DIVIDEND
DIVIDEND
The word “Dividend” has
origin from the Latin word “Dividendum”. It means a thing to be
divided. Dividend means the portion of the profit received by the shareholders
from the company's net profit, which is legally available for distribution
among the members. Therefore, dividend is a return on the share capital
subscribed for and paid to its shareholders by a company. Dividend defined
under section 2(35) of the Companies Act, 2013, includes any interim dividend.
Section under CA 2013
|
Section under CA
1956
|
Matters dealt with
|
2(35)
|
2(14A)
|
Definition of
Dividend
|
51
|
93
|
Payment of
dividend in proportion to amount paid up.
|
91
|
154
|
Declaration of
book closure/Record date and publication of notice of record date/book closur
|
123
|
205
|
Payment of
dividend-sources, conditions, transfer of profits to reserve, etc.
|
123(5)
|
205, 205A(3)
|
Dividend shall
be paid to registered shareholders
and beneficial
owners under CSDL/NSDL Opening of a separate bank account for making payment
of dividend and deposit the amount of dividend into the account within a
period of 5 days of its declaration
|
126(6)
|
205
|
Restriction on
payment of dividend on equity shares on failure to comply with Deposits
|
124
|
205A
|
Unpaid
dividend to be transferred to special dividend account.
|
126
|
206A
|
Right of
dividend, etc. — When to be kept in abeyance.
|
127
|
207
|
Payment of
dividend must be made within 30 days of its declaration and penalty for
failure to pay dividend within prescribed time limit.
|
Types of dividend: There are
following types of dividend:—
·
Interim
dividend; and
·
Final
dividend
·
Preference
share Dividend
[1]Meaning of 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.
Source for payment of Dividend: Dividend
can be paid out of Followings mentioned below: Section-
123 (1)(a)
§
Profit
of the current year after providing of the depreciation; or
§
Profit
of the previous financial year or years after providing for depreciation for
previous years; or
§
Out of
the money provided by Central or State Government for payment of dividend in
pursuance of guarantee given by that, if any.
v Whether it is compulsory requirement of making provision for
depreciation before payment of dividend?
In
terms of the provisions of section 123 of the Act, no company can pay dividend
in any year without charging depreciation in the profit and loss account for
the current year and that there is no balance of un provided depreciation of
any earlier year or years.
Depreciation
shall be provided in accordance with the provisions of Schedule II to the
Companies Act, 2013.
v Whether the term “Profit of the current year” used in 123(1)(a) refers
to profits after tax or before tax?
It
refers to profits after tax.
Term ‘Profit’- Profit
can be either revenue profit or Capital profits or both. Thus, dividend can’t
be paid by revaluation of assets, as the surplus has not been actually
realized.
For the purpose of prohibition of payment of dividend out of capital,
capital means capital according to the Act and not the goods or things on which
capital is laid out. [Lubbock v British Bank of South America (1892) 2 Ch. 198
(CA)]
Transfer portion of profit in reserve:
Before declaration of dividend, a company may transfer a portion from
the profit to the reserves of the company. The company is free to decide the
percentage for such transfer to the reserve.
v Whether it is mandatory for the Company to transfer some amount in
reserve before declaration of dividend?
No,
it’s not mandatory to transfer the amount. Earlier in Companies Act, 1956 it
was Compulsory to transfer the amount in reserve while declaration of dividend.
But the same is on the discretion of the Company in Companies Act, 2013.
Companies
are free to transfer such percentage of its profits for that financial year as
it may consider appropriate to the reserves. {First Proviso to Section 123(1)
of the Companies Act, 2013}.
The
reserve shall, at the discretion of the Board, be applicable for any purpose to
which the profits of the company may be properly applied, including provision
for meeting contingencies or for equalizing dividends. {As per Clause 82 (i) of
Model Articles of Company Limited by shares as Contained in Table-F of
Schedule-I of the 2013 Act}.
Declaration of Dividend:
Notice of Dividend:
{As
per Clause 87 of Model Articles of Company Limited by shares as Contained in
Table-F of Schedule-I of the 2013 Act} Notice of dividend declared shall be
given to the persons entitled to share in it.
Process for declaration of Dividend:
{As
per Clause 80 of Model Articles of Company Limited by shares as Contained in
Table-F of Schedule-I of the 2013 Act}
·
Company
in Board Meeting may decide the amount of dividend which they want to recommend
in General Meeting.
·
Company
will mention the resolution for Dividend in the Notice of General Meeting.
·
Company
will hold the General Meeting:
§
Declaration
of Dividend is Ordinary Business.
§
Ordinary
Resolution for declaration of dividend will be passed in the General Meeting.
§
Once
dividend is declared, it must be paid within 30 days.
Note:
§
Dividend
declared in General Meeting can’t exceed the dividend recommended by the Board.
§
Dividend
declared in General Meeting by member can be less than the dividend recommended by the Board.
§
Dividend
paid in General Meeting is Final Dividend.
v Whether it is mandatory to Recommendation of dividend by the Board is
compulsory
In
the matter of payment of dividend or not in any financial year irrespective of
the profit earned by a company in the financial year is left to the discretion
of the Board to recommend or not to recommend dividend for any year. If the
Board does not recommend any dividend, the company in general meeting cannot
consider and approve any dividend for payment. The company in general meeting
cannot also
Increase
the rate of dividend recommended by the Board.
In
Maharani Lalita Rajya Lakshmi v Indian Motor Co. (Hazaribagh) Ltd. (1962) 32
Comp Cas 207, the Division Bench of the Calcutta High Court rejected the
grievance of the shareholders by observing thus: “It is then argued that the
board of directors controlled by the managing agents has not been properly declaring
dividends. In fact what is said in paragraph 21 of the petition is that
dividend which is much below the actual profit earned by the company has been
declared. I fail to see how this is an act of oppression to any member or
members within the meaning of section 397 of the Companies Act, 1956 (Now
section 241of the Companies Act, 2013). The board of directors has a discretion
to declare dividend and the rate of such dividend. There is no company law that
I know which obliges a board of directors to use up all its profits by
declaring dividend. No company law lays down that all profits must be declared
and exhausted in paying dividends. Surely, failure to do so could not be a
ground for an application for oppression under section 397 of the Companies
Act. Besides, that will also not be a ground for winding up a company as
indicated by Lord Blanesburgh in the observation quoted above in the Privy
Council decision of Ripon Press and Sugar Mill Co. Ltd. v Gopal Chetty.” The
decision has been followed by the Single Judge of Calcutta High Court, in the
case of Jaladhar Chakraborty & Ors. v Power Tools & Appliances Co. Ltd.
(1994) 79 Comp Cas 505.
v Whether Board's recommendation can be withdrawn before communication
to others?
Since
the director's recommendation of dividend is only a proposal, it can be
withdrawn by the Board before it is included in the notice for the annual
general meeting.
v Whether Dividend becomes unsecured debt against the company after
approval in the general meeting?
Where
a dividend is approved by the shareholders at the annual general meeting, it
becomes a debt against the company and it is deemed to be receivable by the
members only in the year at which the members declared the dividend and not at
the time when the dividend was recommended by the Board. [Tarajan Tea Co. (P)
Ltd. v CIT (1994) 13 CLA 75 (Gau); Hanuman Prasad Gupta v Hiralal (1970) 40
Comp Cas 1058 (SC); Upendra Kumar Joshi v Manik Lal Chatterjee (1982) 52 Comp
Cas 177 (Pat)]
Interim Dividend: {As per Clause 81 of Model Articles of Company
Limited by shares as Contained in Table-F of Schedule-I of the 2013 Act}
§
Interim dividend can only be declared by board of
Directors.
§
Generally paid in the middle of the year if Board
of directors fined that profitability of the Company.
§
Board of Directors can declare dividend out of
surplus in profit and loss account at the beginning of the year or profit
during the year.
In case of Company
incurred losses in current financial year:
If
the company has incurred loss during the current financial year upto the end of
the quarter immediately preceding the date of declaration of interim dividend,
such interim dividend shall not be declared at a rate higher than the average
dividends by the company during the immediately preceding three financial year-
Section 123(3).
Note:
§ Interim
dividend is really a mod of keeping shareholder happy and keeping good image of
Company in stock market.
§
All legal provisions applicable on final dividend
equally apply on interim dividend.
Condition common for Both Final Dividend and
Interim Dividend:
§
Deposit of Amount of declared dividend in
separate Bank Account.
§
Payment of dividend within 30 days of
declaration.
§
Transfer of unpaid dividend in special account.
§
Interest for late payment
§
Transfer of Investor protection Fund after Seven
year.
§
Penalty for nonpayment etc.
HOW TO DECIDE THE
SHAREHOLDERS TO WHOM DIVIDEND WILL BE GIVEN:
Unlisted Companies (Include unlisted Public and Private Limited
Company):
-
It is not necessary to close register.
-
There are few transfers in these Companies.
-
General Meeting can decide the ‘Cut off’ date or
could be date of General Meeting.
In
case of the annual dividend, the persons who are members as on the date of the
annual general meeting will be eligible to receive the dividend as the dividend
is approved by the members on the day when annual general meeting is held.
Listed companies are required to inform
the Stock Exchange 1 [atleast 7 working days] in advance of closing the Register
of members for payment of dividend declared at the annual general meeting for
determining the names of shareholders entitled to dividend.
v Whether shareholder can give director to the Company to pay his
dividend to any third person?
Section
123(5) provides that no dividend shall be paid by a company in respect of any
shares therein except to the
§ Registered holders of such shares or
§ To his order to any person or
§ To his Bankers
So
it is clear that on the director of the register shareholder company can pay
dividend to any third person.
v In case of Transfer of shares, shares are still not registered on the
name of the transferee then who will be entitled to receive the dividend on the
point of view of the Company?
Merely
because a person may have purchased or been in receipt of shares, in the
absence of the shares being registered in his name in the books of account of
the company, such a person is not
entitled to receive the dividend, unless the shares lodged for transfer.
The dividend has to be paid by the company in the name of the registered
shareholders and it is the registered shareholders alone who claim dividend
under section 27 of the Securities Contracts (Regulation) Act, 1956. [CIT v
Aatur Holdings Pvt. Ltd. (2008) 146 Comp Cas 152 (Bom)]
Section
126 provides that where valid transfer deed has been lodged which has not been
registered by the company, it shall withhold payment of the dividend on such
shares till the shares are registered. This section does not apparently apply
to a transfer, which has been refused. But where the rejection is on account of
reasons like difference in signature, insufficient stamp, etc., it will be
desirable for the company to wait and keep in abeyance the dividend till the
irregularity is removed to enable the company to register the transfer and pay
the dividend to the transferee.
In
Nagarajan (S.V.) v Lakshmi Vilas Bank Ltd. (1997) 90 Comp Cas 392 (CLB): (1997)
26 CLA 308 (CLB), it was held that when a person comes with a petition as an
aggrieved person all that is required to be seen is whether he has any such
prima facie ground for seeking rectification and so long as he had such prima
facie ground, he can come as an aggrieved person.
In
such cases, the company shall transfer the dividend to the Unpaid Dividend
account referred in section 124, unless the company has authorised by the
registered holder of such shares in writing to pay such dividend to the
transferee specified in such instrument of transfer.
v In case of joint share holder who will be entitled to receive dividend?
In
the case of Joint Holdings, the dividend shall be paid to the person whose name
is registered first in the books. It may be noted that the person whose name is
named first in the application for shares is entered first in the Register of
members. There will be no objection to send the dividend to any other joint holder,
if a request is made to the company signed by all the joint holders.
In other words:
§
In
case of Joint shareholders, the cheque or warrant of dividend should be sent to
the holder first named in the register of members.
§
If
the joint holders direct in writing the cheque or dividend can be send to
another person as directed by the join shareholders { Regulation 85(i) of Model
Articles Table- F as per the 2013 Act.}
v In case of shares held in electronic mode, who will be entitled to
receive dividend?
In
case if the shares are held in electronic mode, the dividend will be paid to
the beneficiaries whose names as may be provided by the CDSL/NSDL to the
Company or its registrar on the record date or date of book closure as the case
may be.
Mode of Payment of Dividend:
There are following
Modes of Payment of Dividend: [Section- 123(5)]
§ Cash
§ Cheque
§ Dividend Warrant
§ In any electronic Manner.
Note:
§ Dividend should be paid by cheque or warrant sent
through post to the registered address of the shareholder.
§ Dividend can’t be paid in ‘KIND’ e.g. in form of Gifts, Goods or Bonus Shares.
§ Payment of dividend to another person as per
order of the shareholder is permissible. This is also providing in {Regulation
85(ii) of Model Articles Table- F as per the 2013 Act.}
Issue of Shares with Differential Right:
If share with
differential right have been issued, dividend will be declared and paid on the
basis of terms of issue. {Regulation 83(iii) of Model AOA Table-F of the Act,
2013}.
Prohibition on Dividend:
A company which has default under Section
73 and 74 related to deposit and repayment of deposit or interest thereon may
not declare dividend.
A company cannot declare dividend if the
company fails to comply with acceptance of deposits and repayment of deposits
accepted prior to the commencement of this Act. (Section 73 & 74 of
Companies Act 2013.
Free Reserve:
No
dividend shall be paid from its reserves other than free reserves. The term
“Free Reserves” is defined under Section 2 (43) of the Company Act 2013. Free
reserve means such reserve which, as per the latest audited balance sheet of a
Company, are available for distribution of profit.
Punishment for Failure to Distribute Dividend (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 two years and with fine which
shall not be less than one thousand rupees for every day during which such
default continues and the company shall be liable to pay simple interest at the
rate of eighteen percent per annum during the period for which such default
continues.
No offence
under this section shall be deemed to have been committed:—
(a) Where the
dividend could not be paid by reason of the operation of any law;
(b) 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;
(c) Where
there is a dispute regarding the right to receive the dividend;
(d) Where the
dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder; or
(e) 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.
Some Important Points to be kept
in Mind:
§
Declaration of dividend and amount to be
transferred to reserve is responsibility of the Board.
§
Bona
fide decision of Board in respect of dividend can’t be challenged.
§
The
dividend should be declared unconditional and must be paid within 30 days.
§
Dividend
on equity shares can be distributed only after dividend on preference shares is
declared.
§
The
amount of the dividend, including interim dividend, shall be deposited in a
schedule bank in separate account within 5 days from the date of declaration of
such dividend.
FAQ’S
v Whether Company can declare dividend in
EGM instead of AGM?
As
per regulation 80 of Model Articles Table F of the 2013, Act, “Company in
General Meeting may declare dividend”. As per the Regulation 80 of AOA it’s not
mandatory to declare dividend in AGM, if dividend not declared in AGM then
company can declare dividend in subsequent EGM.
If
dividend is declared in AGM, it can’t be increased further in subsequent EGM.
v Whether shares issued during the year are entitled to dividend for
full year?
In
case of new shares issued during the year, offer document may provide that
dividend is payable on pro rata basis from the date of allotment or a date
specified in offer document. Thus, Old shares will be entitled for dividend for
full year, while new shares will be entitled to dividend only from the date of
allotment on pro rate basis.
It
is usually provided that share issued during the year will be entitled to
dividend on pro rata basis i.e. only for part of the year for which new shares
were held.
v Whether dividend will be payable on call money paid in advance?
Dividend is not payable on call money paid in advance.
v TDS not required on dividend.
With effect from 1st April, 2003, no deduction of tax will be made by
an Indian company on dividend paid by it to resident shareholders who are
individuals or Indian companies.
v Authority to keep the unpaid/unclaimed dividend amount in a fixed
deposit account with a bank?
The Reserve Bank of India (RBI) had allowed banks for opening of fixed
deposit accounts for the purpose of maintaining the unpaid/unclaimed dividend
amount of a company and to pay interest thereon.
The above said arrangements may be made by a company to earn interest
on the amount of unpaid dividend.
It may be desirable that the fixed deposit account should be made for
different amount for different maturity period and an appropriate amount of
unpaid dividend should be kept in the form of current account so that all the
revalidated or duplicate dividend warrants may be encashed by the bank on
presentation.
The fixed deposit account should also be opened under the style as
"Fixed Deposit Account ABC Limited Unpaid Dividend Account-2014" and
the amount of deposit and interest earned on such amount shall not be credited
to the company's other business account.
However, it should be noted that any interest accrued/earned on the
unpaid dividend account during the period of 7 years, has to be transferred to
the Investors Education and Protection Fund of the Central Government.
v Whether Company required to take approval of shareholder in AGM for
payment of dividend (decide at the time of issue of preference share) to
preference share holders?
As per section 102 declaration of dividend is ordinary business of
General Meeting. According to this provision all the final dividend declared by
the Company will be approved by the shareholder in the AGM.
But in case of Preference share,
2.
As
stated in Rule 9(1)(a) of The Companies (Share Capital and Debenture)
Rules, 2014 A company issuing
preference shares shall set out in the resolution particulars in respect of the
following matters relating to such shares, namely: (i) the priority with
respect to payment of dividend or repayment of capital vis-avis equity shares;
(ii) the payment of dividend on cumulative or non-cumulative basis.
From the above mentioned two points it seems that
company has already taken the approval of shareholder for payment of a fixed
percent of dividend to preference share holder.
Therefore, there is no need to put the matter for dividend to preference
share holder every year in AGM.
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