Declaration and payment of dividend under Companies Act 2013

The Finance Act 2020 has abolished Dividend Tax and moved to the traditional system of taxation wherein dividends are taxed in the hands of the investors.

Dividend:- Sec-2(35) provides the definition of dividend which states that dividend includes any 'interim dividend'. Where in simple terms, dividend can be defined as the sum of money paid by a company, to its shareholders, out of the profits made by a company, in the proportion to the amount paid-up on the shares held by them (Sec-51).

Note:- Preference shareholders are always paid dividend in preference to the equity shareholders.

Now the question is who can declare dividend? Is it applicable to all the companies?

Well, subject to the provisions of Companies Act-2013, All Companies, except those companies which are registered under sec-8 (i.e. Non-profit organizations) can declare dividend.

Under Companies Act - 2013, Chapter VIII containing sections, which deals with the provisions related to declaration and payment of dividend. Section - 123 to 127 deals with the provisions related to the declaration and payment of dividend.

Let's have a look on the prov. related to the declaration and payment of dividend

Declaration of dividend (Sec-123)

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.

Sources of Dividend: 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.

Some conditions required to be satisfied for the declaration of dividend:-

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.

Note:- In case of, Inadequacy of Profits resulting declaration of dividend out of previous year undistributed profits: - Where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with Companies (Declaration and Payment of Dividend) Rules, 2014.

Hence, as per Companies (Declaration and Payment of Dividend) Rules, 2014 a company may declare dividend out of surplus reserves subject to the fulfillment 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 the provisions of Companies Act - 2013, No dividend shall be payable except by way of cash, where dividend payable in cash can also be paid through cheque, warrant or in any electronic mode, to the shareholder who is entitled to the dividend.

Condition:- A company who has committed any default in compliance with the provisions of sec- 73 and 74 relating to the acceptance and repayment of deposits would be barred to declare dividend.

Interim Dividend

According to the provisions of section - 123(3), Board of directors of a company may declare interim dividend during any financial year, out of the profits made by the company during such financial year or out of previous year undistributed profits (subject to Companies (Declaration and Payment of Dividend) Rules, 2014) .

As per Section- 2(35) 'dividend includes interim dividend' signifies that the provisions of Companies Act 2013, applicable to the final dividend to the extent possible, shall also applicable on interim dividend.

Unpaid Dividend Account (Sec- 124)

There are some cases wherein, dividend declared by the company has not been paid or claimed and in case where such dividend remained unpaid or unclaimed within 30 days from the date of declaration; company shall take the following necessary steps-

  1. Open a special account with a scheduled bank to be called ' Unpaid dividend account of . (Company Limited/Company( Private) Limited'
  2. Transfer the unpaid or unclaimed amount of dividend within a period of 7 days from the expiry of such 30 days, to the special account.

In case of default- If the company committed any default, in transferring such amount to the special account with in the specified time, company shall be liable to pay interest @ 12% p.a. from the date of such default.

Punishment for failure to distribute dividend (Sec-127)

According to the provisions of sec- 127 of the companies act - 2013, if a company fails to pay the dividend, within a period of 30 days from the date of its declaration, to the shareholders who are entitled to the dividend then-

Liability of

Imprisonment