1 Declaration and Payment of Dividend

General Meaning of Term Dividend

Dividend is any sum payable as interest on loan or as share of profit to shareholders in

a business of a company or a profit of a company to the creditors of the ruined
property or as an individual’ share of it.
There are basically two kind of Dividends

Share of Profit

Dividend
Residuary at the
time of Winding
up
Section
Declaration of Dividend
123
Dividend Shall be paid out of
Depreciation to be calculated as
Current year profit after the depreciation
per Schedule II as per CAct 2013
Previous Year Profits but after Depreciation
Money provided by Government for payment of dividend in pursuance of a
guarantee given by that Government.

Company may transfer any portion or percentage of its profit to Reserves.

However, transfer is not a mandatory.

Declaration of Dividend out of Reserves (Important)

As per Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014,
when there is inadequacy or absence of profits in any year, a company may declare
dividend out of free reserves. However, the following conditions to be satisfied,
The Rate of Dividend = Dividend shall not exceed the average of past three
declared dividends. (if first year, this rule shall not apply)
Maximum Amount to be Drawn = Amount shall not exceed 1/10th of Paid up
share Capital + Free Reserves.
The Amount must be first used to set of current year losses.
After Dividend Paid the Balance Reserves shall be > 15% of Paid up Capital as
appearing in last audited Balance Sheet.
1
The above Provisions are not applicable to the Government Companies where
entire Capital is held by either CG or SG or one or more of them.

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 Section
Deposit of the Dividend Amount
123(4)
The dividend declared must be deposited in a Scheduled Bank in separate account,
within 5 Days from the date of declaration of the dividend.
(This provision shall not apply to Government Companies)
Section
Payment of the Dividend
123(5)
Dividend shall be Payable in cash, cheque, warrant or any other E-Payment.
Dividend shall be payable only to registered share holder or his order or his
banker.
Company can capitalize the profit or reserves for issuing fully paid Bonus
shares.
Section
Prohibition of Declaration of the Dividend
123(6)
When Company cannot propose Dividend?
If the company contravenes any provisions of below sections it cannot propose
dividend until such failure continues.
Section 73: Prohibition on acceptance of Deposit from Public
Section 74: Repayment of Deposits accepted
Section
Interim Dividend
2(35)
As per Section 2(35), “dividend includes interim dividend”
Board of Directors of a company may declare interim dividend during any
financial year out of the surplus in the profit and loss account.
In case of loss, the rate shall not be higher than average rate of dividend
declared in immediate 3 preceding years.
Other provisions like, depositing the amount shall continue to apply here also.
Section Keeping in abeyance the dividend, bonus or rights issue if registration of shares are
126 pending
If any instrument of transfer of shares delivered to the company but shares not
registered yet, then
Transfer the dividend in relation to such shares to the Unpaid Dividend
Account. If registered shareholder (Transferor) has given written consent to
transfer the dividend amount to transferee then it can be transferred to his
account instead of Unpaid Dividend Account.
The offers of Rights issue (Section 62) or Bonus issue (Section 123(5)) shall be
kept under abeyance until shares are registered.
Section
Unpaid Dividend Account
124
2
Though Section 124 of Companies act. 2013 applies to Unpaid Dividend Account this
section has not been notified yet. Section 205A of Companies act, 1956 shall continue
to apply to this topic.

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 If any dividend declared by the company is not been paid or claimed within 30
Days from the date of declaration to shareholders then within 7 days from the
expiry of said 30 days company shall transfer the unpaid dividend to a special
account called “Unpaid Dividend Account of ____Co.” to be created in
Scheduled Bank
If the company fails to transfer such an amount after 7th day from 30th day
then it must pay an interest at the rate of 12% per annum of the said unpaid
balance. Such amount shall ensure the benefit to the shareholders in the
proportion of amount remaining unpaid to them.
If any amount deposited in Unpaid Dividend Account remain unpaid for 7
years from the date of transfer, it shall be transferred to Investor Education
and Protection Fund.
If company fails to comply with any provisions of this section Penalty shall be
Rs. 5000/day until such failure continues. (To both Company and officer in
default)

Company Adhara Ltd. has declared the dividend on 1st April 2017.

It must deposit the amount in special account within 5 Days, that is before
6th of April as per section 123(4)
If any unpaid dividend up to 30th April 2017 then the amount must be
transferred to a special account in called “Unpaid Dividend Account of
Adhara Ltd” within 7 days of 30th April that is 7th May 2017.
If Adhara Ltd fails to deposit Rs. 5 lakhs on 7th it shall pay an interest at the
rate of 12% on Rs. 5 Lakhs until the amount is deposited.
If any amount in “Unpaid Dividend Account of Adhara Ltd” unpaid for 7 years
it must be transferred to Investor Education and Protection Fund.

Investor Education & Protection Fund (Section 205C of the Companies Act, 1956)

Purpose: Fund shall be utilized for promotion of investor’s awareness and protection
of the interests of investors.
The amounts credited in IE&P Fund:
Amounts in the unpaid dividend accounts of companies
The application moneys received by companies for allotment of any securities
and due for refund
Matured deposits with companies
Matured debentures with companies
3 The interest accrued on the amounts referred to in (a) to (d) as above.
Grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the
Fund

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 The interest or other income received out of the investments made from the
Fund.

Payment of Interest out of Capital (Section 208 of Companies Act, 1956)

When: Where any shares in a company are issued for the purpose of raising money to
defray the expenses of the construction of any work or building, or the provision of
any plant, which cannot be made profitable for a lengthy period.
Pay the interest on the amount of Share Capital being paid for the time period.
Charge the amount paid as interest to capital as cost of construction of the
work or the building.
Authorization by Articles of association or special resolution is needed in
addition to Central Government permission (must).
Central government may initiate enquiry and enquiry charges to be met by the
company.
The maximum rate of interest shall be 4% or as may be decided by central
government and time period also approved by CG.
Section
Punishment for failure to distribute dividends
127
Type of contravention Penalties
• Directors who are knowingly part of
contravention shall be subject
imprisonment up to 2 years
Dividend declared but not paid within 30
days • Fine of Rs.1,000-00/day
• Company shall be liable to pay
interest at the rate of 18% per annum
during the period of defaults.
No Penalties in the following Cases:
Where the dividend could not be paid by reason of the operation of any law
Where a shareholder has given directions to the company regarding the payment
of the dividend and those directions cannot be complied with and the same has
been communicated to him.
Where there is a dispute regarding the right to receive the dividend
Where the dividend has been lawfully adjusted by the company against any sum
due to it from the shareholder.
Where for any other reason, the failure to pay the dividend or to post the
warrant within the period under this section was not due to any default on the
part of the company.
If the dividend payable by Nidhi Company to members is Rs.100 or less per member,
4 then it would be sufficient if advertisement is given in one local newspaper and
published in company’s notice board for at least 3 months

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 Quick Summary and Practice Manual Questions topics

Dividend may be paid by Current year or preceding year profit after depreciation
or any amount granted by government to pay as dividend.
Any percentage of profit may be transferred by Company to its reserves.
Conditions to pay dividend out of Free Reserves (Rule 3 of Co.(D&PD) Rules 2014)
• Rate of dividend: Maximum of Average of past 3 years dividends
• Reserves withdrawn must be < than 1/10th of Capital + Free Reserves.
• First set off current year losses if any
• After withdrawal Balance in reserve > 15% of opening paid up capital
These rules not applicable to Government Companies.
Dividend declared (Section 123(4)) must be deposited within 5 days in Bank.
If company not repaid deposits or prohibited to accept deposit (Section 73&74)
then no dividend can be paid until mistake continues.
Interim dividend (Sec 2(35)) in loss possible but Rate< Average of last 3 years.
Keeping abeyance of dividend in case shares not registered (Sec 126) and transfer
to unpaid dividends account to be constituted under section 205A of Co. act
1956. However if transferor given written instruction amount may be transferred
to Transferee.
Any amount declared not paid within 30days transferred to UD Account within 7
days and not paid within 7 years from there then to IE&P Fund (section 205C).
(Penalty 5000/day)
Amounts in IE& P Fund are unpaid dividend, share money, matured debenture,
matured deposits, interests such amounts, Government grants.
Company can pay interest on Paid up capital raised for some capital expenses,
such interest may be capitalized. Prior approval of CG, AOA and Special
Resolution needed. Maximum rate shall be 4% or as decided by CG.
Punishments (Section 127) 2 years imprisonment, 1000/day penalty, 18% interest
No Penalty if, operation of law, consent from shareholder, adjusted against any
dues, no defaults from company.

Practice Manual Questions topics

The interest payable by the company in case of contravention of nonpayment of

dividend within 30 days is maximum 18%. Even though member may have
demanded higher interest.
Final Dividend is declared by BOD and approved by Members in general meeting.
Directors cannot divert the amount declared as dividend for any other
investment and defer the payment beyond 30 days. It amounts to contravention
under section 127.
5 The dividend amount may be adjusted against any sum payable by the members.
BOD can declare interim dividends.

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