As more and more people invest in the stock market, dividends as a source of income gains popularity. Therefore, it is important to understand the legal framework of the process and its details in order to make a well-informed investment.
Sources of Dividend declaration
The basic principle of declaration of dividend is that it shall be paid out of profits only. However as per companies act dividend can be paid out of-
1) Current year’s profit of the company, or
2) Undistributed or accumulated profits of the previous years, or
3) Out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government.
Dividend Declaration Provisions
1) Depreciation: – Before the declaration of dividend, a company shall provide depreciation to all its depreciable assets, in accordance with the rates or useful life, as the case may be provided in Schedule – II of Companies Act -2013.
2) Transfer to Reserves:- A company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year, as it may consider appropriate to the reserves of the company.
3) Set off of previous year losses and depreciation: –A company shall not declare dividend unless carried over previous losses and depreciation not provided in previous year or years, are set off
against profit of the company for the current year.
4) Free Reserves: – A company shall not declare or pay dividend out of its reserves, other than free reserves.
Conditions for declaration of dividend out of surplus reserves
As per Companies (Declaration and Payment of Dividend) Rules, 2014 a company may declare dividend out of surplus reserves subject to the fulfilment of the following conditions, namely: –
1) Rate of Dividend: – The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. However, this condition shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.
2) Total Amount to be withdrawn: – The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the paid-up share capital and free reserves as appearing in the latest audited financial statement.
3) Utilization of withdrawn amount: – The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.
4) Balance amount of Reserves:- The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as appearing in the latest audited financial statement.
Payment of dividend: According to section 123(5):
■ Dividends are payable in cash. Dividends that are payable to the shareholder in cash may be paid by cheque or
warrant or in any electronic mode.
■ Dividend shall be payable only to the registered shareholder of the share or to his order or to his banker.
■ This subsection shall apply to the company, subject to that any dividend payable in cash may be paid by crediting the same to the account of the member, if the dividend is not claimed within 30 days from the date of
declaration of the dividend.
■ Nothing in sub-section 5 of section 123, shall prohibit the capitalization of profits or reserves of a 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.
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