Chapter 8 Dividend

Definition of Dividend It is recommended by BOD and It is paid to both equity and preference shareholders for
2(35) defines dividend as “ dividend approved by the shareholders. their contribution of capital towards the company.
includes interim dividend” (Similar to return on their investment).
PAYABLE ONLY IN CASH to the registered
Shareholder or order or his banker Section 123

Does company have adequate profits?

YES NO
Declare dividend after following procedure laid down in Rule 3 of the Companies
Sources for declaration of Dividend (Declaration and Payment of Dividend) Rules, 2014. (Satisfy ALL 3 conditions)
u/s 123(1)

1.Profits of the current financial year CONITION 1 – Rate rule CONDITION 2 – Usage rule CONDITION 3 – Balance rule
arrived at after providing for depreciation
in accordance with Schedule II (or) The rate of dividend declared shall The total amount to be drawn from The balance of reserves after such
not exceed the average of the rates such accumulated profits shall not withdrawal shall not fall below
2. Profits of any previous financial at which dividend was declared by exceed 10% of its (paid-up share 15% of its paid up Share capital as
appearing in the latest audited
year(s) arrived at after providing for the company in the immediately capital and free reserves) as
financial statements.
depreciation in accordance with Schedule preceding three years. appearing in the latest audited
II and remaining undistributed. (i.e. free Rate of Dividend ≤ (RD1 +RD2 + RD3)/3 financial statement.
reserves and Balance in Profit and loss Free Reserves – Amount drawn
account) (or) Where, RD1, RD2, RD3 are rates at which
for payment of dividend
dividend was declared by the company in the The amount so drawn shall first be
3. Both 1 and 2 (or) immediately preceding three years. utilized to set off the losses incurred >= 15 % of paid up share
(Note This condition is NA if the in the financial year in which dividend capital
company has not declared dividend is declared and only thereafter, any
4. Money guaranteed by central or state
in each of the previous 3 years) dividend in respect of equity shares
government for the payment of dividend.
shall be declared.

Key provisions as contained in Section 123

1. A company which fails to comply with section 73 and 74 shall not declare dividend as long as the default continues. (i.e. failure to repay deposits)
2. Before declaration of any dividend, Previous year losses and depreciation not provided in previous year(s) are required to be set off against profits of the company for the current year.
3. Amount represented by unrealised gains, notional gains, revaluation of assets and any change in carrying amount of asset/liability at fair value shall be excluded while computing profits.
4. The conditions prescribed by Rule 3 are not applicable to a Government company in which the entire (100%) paid up share capital is held by CG/SG or combination of above.
5. Transfer Amount payable as dividend to a separate bank account within 5 days of declaration of dividend
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 Chapter 8 Dividend
Section 124 Unpaid dividend
Account

Where the dividend declared remains Unpaid (or) Unclaimed

Any money transferred to the for 30 days from the date of declaration of dividend
Unpaid Dividend Account If such amount is not
which remains unpaid or transferred, company to pay
unclaimed for seven (7) years interest at 12% P.A from the
Transfer the unclaimed or unpaid amount to a separate bank
from the date of such transfer date of default.
account named “Unpaid dividend account” with a scheduled
shall be transferred by the
bank withing 7 days from the expiry of 30 days
company along with interest Such interest shall also be
accrued thereon to the accrued to the members in
Investor Education and Within 90 days of transferring any amount to the “Unpaid proportion of amount unpaid
Protection Fund.
Dividend Account”, the company shall prepare a statement
containing the names, last known addresses and the amount
of unpaid dividend to be paid to each person and place such
statement on its website, if any, and also on any other web- Note : Dividend
will be paid to the
site approved by the Central Government for this purpose.
Shareholder whose
name exists in
ROM on the record
date
Contravention of S.124

Company – 1 Lakh, Rs 500 in case of a Officer – 25,000, Rs 100 in case of a

continuing offence Subject to a maximum of Rs continuing offence Subject to a maximum
10,00,000. of Rs 2,00,000.
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 Chapter 8 Dividend
Section 125
Investor Education and Protection Fund (IEPF)

Credits to the Fund (i.e. cases when money will be transferred

Debits to the Fund (i.e. cases when money will be into the fund)
taken out of IEPF)
1. grants by CG or Donations by CG/SG, companies or any other Authority for the Fund
1. refund of unclaimed dividends, matured institution for the purpose of the fund.
The Authority oversees the
deposits, matured debentures, the 2. Amount transferred from the unpaid dividend account. management of IEPF
application money due for refund and interest
3. Amount lying in IEPF fund before the commencement of 1.Constitution of Members
the act
2. reimbursement of legal expenses incurred A. the Secretary, Ministry
in pursuing class action suits under sections 4. Interest or other income received out of investments of Corporate Affairs shall
made from the fund
37 and 245 by members, debenture-holders or be the ex-officio
Chairperson of the
depositors as may be sanctioned by the 5.Amount received through disgorgement or disposal of Authority.
Tribunal securities. (i.e. securities seized from a person who has been B. Min – 6 Members
convicted for personation for acquisition of securities, when Max – 7 Members
someone applies for securities in fictitious names the court can
3. promotion of investors’ education, order for disposal of those securities)
C. Chief Executive Officer
who shall be the convenor
awareness and protection of the
6. Application money received and due for refund if it is not
Authority.
claimed for more than 7 years
4. distribution of any disgorged amount
2. The authority will work in
among eligible and identifiable applicants for 7. Matured Deposits with companies other than banking
consultation of C&AG and
companies, matured debentures and Redeemable preference
shares or debentures, shareholders, shares only if it remains unclaimed or unpaid for more than 7
the authority will be
debenture-holders or depositors who have years
audited Annually by C&AG
and audit report to be sent
suffered losses due to wrong actions by any to the Central Government
8. Interest accrued on amounts specified in point 5 to 7 above.
person, in accordance with the orders made which will be laid in both
by the Court which had ordered 9. Amount received from sale of fractional shares arising out of
the houses of parliament.

disgorgement; issue of bonus shares or in the case of merger or amalgamation.

10. All shares and benefits arising out of SBO U/s 90. Chapter 8
 Chapter 8 Dividend

S.126 – Right of Dividend, rights shares and S.127 punishment for failure to distribute dividends within 30 days
bonus shares to be held in abeyance pending
registration of transfer of shares
In case a company fails to pay declared dividends or fails to post
dividend warrants within 30 days of declaration
Where any instrument of transfer of shares
has been delivered by a shareholder for
registration and the transfer of such shares
has not been registered by the company, The Every director who is knowingly a party The company shall be
company shall; of default is punishable with liable to pay simple
imprisonment upto 2 Years interest at the rate of 18%
AND p.a. during the period for
Liable to pay a fine of Rs 1,000 for every which such default
1. Transfer the dividend in relation to day during which such default continues continues.
such shares to the Unpaid Dividend
Account unless it is authorized by the Exemption from Punishment ( cases where the company will not be punished
registered holder of such share in writing even if dividend warrant is not dispatched withing 30 days)
to pay such dividend to the transferee
where the dividend could not be paid by reason of the operation of any law;
specified in the instrument of transfer;
where a shareholder has given directions to the company regarding the
and payment of the dividend and those directions cannot be complied with and the
same has been communicated to him;
2. Keep in abeyance in relation to such where there is a dispute regarding the right to receive the dividend;
where the dividend has been lawfully adjusted by the company against any
shares any offer of rights shares and any sum due to it from the shareholder;
issue of fully paid-up bonus shares. where, for any other reason, the failure to pay the dividend or to post the
warrant within the prescribed period of 30 days was not due to any default on the
part of the company.

In case of a Nidhi Company -> If dividend payable to a member is less than Rs 100, it is enough to annouce the
declaration in one vernacular newspaper with wide circulation and publish in notice board of Nidhis for 3 months Chapter 8
CA CS Karthik Manikonda (75501 37279)
 Chapter 8 Dividend
Interim Dividend
Section 123(3) & 123 (4)

What is Interim dividend? From where can such dividend be paid? I.e. Source of Can the company declare interim dividend if they
Interim dividend? have incurred loss in the current year in which they
“Interim dividend may be declared sought to declare interim dividend??
by the Board of Directors at any time The sources for declaring interim dividend include:
during the period from closure of 1. Surplus in the profit and loss account; (I.e. reserve balance “If the company has incurred loss during the current
financial year till holding of the available in Profit and loss account under reserves and surplus financial year up to the end of the quarter immediately
annual general meeting.” heading) or preceding the date of declaration of interim dividend,
2. Profits of the financial year in which such dividend is sought such interim dividend shall not be declared at a rate
“ Interim dividend is the dividend to be declared (i.e. Balance available in General reserve) or higher than the average (rate of) dividend declared by
declared and paid between 2 3. Profits generated in the financial year till the quarter the company during the immediately preceding three
AGM’s” preceding the date of declaration of the interim dividend financial years.”
(i.e. if dividend is sought to be declared in Q3, Profits earned
until Q2). What if dividend is not declared for any one of the 3 years?
IT IS DECLARED BY THE BOARD OF Then ignore such year and compute average for the years
DIRECTORS and later ratified in where dividend is declared, i.e. if divided is declared for only
the upcoming AGM. 2 out of the last 3 years, take 2 years average

Articles has to specifically provide

for declaration of interim
dividend.
ALL OTHER PROVISIONS THAT Interim dividend can
ARE APPLICABLE FOR FINAL
DIVIDEND ARE EQUALLY be revoked with the
APPLICABLE FOR INTERIM consent of all
DIVIDEND EXCEPT THE
DIFFERENCE THAT IS STATED
Shareholders
ABOVE. (Unanimous
Resolution)

Chapter 8
CA CS Karthik Manikonda (75501 37279)