Dividend is a payment made by a company to its shareholders out of distributable profit.
DECLARATION OF DIVIDEND (SECTION 123):
A company shall declare dividend and pay it, only out of profit of the company for the financial year or out of undistributed profit of any previous financial year or out of both.
In case, any guarantee give by any Government (Central or State), the company may dividend out of money provided by that government for payment of dividend.
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.
Where a company has no adequate profit or any profit in a financial year or any accumulated profit to distribute as dividend, it may declare dividend out of reserves in accordance with the rules made by the government. The company may pay dividend only from free reserves, not from any other reserves.
For the purpose of calculation of distributable profit, depreciation shall be calculated as per Schedule II.
The Board of Directors may declare interim dividend during financial year out of surplus in profit and loss account. In case, a company is incurring loss as per financials of latest quarter, interim dividend shall not be higher than average dividend declared by the company during last three financial years.
Dividend Account in Bank:
The amount of dividend and interim dividend shall be deposited in a separate account in a scheduled Bank within five days from the date of declaration of such dividend.
The dividend shall be paid to shareholder or to his banker in cash not otherwise. However issue of bonus shares out of distributable profit or free reserve is permitted and not be deemed to be a violation of this rule. Making a partly paid share, fully paid through payment from distributable profit and free reserve is permitted.
Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder.
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.
RIGHT OF MEMBERS PENDING REGISTRATION OF TRANSFER (SECTION 126):
Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company, it shall,—
(a) transfer the dividend in relation to such shares to the Unpaid Dividend Account unless the company is authorised by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares, any offer of rights shares and any issue of fully paid-up bonus shares.
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.
Unpaid Dividend Account (Section 124):
Where a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.
Thus number of days to transfer unpaid or unclaimed amount of dividend to unpaid dividend account comes to 30 + 7 = 37 days.
The company shall, within a period of ninety days of making any transfer of an amount to the Unpaid Dividend Account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose.
This period of ninety days start form date of transfer to unpaid dividend accounts, not from declaration of dividend or transfer of the meant for dividend to dividend account.
If any default is made in transferring the total amount referred to the Unpaid Dividend Account of the company, it shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve per cent per annum and the interest accruing on such amount shall enure to the benefit of the members of the company in proportion to the amount remaining unpaid to them. The Term enure convey to take, or have effect or serve to the use, benefit, or advantage of members.
Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed. The person can claim this amount from company only within seven years of its transfer to Unpaid Dividend Account. After this period not only his dividend amount but also shares shall be transferred to the Investor Education and Protection Fund (IEPF). We will discuss these provisions along with provisions related to IEPF later in this blog – post.
If a company fails to comply with any of the requirements of this section, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.