1. PROVISIONS RELATING TO PAYAMNET OF
DIVIDEND
• Synopsis of the topic :-
a. Meaning of Dividend
b. Types of Dividend
c. Sources of Dividend
d. Provision relating to payment of dividend.
e. Punishment for Failure
2. MEANING OF DIVIDEND
• Meaning of dividend :-
Dividend may be defined as ‘profits distributed by a company to its members’. It
represents the profits which are legally available for distribution among the members.
As per Section 2(35), dividend includes interim dividend. The Articles shall authorize
the payment of dividend to members in proportion to the amount paid-up on the shares
held by them. Preferenceshareholders are given priority in payment of dividends as
compared to the equity shareholders. Hence, it can be said that dividend is the return
on the share capital paid-up by the members of a company. All companies that declare
dividends (except Section 8) must comply with the provisions of the Companies Act
2013
3. TYPES OF DIVIDEND
• The dividend are of two types :-
a. Preference Dividend
b. Equity Dividend
a. Preference Dividend :-
Dividend to preference shareholders is compulsory, subject to availability of distributable
profits. Preference dividend is paid before payment of equity dividend. Dividend to
preference shareholders may be paid at a fixed rate on the paid-up preference share
capital or a fixed amount every year.
b. Equity Dividend :-
Dividend to equity shareholders should be recommended by the Board of Directors and
paid accordingly. Equity dividends are paid after distribution to preference dividends .
The rate of dividend to equity shareholders is not fixed and the same varies according
to availability of profits as well as Board recommendation.
4. • Further the equity dividend is classified as follows :-
- Final Dividend :- Final Dividend is recommended by the Board at the end of financial
year of the company, i.e. 31st March every year. It is declared by the shareholders in the
annual general meeting. The shareholders cannot increase the rate of dividend, as
recommended by the Board, but they can reduce the dividend rate. However, in the
absence of a Board recommendation, the shareholders cannot declare any final
dividend. Once final dividend is declared by the members in AGM, it becomes an
obligation for the company.
- Interim Dividend :- As per Section 2(35) of the Companies Act 2013. Dividend includes
‘Interim Dividend’. The dividend declared by the Board and paid between two AGMs is
known as interim dividend. Such dividends are paid on the basis of estimated profits for
the current year, after making all provisions.
Section 123 (3) of the Companies Act 2013 empowers the Board to declare 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, there are restriction on such dividend rate. In this situation, the rate of
interim dividend shall not be higher than the average dividend rate declared by the
company during the immediately preceding three financial year .
5. SOURCES OF DIVIDEND
• As per Section 123 (1) of the Companies Act 2013, dividend shall be paid by a company for any
financial year, out of the following sources-
a. Profits of current year of the company, arrived at after providing for depreciation or,
b. Past undistributed profits (reserves) of the company, arrived at after providing for depreciation, or
c. Both (a) and (b) above or,
d. Money paid by Central Government or State Government for the payment of the dividend.
It shall be noted that dividend cannot be paid out of the capital of the company, i.e. only divisible profits
shall be utilized. Divisible profits mean the profits which the law allows the company to distribute
to the shareholders by way of dividend. Depreciation ( as per Schedule II) should be provided for
the purpose of arriving at the divisible profits. No Company shall declare dividends unless carried-
over past losses and depreciation of previous years are set-off against the profits of the Company
for the current year.
6. • According to MCA, declaration of dividend should not be
subject to prior approval of financial institutions, banks, etc.
However, as per subsisting loan agreement, companies may
require prior approval from financial institutions, banks.
• 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 reserves of
the company. Hence, there is no mandatory amount of profits to
be transferred to the reserves, prior to payment of dividends.
7. DIVIDNED PAYMENT PROVISIONS
• Final dividend or interim dividend, once declared, cannot be revoked, except with the
consent of shareholders.
• As per Section 123(4), the dividend amount shall be deposited in a separate account in a
scheduled bank within 5 days from the date of declaration.
• Dividend shall be payable only to the registered member, as on the record date. If an
instrument of transfer is received by a company for registration and not yet registered,
then the dividend shall be paid to the transferee, if approved by the transferor. Else,
such dividend is transferred to the Unpaid Dividend Account. ( Section- 126)
• Bonus shares in lieu of dividends is not permitted.
• Payment of dividend includes payment by cash, cheque, warrant, demand-draft or
electronic mode. The posting of cheque, DD etc is equivalent to actual payment
whether the member receives it or not.
• ‘Dividend Warrant’ is an order by a company to its banker to pay the amount specified
therein to the shareholder, whose name is written therein. However, if dividend warrant
does not reach the registered shareholder, it can be encashed by any unauthorized
person and the company shall be liable for the loss.
• Dividend, once declared must be paid within 30 days from the date of declaration of
dividend.
8. PUNISHMENT FOR FAILURE
• As per Section 127 of the Companies Act, 2013, when dividend has been declared by a company
but has not been paid within 30 days from the date of declaration, every director of the company
shall be punishable with imprisonment which may extend to two years and with fine which shall
not be less than Rs 1000 for every day such default continues and company shall be liable to pay
simple interest at the rate of 18% p.a during the period for which such default continues.
• Exceptions in the following cases, no penalty shall be charged-
- Where a shareholder has given directions to the company regarding the payment of the dividend
and those directions cannot be complied with and the same has been communicated to him;
- Where there is a dispute regarding the right to receive the dividend;
- Where the dividend has been lawfully adjusted by the company against any sum due to it from the
shareholder; or
- Where, for any other reason, the failure to pay the dividend or to post the warrant within the
period under this section was not due to any default on the part of the company.
10. MEANING OF NCLT and NCLAT
National Company Law Tribunal (“NCLT”) and National Company Law Appellate
Tribunal (“NCLAT”) were established as a part of reforms in India’s Company Law
and as a part of reforming Companies Law. On June 01, 2016, the Ministry of
Corporate Affairs (“MCA”) published a notification regarding the constitution of
the National Company Law Tribunal (NCLT) and National Company Law
Appellate Tribunal (NCLAT) with effect from June 01, 2016. It came as a big-
ticket reform as the Companies Act, 1956 was enacted prior to India opening its
markets in 1991 and the periodic amendments to the 1956 Act could not satisfy the
current needs of Industry, market regulators. NCLT and NCLAT were established
as per powers granted to MCA under Section 408 and Section 410 of Companies
Act, 2013, respectively.
11. • Section 408 of Companies Act, 2013 defines NCLT
and it specifies that the Central Government shall
constitute a Tribunal to be known as the National
Company Law Tribunal composing of President
and other Judicial and Technical members, to
exercise and discharge powers and functions as
prescribed by the Act or any other power delegated
to them by way of any other enactment or a
Notification by Ministry Of Corporate Affairs.
• Similar to NCLT, NCLAT was established as per
Section 410 of Companies Act which states that the
Central Government, by way of notification shall
constitute an Appellate Tribunal to be known as the
National Company Law Appellate Tribunal
comprising Chairperson and Judicial and
Technical members, for hearing appeals against
the orders of the Tribunal.
12. However, it provides a Condition that technical members of NCLAT
shall not exceed 11 members. Initially NCLT and NCLAT were given
Jurisdiction over the Following matters:
• Board for Industrial and Financial Reconstruction. (“BIFR”)
• The Appellate Authority for Industrial and Financial
Reconstruction. (“AAIFR”)
• Jurisdiction and powers relating to winding up restructuring and
other such provisions, vested in the High Courts.
• Company Law Board (“CLB”).
• It is important to note that the Company Law Board would cease to
exist after the establishment of NCLT and NCLAT as per Section
466 of Companies Act, 2013.
15. Background of NCLT
• The need for a uniform code for adjudicating corporate disputes was first
suggested by the Justice Eradi Committee which was set up by Central
Government in the year 1998 for reforming the law related to insolvency of
companies and winding up. The Committee submitted its report in the year
2000 and as per the recommendation of the Committee, Companies
(Second Amendment) Act, 2002 was passed and the amendment stated that
there is a need to constitute National Company Law Tribunal and National
Company Law Appellate Tribunal which will act as a Uniform body for
Adjudicating Corporate Disputes. There were various legal challenges to it
and the constitution of NCLT and NCLAT under Companies (Second
Amendment) Act, 2002 were challenged on ground that it is
unconstitutional.
16. • However, the constitution bench of Supreme Court in the case of Union
of India v. R. Gandhi upheld the constitutionality of NCLT and NCLAT
by giving guidelines relating to number of judicial members, number of
technical members and tenure of members to be followed during the
constitution of NCLT and NCLAT.
• Though the Union Government did not notify the Constitution of NCLT
and NCLAT and instead incorporated it by way of Companies Act, 2013,
even then another legal challenge came in way of establishment of NCLT
and NCLAT in the case of Madras Bar Association vs. Union of India &
Anr where the petitioners challenged the constitution of NCLT and
NCLAT under Companies Act,2013 on ground that the constitution of
NCLT and NCLAT does not incorporate and follow the guidelines given
by Hon’ble Supreme Court in the case of Union of India v. R. Gandhi.
