This article has been written by Ms. Aarsha Prem, a 5th year LL.B. student from CLS GIBS college.

Introduction

When investors put money into a corporation, the company returns a portion of its business profits to the investors. The dividend paid to shareholders is a portion of the company’s profits in this manner.a It is important to stress that the stockholders do not have a legal claim to such a dividend. Nevertheless, as soon as the corporation declares a dividend, it creates debt that cannot be cancelled. The dividend becomes due to the stockholders. Also, the corporation must confirm that its financial situation supports the payment of an interim dividend before declaring one. Only when the company has generated sufficient profits within a specific time period of the fiscal year and when sufficient profits are anticipated for the remainder of the year may it be declared.

Dividend

The percentage of the company’s profit that is distributed to its shareholders as a return on their investment is known as a dividend. After the company’s accounts are closed, the shareholders receive this fraction of the earnings. After the accounts are closed for the financial year, dividends are paid. In plain words, the corporation distributes a dividend to its shareholders in proportion to the paid-up value of their total shareholding, from the profit produced during a fiscal year. Any businesses may declare dividends, with the exception of Section-8 entities (Non-Profit Organizations). 

Chapter VIII of the Companies Act, Sections 123 to 127, addresses the declaration and payment of dividends.

To whom and how Dividend is paid

In contrast to equity shareholders, preference shareholders have a predetermined dividend rate and a preference for dividend distribution. This means that the demands of preference shareholders will take precedence over those of equity owners in the event that the company experiences difficulties with the payment of dividends. Furthermore, preference stockholders are not permitted to treat preference dividends as debt and bring a claim for debt collection. For equity investors, the dividend amount could vary depending on the earnings.

Dividends must only be given to shareholders who are eligible to receive them, per Section 123(5). The dividend may be paid by check, warrant, or any electronic method, but it may only be received in cash. 

A firm that has violated Sections 73 and 74 is prohibited from declaring any dividends, as stated in Section 123(6).

Sources Of Dividend

The fundamental tenet of a dividend declaration is that it must only be paid from profits. It may be paid from the following sources in accordance with the Companies Act: 

1. From the profit for the current year 
2. Profit from the prior year that has accumulated 
3. From the funds made available by the federal or state governments for the payment of dividends in accordance with promises made.

Conditions to declare dividend out of current year’s profit

• Before declaring the dividend, depreciation must be applied to all depreciable assets at the stipulated rate or for the duration of their useful lives. 

1. The company must allocate a specific portion of profits to the reserve before it may declare or pay a dividend. 
2. Prior to paying the dividend, the company must deduct the carried-forward loss from the prior year from the current year’s profit. 
3. The company may only use Free Reserve to fund dividend declarations. 

If the current year’s profits are insufficient, the corporation may issue a dividend from its surplus reserves, provided that the following criteria are met: 

1. The dividend rate must not be higher than the average of the declared dividends for the three years prior. 
2. According to the most recent audited financial statement, the total withdrawal from the accumulated reserve cannot exceed 1/10th of the paid-up share capital and free reserves. 
3. Before declaring a dividend for the current year, such money from the accumulated reserve must first be utilised to offset the loss from the prior year. 
4. According to the company’s most recent financial statement, the balance of the surplus reserve after withdrawal cannot be less than 15% of the paid-up share capital.

Procedure To Pay Final Dividend

The actions the corporation must take to declare and pay the final dividend are as follows: 

1. Provide seven days’ notice before the board meeting to consider several agendas 
2. The Financial Statement is being approved. 
3. recommending the final dividend quantum to be declared at an Annual General Meeting (AGM). 
4. Considering the dividend’s funding source 
5. The amount of profit that will be added to the reserve account will also be discussed by the board. 
6. Set the AGM’s date, time, and location. 
7. Submit the AGM notice at least 21 days before the meeting. 
8. The business must make sure that the required portion of profits is transferred to the company’s reserve account.
9. Hold and conduct the AGM in order to declare a final dividend that is at least as much as the board recommended in the board meeting. 
10. Within five days of the declaration of the dividend, open a separate account for the transfer of the dividend money. 
11. For each shareholder, prepare a dividend statement. 
12. Make that the business has paid 15% of the dividends’ gross amount in corporate dividend tax to the tax authority within 14 days of the declaration of the dividend. 
13. Finish the process by paying the stockholders their final dividend within 30 days of the declaration in any manner, including cash, check, warrant, or electronically. 

Non-Payment Of Dividend

Following are the circumstances in which dividend is not required to be paid:

1. Due to the operation of law
2. When the members have given the direction to the company which the company dint complied.
3. Due to dispute regarding payment of dividend
4. If the company has adjusted the dividend against the money due from shareholders.

Penalty for Failure: 

Directors who fail to pay dividends within 30 days after declaration are subject to a punishment of up to INR 1000 per day, two years in prison, and interest at the rate of 18% (12% in the case of a failure to transfer funds to an unpaid dividend account) for the duration of the default.(Section 127)

Dividend out of reserves

A business may use its reserves to pay dividends. The bulk of investors in India ahead invest in the stocks of businesses that consistently offer dividends. Everyone who makes an investment hopes to get a substantial return. Those who anticipate a consistent return on their investments are becoming increasingly fascinated by the giant corporations that pay dividends on a regular basis. When a company proposes to declare a dividend from the accumulated profits it has accrued over the duration of prior years and moved to the free reserves, such declaration of dividend will not be made except in conformity with the kind of rules as may be prescribed in this regard, according to the second proviso of section 123 of the Companies Act of 2013. According to Rule 3 of the Companies (Declaration and Payment of Dividend) Regulations, 2014, a business may declare a dividend out of free reserves in the event of insufficiency or a lack of earnings in any year, provided that the following requirements are met, including: 

(1) The rate of dividend issued must not be higher than the average of the rates at which it declared dividends in the three years before to that year. With the caveat that a corporation that has not declared a dividend in any of the three most recent financial years is exempt from this sub-rule. 

(2) No more than one-tenth of the company’s paid-up share capital and free reserves as shown in the most recent audited financial statement may be deducted from such accumulated profits in total. 

(3) Before any dividend in respect of equity shares is paid out, the money so drawn must first be used to offset losses incurred in the fiscal year in which dividend is announced. 

(4) The reserve balance following such withdrawal must not be less than 15% of the company’s paid-up share capital as shown in the most recent audited financial statement.

Interim Dividend

The board of directors of a firm may declare interim dividends at any time throughout a fiscal year using both the profit from that fiscal year’s operations and the surplus in the profit & loss account. 

Unless the Company has incurred losses during the current financial year up to the end of the quarter immediately preceding the date of the declaration of interim dividend, the rate whereby an interim dividend shall be announced shall not be greater than the average of the dividends declared by the Company during the three financial years immediately before the current financial year. A Private Limited Company’s board may announce an interim dividend at any time before to the conclusion of the fiscal year in accordance with Section 2(35) of the Companies Act of 2013.

Investor Education and Protection Fund 

Any funds added by a corporation to the Unpaid Dividend Account that are not paid or claimed after seven years from the transfer date, plus any interest accumulated, are added to the Fund. A statement in Form no. 8.2 detailing the transfer to the Authority must be filed with MCA and validly certified by a CS in practise, a CA, or CWA. 

In Form No. 8.3, the company must submit a list of the shares for which unpaid or unclaimed dividends have been transferred to the Investor Education and Protection Fund. 

Form No. 8.4 must be used to submit a request to the Authority for an order authorising the payment of dividends and other items from the Fund.

Conclusion

Dividends are the Return on Investment made by shareholders on the company’s shares in each type of investment. Dividends fluctuate according to the company’s profit, unlike debenture interest, which is fixed. Since the dividend is crucial to the satisfaction of the company’s investors, the corporation must make intelligent decisions regarding the amount and type of dividend to be paid.

References:

1. https://taxguru.in/company-law/dividend-reserves-possible.html
2. https://corpbiz.io/learning/dividend-declaration-sources-mandatory-conditions-and-procedure/
3. https://thecompaniesact2013.com/article_detail.php?id=5
4. https://blog.ipleaders.in/procedure-for-declaration-of-dividend-out-of-reserves/
5. https://www.caclubindia.com/articles/declaration-and-payment-of-dividend-under-companies-act-2013-33439.asp

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