“Dividend” means a distribution of any sums to Members by the Company out of profits and wherever permitted out of free reserves available with the Company. Dividend is basically a return on investment made by an investor in any Company. Generally when business of any company is thriving, Company either resorts to reinvest the profits into the business or distribute a part of their earning among the shareholders as dividend on shares. Based on the profit or retained earnings, management of the Company may decide for quantum of the dividend to be paid.

1. Process for Declaration &
Payment of Dividend

2. “Dividend” means a distribution of any sums to Members by the Company out of profits and wherever permitted out of free
reserves available with the Company.
Dividend is basically a return on investment made by an investor in any Company. Generally when business of any company
is thriving, Company either resorts to reinvest the profits into the business or distribute a part of their earning among the
shareholders as dividend on shares.
Based on the profit or retained earnings, management of the Company may decide for quantum of the dividend to be paid.
Understanding of Dividend

3. Companies declare dividend for various reasons some of which are enumerated below:
• To reward the investors: Shareholders of the Company invest amount in Companies with an expectation of increase in
value of shares along with distribution of part of profit in form of dividend. Thus declaring dividend is a reward for the
investors for keeping their investment in the Company.
• To create goodwill: Investors are willing to put their money in those entities which declares high value dividend on
frequent basis, as it shows that the Company is a profit making entity and company is also concerned towards their
investors. This creates a brand value and goodwill of the company in the market.
• To maintain the consistency in payment of dividend: It may happen for a Company that, it has been declaring
dividend from past eight to ten years but due to adverse market conditions, company is not able to declare dividend in
current year due to inadequate profit. Further if the loss in the Company subsists, it will not be able to declare dividend. In
such scenario, investors of the company may start feeling that their investment is no longer safe in the Company since
they are not declaring dividend. To mitigate such assumptions among investors, Company inspite of incurring losses in
particular year, declares dividend which maintains the consistency in the Company.
• To attract investment: Dividend declaration is generally an indicator of successful business and as mentioned earlier it
creates goodwill of the company in the market. Prima facie, investors/lender may incline to provide financial assistance to
a company instead of a non dividend declaring company.
Why Company Declare Dividend

4. Final Dividend: Dividend declared by any Company at the Annual General Meeting of the Company is known as final
dividend. Corporates can ascertain its actual financial position in any year only after closing of its books of account at the end
of financial year. After assessment of books of account, the Company takes decision for quantum of dividend.
Company at its Board Meeting then decides to declare dividend and approves for its recommendation at the Annual General
Meeting. Further at the Annual General Meeting of the Company, Members approve the declaration of dividend through
ordinary resolution.
Interim Dividend: During any financial year, when company ascertains that it has earned sufficient profit on basis of quarter
or half year financial results of the Company, it may decide to declare dividend even before the Annual General Meeting of the
Company. Such dividend which is paid during any financial year or at any time after closure of financial year and before
annual general meeting of the Company is called as interim dividend.
It is important to note that as per section 2(35) of Companies Act, 2013 "dividend" includes any interim dividend.
Although the term “Dividend” has been defined in the Act to the effect that it Includes Interim Dividend. The Act neither
specifically defines the term Dividend nor makes any distinction between Interim and Final Dividend.
The term Final Dividend is more relevant in use for those Companies which often declares interim dividend and to distinguish
it, the term final dividend is used.
Otherwise Companies in general use the term “Dividend” instead in “Final Dividend” for its declaration at Annual General
Meeting.
Type of Dividend

5. Companies generally distributes dividend out of profit of year in which dividend is declared or it may utilise the fund from free
reserves of the Company. However as mentioned earlier Act also permits the payment of dividend even when the Company
has not earned adequate profit to distribute dividend or incurred losses.
Section 123 of Companies Act, 2013 regulates the distribution of dividend and states the provision as regarding the sources
from which Company may declare dividend and in what manner.
Sources for Payment of Dividend

6. Sources for Payment of Dividend
Conditions:
• Profit should be arrived in all cases after providing for
depreciation
• Depreciation will be computed in accordance with
schedule II of Act
• Company may transfer some part of profit to reserve
before declaring dividend
• Profit should exclude: (a) Unrealised Gains (b)
Notional Gains (c) Revaluation of Assets (d) Change in
carrying & fair value of Asset & Liability
Conditions:
• Rate of divided=< Avg. dividend rate of previous 3 FY. Example: Rate of dividend for
3 PY are 5%,6%,7% then Rate of dividend should not be exceed 6%. i.e. (5+6+7/3).
• Amount drawn from reserve=< 1/10 of Paid up capital (PUC)+ Free Reserve(FR).
Example: PUC is Rs. 10L; FR is Rs. 15L Amount can be withdrawn upto 1/10 (10L +
15L)= Rs. 2.5 L
• Amount drawn to be utilised first for set of losses in current year. Example: if 2.5 L
is amount that can be withdrawn then loss of current year say 1L will be set off
then remaining amount 1.5 L can be distributed.
• Balance amount after withdrawal >= 15% PUC as per latest account. Example: 15%
of PUC will be Rs. 1.5L, inii minimum amount to maintain in reserve is 1.5L after
withdrawal of dividend amount.
Distribution from Profit Distribution in case of Loss/ Inadequate Profit
Dividend can be Declared:
• Out of profit of current F.Y.’s
• Out of Profit of previous F.Y.’s
• Out of Profit of current F.Y. & Out of Profit of Previous F.Y.’s
Dividend can be declared:
• Out of Free Reserve

7. As per section 123 of Companies Act, 2013 and other relevant rules Company has to consider below given provisions at the
time of declaration and payment of dividend
• Dividend shall be paid only out free reserve.
• Dividend shall be paid only to registered shareholder or to his order or to his banker.
• Preference Shareholders shall be paid Dividend before Dividend is paid to the equity Shareholders of the company.
• Arrears of Dividend on cumulative preference shares shall be paid before payment of any Dividend on equity shares.
• Dividend on equity shares shall be paid in accordance with the rights of the respective classes, if any, of such shares.
• The Register of Members and Share Transfer Books of the Company will needs to be for ascertaining the number of
shareholders for the purpose of payment of final dividend at the AGM.
• Dividend shall be payable in cash not in kind.
• Dividend payable in cash can be paid through cheque, warrant, or any other electronic mode.
• Dividend, once declared, becomes a debt and shall not be revoked.
Points to consider while declaring Dividend

8. • The amount to be distributed as dividend shall be deposited by the Company in a scheduled bank account within 5 days
from declaration of dividend
• Dividend shall be paid to the shareholders within 30 days of its declaration.
• A duplicate Dividend cheque or warrant shall be issued only after obtaining requisite indemnity/ declaration from the
concerned Member and after ascertaining the encashment status of the original Dividend cheque or warrant.
• The Dividend cheque or warrant shall be accompanied by a statement in writing showing the amount of Dividend paid,
Folio no./DP ID and Client ID nos., number of shares held by the concerned Member as on the record date, amount paid
up on each share and the financial year to which the Dividend pertains
• A company is prohibited to issue Bonus shares in lieu of Dividend.
• All requisite approvals shall be obtained before declaration of Dividend. Dividend shall not be declared subject to any
condition such as the approval of financial institutions/ banks or foreign collaborators or compliance with any other
contractual obligation.
• The amount of Interim Dividend, if any, paid during the financial year and final Dividend recommended by the Board of
directors shall be disclosed in the Board’s Report.
Points to consider while declaring Dividend

9. 1. Any director or person authorised by the Board will dispatch a notice to call for Board Meeting. Notice shall be give as per
section 173 of Companies Act, 2013 read with secretarial standard 1 on Board Meetings.
2. Where a company has an Audit Committee, this Committee shall consider the financial results which shall thereafter be
submitted to the Board for its consideration and declaration of Interim Dividend.
3. Conduct Board Meeting to consider payment of dividend and the quantum of dividend. Generally such decisions were
taken by the Board of the Company at the Meeting of the Board in which accounts are approved and recommended for
shareholders’ approval.
4. Board will also take decision regarding opening of a scheduled bank account for purpose of depositing the amount of
dividend.
5. After taking decision on declaration of dividend, dispatch notices for calling an AGM to all the members in accordance with
provisions section 101 of Act read with SS 2 on General Meetings
6. Approval of members will be sought through ordinary resolution for declaration of dividend.
7. Within five days from the date of AGM, submit the amount of dividend into the scheduled bank account as opened by the
Company.
8. Distribute the dividend within 30 days from the date of AGM.
Aforesaid process is to be followed for declaration of final Dividend, In case of interim dividend, approval of members is not sought at
AGM and Board approves the proposal of interim dividend.
Procedure for Declaration of Dividend

10. The amount of Dividend which remains unpaid or unclaimed after thirty days from the date of its declaration shall be
transferred to a special bank account titled as ‘Unpaid Dividend Account’ to be opened by the company with any scheduled
bank.
Such transfer shall be made within seven days from the date of expiry of the thirty days period from the date of declaration of
Dividend.
Further if the amount in the bank account remains unclaimed/unpaid for seven years then it will be transferred to a fund called
as Investor Education & Protection Fund.
Unpaid Dividend

11. Although Company is required to comply with conditions as given above for declaration and payment of dividend, there are
certain cases in which company is restricted to declare dividend.
Section 123(6) of Companies Act, 2013 and the rules made thereunder, states that a Company cannot declare dividend on
equity shares if it fails to comply any of the provisions with respect to acceptance and repayment of deposit taken by
Companies.
Company will be restricted to declare dividend as long as the failure continues.
Restriction on Declaration of Dividend

12. If any Company failed to make payment of dividend within 30 days of its declaration then as per section 127 of Companies
Act,2013 below given will be the penalty.
Punishment for failure to distribute Dividend
Penalty on Directors
Every director of Company, if committed default
intentionally:
Imprisonment: Upto 2 years
+
Fine : Minimum Rs.1000 for every day during which such
default continues
Penalty on Company
Company has to an interest @ 18% p.a. during the period
for which such default continues

13. The Act has prescribed certain situation whereby if a company has not paid dividend in 30 days, it will not liable for
punishment as mentioned above. As per section proviso of section 127 of the Act no offence will be deemed to be committed
if:
• Dividend could not be paid due to operation of law. For example: If any court has passed an order which restricts the
Company in making payment of already declared dividend, such situation will not be considered as offence.
• Dividend could not be paid as shareholder has given company certain instruction for payment of dividend and the same
has not been fulfilled and company has communicated the issue with the shareholder. For example: Company has
received instruction from the shareholder to make e-payment of the dividend and provided bank details for the same. It
may happen due to any discrepancy in bank details provide by shareholder the amount bounced back, in such situation
the Company has to intimate the shareholder regarding the issue else it would treated as default in payment of dividend.
• When the ownership of share is under dispute. For example: If two or more person are making claim as owner of
shareholding for the Company and ownership is not yet decided, then Company is not under any obligation to pay dividend
on such shares.
• When dividend is adjusted among some payment which were due from shareholder legally. For example: Company may
not pay amount of dividend to any shareholder from whom company has yet to receive any payment like any member has
asked for inspection of minute books but not yet paid for the same .In such case Company can adjust the amount of
dividend from the same.
• If the default in payment of dividend is beyond control of Company.
Exemption for Punishment

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