Company Law Provision On Dividend Payment

• Companies rely on funds to manage the affairs
of their business successfully. Shareholders in

a company play a vital role in raising funds,
and in that process, they become its
stakeholders. They exercise control over the
share of profits in proportion to the money
they invest.
• Dividend is known as the share of profit by shareholders.
Shareholders are also considered the owners of the
company; therefore, they are entitled to get a dividend.
There is not an exact definition of the dividend in the
Companies Act, 2013. Under section 2(35), it merely
mentions dividends as “any interim dividend.” With a
view to distribute the profit among the shareholders of
the company, the Declaration and Payment of Dividend
under the Companies Act were enacted. In this article, we
shall cover various provisions related to the Declaration
and Payment of Dividend under the Companies Act, 2013.
Meaning of “Dividend”
• Dividend refers to the reward a corporation offers

to its shareholders, in cash or otherwise. Dividends
can be given in various ways, such as cash
payment, inventory, or some other form. It is
determined by its Management Board and requires
the approval of the shareholders. A dividend is the
distribution of a portion of the company’s
earnings, decided and managed by the company’s
board of directors, and paid to a class of its
shareholders.
Understanding Dividend as per Companies Act 2013
• Dividend is defined under Section 2(35) of the

Companies’ act, 2013 includes any interim dividend:
• Dividends are sum of money to be paid to the members
of the company out of the profits made by the Company.
• It is a share of profits of the company.
• It may be noted that dividend is paid to shareholders in
proportion to the amount paid-up on the share held by
them.
• Preference shareholders re always paid the dividend in
preference to the equity shareholders.
Sources of Dividend
• The basic principle of a declaration of dividend
is that it shall be paid out of profit only. As per
the Companies Act, it can be paid out of the
following sources:
• From the current year’s profit
• Accumulated profit from the previous year
• Out of the money provided by the Central or
State Government for the payment of dividends
in pursuance of guarantee given
Who can declare Dividend?
• As per the provisions contained in the Companies Act, 2013, all

companies can declare dividends except for those who are
registered under section 8.
• Dividend is to be declared by the company at its Annual General
meeting on such rate as may be recommended by board, and it
has no power to declare dividend exceeding the amount
recommended by the board. Once declared, it becomes debt
payable by the company to its shareholders, who can sue the
company for the non-payment of the dividend.
• A company cannot pass a resolution for the declaration of
dividend, without passing a resolution for the adoption of
accounts. Hence, a company shall adopt its books of accounts first
and then only, entitled to declare the dividend.
Types of dividend
• There are following types of dividend:

• Interim dividend; and
• Final dividend
• Preference share Dividend
Interim Dividend vs. Final Dividend
• As per Section 2(35) of the Companies Act

2013, an Interim Dividend will be declared by
the board any time before the closure of the
fiscal year by the Private Limited Company.
Following is the difference between interim
and final dividend:
Mandatory Conditions for Dividend Declaration
• Declaring dividend out of current year’s profit

• Company has to meet the following requirements for declaring
dividend out of its profit:
• Depreciation: Depreciation shall be provided on all depreciable
assets as per the prescribed rate or its useful life before declaring the
dividend.
• Reserve: Company cannot declare or pay a dividend unless it
transfers a certain percentage of profit to reserve.
• Set off previous year loss: Company must set off the carried
forwarded previous year’s loss from the current year’s profit before
declaring the dividend.
• Free Reserve: Company shall not declare its dividend out of any
reserve other than Free Reserve.
Declaring Dividend out of Surplus Reserves in case of insufficient current year’s profit
• The company can declare the dividend out of surplus reserve in case of
insufficient current year’s profit subject to the following conditions:
• Rate of Dividend: The dividend rate shall not exceed the average of the
declared dividend of three immediately preceding years.
• Withdrawal amount: The total amount of withdrawal from
accumulated reserve shall not exceed 1/10th of the paid-up share
capital and free reserves as per the latest audited financial statement.
• Utilization of money withdrawn: Such withdrawn money from
accumulated reserve shall be first used to set off the previous year’s loss
before declaring a dividend for the current year.
• Balance: Balance of surplus reserve after withdrawal shall not fall below
15% of its paid-up share capital as per its latest financial statement.
Circumstances under which dividend is not required to be paid
• In case dividend cannot be paid due to operation of law;

• In case members have given directions to the company
which cannot be complied with;
• In the event of dispute regarding the payment of
dividend;
• In case company has adjusted dividend against amount
due from the shareholders;
• In case the company has made any default in
compliance with the provisions of section 73 and
section 74, dividend cannot be paid.
Provisions relating to Payment of Dividend
• The provisions under the Companies Act, 2013 provides that no

dividend shall be paid except through cash and where the dividend
is payable in cash, it can be paid by way of cheque, warrant or by
any electronic mode to the shareholder who is eligible to receive
the dividend. However, it may be kept in mind that a company, who
has defaulted in compliance with respect to the provisions of
section 73 and section 74 comprising of prohibition of acceptance
of deposits from public and repayment of deposits, shall be barred
to declare dividend.
• The amount of the dividend (Including the interim dividend) must
be deposited in the bank in a separate account in five days from
the date such declaration of dividend is made. The dividend shall
be payable to the eligible shareholder by way of cash.
Procedure to be followed for dividends declaration:
• Issuance of 7 days’ advance notice period under Section 173 of the

Companies act, 2013 for an annual financial meeting of the board
of directors
• Advance 2 days’ notice to the stock exchange where company’s
securities are places in case of a listed company
• The resolution needs to be passed in an annual board meeting for
dividend division and issuance
• Prepare a statement of dividend
• To ensure that annual dividend tax is paid to the concerned
authority
• Open a separate bank account for dividend division
• Transfer dividend to shareholders as per their shareholding pattern
Punishment for Failure to Distribute Dividend as per Companies Act 2013 (Section 127)
• Where a dividend has been declared by a company but has

not been paid or the warrant in respect thereof has not
been posted within thirty days from the date of declaration
to any shareholder entitled to the payment of the dividend,
every director of the company shall, if he is knowingly a
party to the default, be punishable with imprisonment
which may extend to 2 years and with fine which shall not
be less than 1000 rupees for every day during which such
default continues and the company shall be liable to pay
simple interest at the rate of eighteen per cent per annum
during the period for which such default continues.

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• Companies rely on funds to manage the affairs

of their business successfully. Shareholders in

• Dividend refers to the reward a corporation offers

• Dividend is defined under Section 2(35) of the

• As per the provisions contained in the Companies Act, 2013, all

• There are following types of dividend:

• As per Section 2(35) of the Companies Act

• Declaring dividend out of current year’s profit

• In case dividend cannot be paid due to operation of law;

• The provisions under the Companies Act, 2013 provides that no

• Issuance of 7 days’ advance notice period under Section 173 of the

• Where a dividend has been declared by a company but has

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