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LEGAL AND SOCIAL ASPECTS OF DIVIDENDS EP JOHN SEC B 11397044
A dividend is money paid directly to an investor in a companys stock. Some publicly owned companies offer a dividend with their stock, while others do not. The choice of buying and owning a stock that pays a dividend is up to the individual investor, as there are both positive and negative aspects to consider. A company that offers a dividend with its stock is often a larger, more stable business in a field with little growth or a slow, steady growth potential.
When a company offers a dividend to its stock holders, it is taking money that could be reinvested into the company, and distributing it to shareholders as a benefit of investing in the company. Receiving a dividend is good for investors, because they get a guaranteed return on their investment in the form of the money from the dividend. A stock that returns a dividend is good as an income investment or a long term growth investment. This is because these stocks tend to remain stable, and offer a tangible monetary benefit to investors.
DETERMINANTS OF DIVIDEND POLICY•Legal: dividends must be paid out offirm’s earnings/ current earnings•Financial: a firm can pay dividend only tothe extent that it has cash to disburse•Economic constraints•Nature of business conducted by acompany•Existence of the company: length ofexistence of the company.
DETERMINANTS OF DIVIDEND POLICY•Type of company Organization:Pvt. Or Public•Financial needs of the company.•Market conditions•Financial arrangements•Change in government policies
LEGAL ASPECTS OF DIVIDENDS1.Dividends to be paid only out of profits:•It is necessary for a company to declare andpay dividend only out of profits for that yeararrived at after providing for depreciation inaccordance with the provisions of section205(2) of the act.
LEGAL ASPECTS OF DIVIDENDS•A dividend could be declared out ofprofits of the company for anyprevious financial year or yearsarrived after providing fordepreciation in accordance withthose provisions and remainingundistributed.
LEGAL ASPECTS OF DIVIDENDS•The dividend can also be declaredout of moneys provided by thecentral govt. or a state govt. for thepayment of dividend in pursuance ofguarantee given by that govt.
LEGAL ASPECTS OF DIVIDENDS•The company is required to transferto the reserves such percentage ofits profits for that year not exceeding10% in addition to providing fordepreciation as required undersection 205(2A) of the Act.
LEGAL ASPECTS OF DIVIDENDS• Unpaid dividend to be transferred tospecial dividend account:•Dividends are to be paid within 30 daysfrom the date of the declaration•If they are not paid the company isrequired to transfer the unpaid dividend tounpaid account within 7 days of the expiryof the period of 30 days.
LEGAL ASPECTS OF DIVIDENDS•The company is required to open thisaccount in any scheduled bank asrequired under section 205-A of theCompanies Act, 1956• Dividend is to be paid only toregistered shareholders or to theirorder or their bankers
TRANSFER OF UNPAID/ UNCLAIMEDDIVIDEND TO INVESTOR EDUCATION AND PROTECTION FUNDAny money transferred to the unpaid dividendaccount of a company in pursuance of section205A(5) which remains unpaid or unclaimed fora period of 7 years from the date of such transferto unpaid dividend account, shall be transferredby the company to the investor education andprotection fund established under sub-section (1)of section 205C
TRANSFER OF UNPAID/ UNCLAIMEDDIVIDEND TO INVESTOR EDUCATION AND PROTECTION FUNDSub-section (1A) of section 205 stipulatesthat the board of directors may declareinterim dividend and the amount of dividendincluding interim dividend is to be suchdeposited in a separate bank account within5 days from the date of depreciation.
TRANSFER OF UNPAID/ UNCLAIMEDDIVIDEND TO INVESTOR EDUCATION AND PROTECTION FUNDFailure to do so, every director of thecompany, shall, if knowingly a party to thedefault, be punishable with simpleimprisonment for a term which mayextend to 3 years and shall also liable to afine of rupees for everyday during whichsuch default continues
TRANSFER OF UNPAID/ UNCLAIMEDDIVIDEND TO INVESTOR EDUCATION AND PROTECTION FUND The company shall be liable to pay simple interest at a rate of 18% p.a. during the period for which such default continues.
LEGAL CONSTRAINTS• Most state securities regulations prevent firms from paying out dividends from any portion of the company’s “legal capital” which is measured by the par value of common stock -- or par value plus paid-in-capital.• Dividends are also sometimes limited to the sum of the firm’s most recent and past retained earnings -- although payments in excess of current earnings is usually permitted.• Most states also prohibit dividends when firm’s have overdue liabilities, is legally insolvent, or bankrupt.
INTERNAL CONSTRAINTS• A company’s ability to pay dividends is usually constrained by the amount of available cash rather than the level of retained earnings against which to charge them.• Although it is possible to borrow to pay dividends, lenders are usually reluctant to grant them because using the funds for this purpose produces not operating benefits that help to repay them.
GROWTH PROSPECTS• Newer, rapidly-growing firms generally pay little or no dividends.• Because these firms are growing so quickly, they must use most of their internally generated funds to support operations or finance expansion.• On the other hand, large, mature firms generally pay cash dividends since they have access to adequate capital and may have limited investment opportunities.
OWNER CONSIDERATIONS• As mentioned earlier, empirical evidence supports the notion that investors tend to belong to “clienteles” -- where some prefer high dividends, while others prefer capital gains.• They tend to sort themselves in this way for a variety of reasons, including: – tax status – investment opportunities – potential dilution of ownership
MARKET CONSIDERATIONS• The most important aspect of dividend policy is that the firm maintain a level of predictability,• Stockholders that prefer dividend- paying stocks prefer a continuous stream of fixed or increasing dividends.
MARKET CONSIDERATIONS• Shareholders also view the firm’s dividend payment as a “signal” of the firm’s future prospects.• Fixed or increasing dividends are often considered a “positive” signal, while erratic dividend payments are viewed as “negative” signals.