DIVIDEND

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UNIT 17 DIVIDEND

Structure
17.0 Objectives
17.1 Introduction
17.2 Meaning of Dividend
17.2.1 Provisions Relating to Dividend
17.3 Sources of Dividend
17.3.1Declaration of Dividend
17.3.2Interim Dividend
17.4 Payment of Dividend
17.5 Unpaid Dividend
17.6 Investor Education and Protection Fund
17.7 Let Us Sum Up
17.8 Key Words
17.9 Answers to Check Your Progress
17.10 Terminal Questions

17.0 OBJECTIVES
After studying this Unit, you should be able to:
• explain the meaning of a dividend;
• describe provisions relating to dividend and its declaration;
• explain the sources of dividend and interim dividend;
• distinguish between paid and unpaid dividend; and
• explain Investor Education and Protection Fund.

17.1 INTRODUCTION
There is a difference between profit and divisible profit. All profits of a company
are not divisible. Divisible profits are profits available for distribution. The profit
available for dividend means profits which the directors consider should be
distributed after making provision for past losses, transfer to reserves or for
other purposes. In this unit you will learn about meaning and provisions relating
to dividend, sources of dividend, declaration of dividend, You will also learn
about payment of dividend, unpaid dividend and investor education and
protection fund.

17.2 MEANING OF DIVIDEND


The word ‘Dividend’ has not been defined in the Act. Section 2 (35) says
“Dividend includes any interim dividend”. In CIT vs Girdhar Das & Co. (P) 333
Dividned, Accounts, Audit Ltd (1967) 21 Comp. L J Supreme Court defined ‘Dividend’ as under:
and Winding Up
“As applied to a company, which is a going concern, it ordinarily means the
portion of the profit of the company which is allocated to the holders of shares
in the Company”. Thus, it is the share of company’s profit distributed among
the members not retained in the company”.
Bonus shares issued by capitalising accumulated profits to existing shareholders
are not dividend. Equity shares with ‘differential rights as to dividend and voting’
can be issued by a company (Section 43(a) (ii).
17.2.1 Provisions Relating to Dividend
The provisions relating to dividend are as follows:
i) A company may, if so authorised by its articles, pay dividend in proportion
to the amount paid up on each shares (Section 51).
ii) The amount of dividend, including interim dividend shall be deposited in
a scheduled bank in a separate account within five days from the date
of declaration of dividend.
iii) The dividend shall be paid to registered shareholders only or to his order
or to his banker. No dividend shall be payable except in cash. Any dividend
payable in cash may be paid by cheque or warrant or any other electronic
mode.
iv) In case of preference shares dividend in always paid at a fixed rate.
v) No dividend can be paid if the provisions under section 73 and 76 relating
to acceptance of public deposit are not complied with.
vi) The dividend not claimed within thirty days from declaration date shall be
transferred to ‘unpaid dividend account’.

17.3 SOURCES OF DIVIDEND


The dividend may be paid:
i) Out of profits of current financial year after deducting depreciation in
accordance with provisions of Schedule II or
ii) Out of profits for any previous financial year or years arrived at after
providing for depreciation as per schedule II and remaining undistributed
or out of the reserves or
Out of Both (i) and (ii)
But in computing profits any amount representing unrealised gains, notional
gains or revaluation of assets and any change in carrying amount of an
assets or of a liability on measurement of the asset or liability at fair value
shall be excluded or
iii) Out of money provided by Central or State Government for payment of
dividend by the company in pursuance of a guarantee given by that
government.
a) Provided the company may, before declaration of dividend in any
financial year, as it may consider appropriate transfer such percentage
334 of its profits to the Reserves.
b) Provided due to inadequate or absence of profits in any financial year, Dividend
any company proposes to declare dividend out of accumulated profits
earned by it in previous years and transferred by company to the
free reserves, such declaration shall be made according to rules framed
by Central Government.
17.3.1 Declaration of Dividend
i) No Dividend shall be declared or paid by a company from its reserves
other than free reserves.
ii) A company shall not declare dividend unless carried over previous losses
and deprecation not provided in previous year or years are set off against
profits of the company of the current year.
iii) A company which fails to comply with provisions of Section 73 and 74
(acceptance and repayment of public deposits) shall not, so long as such
failure continues, declare any dividend on its equity shares.
iv) In case of preference shares, under Section 43(a), payment of dividend,
either a fixed amount or an amount calculated at a fixed rate, which may
either be free of or subject to income tax, be paid before equity shares.
v) The company in annual general meeting may declare dividend, but no
dividend shall exceed the amount recommended by the Board (Table F(80).
However a company which could not declare dividend at an annual general
meeting may do so at a subsequent general meeting.
17.3.2 Interim Dividend
A company may distribute a part of the profits before its final accounts are
passed and dividends are declared in the annual general meeting. Such dividends
are called “Interim Dividends”.
The provisions relating to interim dividend as per section 123(3) are as follows:
1) The Board of Directors of a company may declare interim dividend during
any financial year or at any time during the period from closure of financial
year till holding of annual general meeting out of the surplus in the profits
and loss account or out of profits of the financial year in which such interim
dividend is sought to be declared or out of profits generated in the financial
year till quarter preceding the date of declaration of the interim dividend.
Provided that in case the company incurred loss during the financial year
upto the end of the quarter immediately preceding the date of declaration
of interim dividend, such interim dividend shall not be declared at a rate
higher than the average dividends declared by the company during
immediately preceding three financial years.
2) Table F(81) lays down that subject to Section 123, the Board may from
time to time pay to the members such interim dividend as appear to it
to be justified by the profits of the company.
3) Interim dividend like final dividend is considered as a debt due. Directors
cannot revoke it by a resolution except under circumstances under which
final dividend may be revoked.
A general meeting cannot pass a resolution for payment of interim dividend.
It may rescind it before payment is made. 335
Dividned, Accounts, Audit Check Your Progress A
and Winding Up
1) What is dividend?
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3) What is interim dividend?
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4) State whether the following statement are True or False.
a) Decision by directors to pay an interim dividend does not create a
debt.
b) Preference Shares have an inherent right to a fixed dividend.
c) Payment of dividend can be effected by credit to a shareholders
account.
d) Divisible profits and profits are the same.
e) A decision for payment of final dividend can be revoked.

17.4 PAYMENT OF DIVIDEND


i) No dividend shall be paid by a company except to the registered
shareholder of such share or to his order or to his banker.
ii) If transfer of shares has not been registered, it shall transfer dividend to
‘Unpaid Dividend Account’.
The shareholder can authorise company in writing to pay dividend to the
transferee as mentioned in instrument of transfer.
iii) No dividend shall be paid except in cash or by cheque or by electric mode
or by warrant. However, capitalisation of profit or reserves of the company
for the purpose of issuing fully paid up bonus shares or paying up any
amount, for the time being unpaid on any shares held by the members
of the company is not prohibited.
iv) In case of joint shareholders, dividend shall be paid to shareholder whose
name appears first in the register of members, or such person and to such
address as the holder or joint holders may in writing direct.
v) The amount of dividend, including interim dividend, shall be deposited in
a scheduled bank within five days of the date of declaration of such dividend
by the company (except a Government Company).
vi) Dividend warrant or cheque should be posted within thirty days. It is not
an offence if the shareholder does not receives it or not within this time.

336 Penalty : In case of failure to distribute dividend, every director of the company,
if he is knowingly a party to the default, be punishable with imprisonment which Dividend
may extend to two years and with fine, which shall not be less than one thousand
rupees for every day during which such a default continues and company shall
be liable to pay simple interest at the rate of eighteen percent per annum during
the period for which such default continues
Defences:
a) Where the dividend could not be paid by reason of the operation of any
law.
b) Where a shareholder has given direction to the company regarding the
payment of dividend and those directions cannot be complied with and
the same has been communicated to him.
c) Where there is a dispute regarding the right to receive the dividend.
d) Where dividend has been lawfully adjusted by the company against any
sum due to it.
e) Where for any other reasons, failure to pay the dividend or to post the
warrant within the specified period was not due to any default on the part
of the company.

17.5 UNPAID AND UNCLAIMED DIVIDEND


According to Section 124 where a dividend has been declared by a company
but has not been paid or claimed within thirty days from the date of declaration
to any shareholder entitled to the payment of the dividend, the company shall,
within seven days from the date of expiry of the said period of thirty days,
transfer the total amount of dividend which remains unpaid or unclaimed to a
special account to be opened by the company in that behalf in any scheduled
bank to be called “unpaid dividend account”.
The company shall within a period of ninety days of making any transfer to
unpaid dividend account prepare a statement containing names, their last known
address and the unpaid dividend to be paid to each person and place it on
the website of the company, if any or any other website.
If any default is made in transferring the total amount, it shall pay from the
date of such default, interest on so much of the amount as has not been
transferred, the company shall pay interest at the rate of 12% p.a.
Any person claiming dividend shall apply to the company. All money transferred
to unpaid dividend account, unpaid or unclaimed for a period of seven years
shall be transferred to the fund established under section 125(1) Investor
Education and Protection Fund to be managed by administrating authority
of the fund, which will issue a receipt to the company.
All shares in respect of which dividend has not been paid or claimed for seven
consecutive years or more shall be transferred by the company in the name
of aforesaid Fund. However any claimant of shares transferred above shall be
entitled to claim the transfer of shares from Investor Educational Protection Fund
in accordance with such procedure and on submission of such document as
may be prescribed.
Penalty : If the company fails to comply with any requirements of this section,
337
Dividned, Accounts, Audit the company shall be punishable with fine which shall not be less than five lakh
and Winding Up rupees, but which may be extended to twenty five lakhs rupees and every officer
of the company who is in default shall be punishable with fine which shall not
be less than one lakh rupee but which may extend to five lakh rupees. [Sub
Section (7)].

17.6 INVESTOR EDUCATION AND PROTECTION


FUND
The Central Government set up this Fund Under Companies Act, 1956. The
Companies Act, 2013, under section 125 lays down the sources and purposes
for which the fund monies can be utilised. An authority called “Investor Education
and Protection Fund Authority” administers it. It has a chairperson, members
not exceeding seven and a Chief Executive Officer.
Sources: The following amount shall be credited to the funds:
a) The amount given by Central Government by way of grants after due
appropriation made by Parliament by law in this behalf for being utilised
for the purposes of the fund;
b) Donations given to the Fund by the Central Government, State Governments,
companies or any other institution;
c) The amount in the Unpaid Dividend Account of Companies;
d) The amount in the general revenue account of the Central Government and
amount lying in the Fund under the Companies Act 1956 as it stood
immediately before the commencement of the Companies (Amendment) Act
1999 and remaining unpaid or unclaimed on the Commencement of this
Act.
e) The amount lying in the investor Education and Protection Fund under
Section 205C of Companies Act, 1956.
f) Interest or other income received out of investment made from the fund;
g) Amount received under section 38(4) i.e., amount received through
disgorgement or disposal of securities;
h) The application money received by companies for allotment of any securities
and due for refund;
i) Matured deposits with companies (except banking companies);
j) Matured debentives with companies;
k) Interest accrued on amounts referred above in (g) and (h);
l) Sale proceeds of fractional shares arising out of issuance of bonus shares,
merger and amalgamation for seven or more years;
m) Redemption amount of preference shares remaining unpaid or unclaimed
for seven or more years.
n) Such other amount as may be prescribed.
Amount referred in (h) to (j) will not form part of the fund unless such amount
has remained unclaimed and unpaid for a period of seven years from the date
338 it became due for payment.
Utilisation : The fund shall be utilized for : Dividend

a) The refund in respect of unclaimed dividends, matured deposits, matured


debentures, application money due for refund and interest thereon;
b) Promotion of investors’ education, awareness and protection;
c) Distribution of any disgorged amount among eligible and identifiable
applicants for shares, or debentures, shareholders, debenture holders or
depositors who have suffered losses due to wrong action by any person,
in accordance with the orders made by the court which has ordered
disgorgement;
d) Reimbursement of legal expenses incurred in pursing class action suits by
members, debenture holders or depositors as may be sanctioned by the
Tribunal; and
e) Any other purpose incidental thereto.
Check Your Progress B
1) What is investor education and investor fund?
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2) What are the penalties if the dividend is not paid by the Company?
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3) Mention any four sources of ‘Investor Education and Protection Fund’.
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4) Fill in the blanks:
a) The shareholder can transfer in writing the dividend to ………………
b) In case of joint shareholders, dividend should be paid to ………………
c) The dividend declared by a company has not been paid or claimed
within thirty days is transferred to………………
d) All shares in respect of which dividend has not been paid or claimed
for a period of seven consecutive years shall be transferred by the
company to………………

17.7 LET US SUM UP


There is a difference between profits and divisiable profits available for. It may
be paid out of profits or past revenues. Dividend is paid at a fixed rate amount
to preference shareholders. Interim Dividend is dividend paid between two annual
general meetings. Dividend is paid to registered shareholder or to his order or 339
Dividned, Accounts, Audit to his banker. Dividend, including interim dividend shall be deposited in a
and Winding Up scheduled bank in a separate account within five days from its declaration.
Dividend payable in cash may be paid by cheque or warrant. Unclaimed and
unpaid dividend within 30 days from its declaration, shall be deposited in separate
account ‘unpaid dividend account’ within 7 days after expiry of said 30 days
by the company. The amount in the unpaid account is transferred to ‘Investor
Education and Protection Fund’. The dividend is to be credited to this fund
should not have been paid or claimed for seven consecutive years or more.

17.8 KEY WORDS


Dividend: It is that share of company’s profit which is distributed among the
members.
Interim Dividend : The dividend that is declared and paid in the middle of
an accounting year before a company has determined its year earnings, of the
year.
Investor Education and Protection Fund (IEPF): The fund created by the
Central Government under provisions of Company Act. The fund is utilised for
promoting investor awareness and protection of investor interest.

17.9 ANSWER TO CHECK YOUR PROGRESS


A) 4 (a) false (b) true (c) true (d) false (e) false
B) 4 (a) to any person (b) shareholder whose name appears first
(c) unclaimed dividend account (d) Investor Education and Protection Fund

17.10 TERMINAL QUESTIONS


1) What are the provision of the Act relating to unpaid and unclaimed dividend?
2) Discuss “Investor education and protection fund”.
3) “Dividend cannot be paid by a company except out of profit”. Discuss.
4) Explain the rules relating to interim dividend.
5) What provisions and rules have been observed by a company before
declaring dividend?

Note: These questions will help you to understand the unit better.
Try to write answers for them but do not submit your answers to the
University. These are for your practice only.

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