• Debt Obligation: Once a dividend is declared, the company is obligated to pay it within 30 days. If not paid, it becomes a debt against the company, and members can only claim it in the year it was declared.
• Directors' Liability: In case of default, directors may face imprisonment for up to two years and a fine of at least Rs. 1000 per day until the default is rectified, along with an 18% simple interest on the amount.
• Exceptions to Default: No offense is considered if the dividend could not be paid due to legal reasons, special directions from shareholders, disputes over dividend rights, adjustments against shareholder dues, or if the delay was not the company's fault.

Procedure of Declaration and Payment of Dividend

• Notification of Board Meeting: As per Section 173 of the Act, the Board of Directors must discuss and decide on dividends in a formal meeting. Directors should be notified about the meeting in advance.
• Hold Necessary Meetings: All resolutions regarding dividends, such as approving annual accounts, deciding the dividend amount, and setting the book closure date, must be discussed and passed in board meetings.
• Declaration of Dividends: After thorough consideration, dividends should be declared following Section 123 of the Act. Companies are not obligated to declare dividends every year; the board has the discretion to do so.
• Open Bank Account: A separate bank account should be opened for dividend payments, and the total amount payable must be credited within five days of declaration.
• Payment of Dividend: Dividends must be paid to shareholders in cash within 30 days of declaration, complying with Sections 73 and 74 of the Act.
• Processing Unpaid Dividends: Amounts left unclaimed in the dividend account should be transferred to the unpaid dividend account under Section 124. After seven years, unclaimed amounts must be transferred to the Investor Education and Protection Fund.