Tag: dividend

Declaration of Dividend

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2) Total Amount to be withdrawn: – The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the paid-up share capital and free reserves as appearing in the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3) Utilization of withdrawn amount: – The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in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.

Dividends 101

As an investor, entrepreneur or even as someone aiming to be financially literate, one must know about Dividends, its types and implications as it is common source of additional income for many investors. Dividends are also considered as an important reflection of the company’s value as it is used in calculating the value of the stock in many methods. One can also determine the future yield or dividends estimates from historic data. Therefore, it is essential to know about dividends, from investor’s, management and entrepreneur’s perspective.

What is a Dividend?

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. A share of the after-tax profit of a company, distributed to its shareholders according to the number and class of shares held by them is called dividend.

The amount and timing of the dividend is decided by the board of directors, who also determine whether it is paid out of current earnings or the past earnings kept as reserve.

Dividend for Preference vs Equity shareholders

Holders of preference shares receive dividend at a pre-determined fixed rate and are paid first. But preference shareholders are not entitled to treat the preference dividend as debt and sue for its payment.

Holders of equity shares are entitled to receive any amount of dividend, based on the level of profit and the company’s need for cash for expansion or other purposes.

Dividend can be defined as the distribution of any sums to Members out of profits and wherever permitted out of free
reserves available for the purpose.
The right to claim dividend will only arise after a dividend is declared by the company in the General Meeting and until and unless it is so declared, the shareholder has no claim against the company in respect of it.

Types of Dividends

  • Final Dividend

Dividend is said to be a final dividend if it is declared at the annual general meeting of the company. Final dividend once declared becomes a debt enforceable against the company. Final Dividend can be declared only if it is recommended by the Board of Directors of the Company in the Directors’ Report.

  • Interim Dividend

Dividend is said to be an interim dividend, if it is declared by the Board of Directors between two annual general meetings of the company. All the provisions relating to the payment of dividend shall be applicable on the interim dividend also.

Dividends can tell us a lot about the company’s position. A deeper study of a company’s financial statements and dividends pay-out ratio (ratio of the dividend paid per share to earnings per share) can tell one about the company’s future plans as well.

For example, if the company chooses to retain most of its earnings and pay lesser dividends to its shareholders, it could possibly mean that it is planning to expand/grow by purchasing more machinery or opening another branch or outlet or introducing another product line. It could even mean that it is planning to invest in another company. This could increase the possibility of getting higher returns in the future. However, it is also riskier so investors with lesser risk appetite should sell their shares.

Hence, it is important to understand dividends and its implications in order to analyse the situation wisely and take decisions according to the risk appetite and wealth objectives of the investor. For the same reason, the management should also understand its implications to make sure the implications derived from company’s data and statements is in line with its future goals and objectives.