In an earlier post here, we have discussed provisions related to dividend under the Companies Act, 2013. Now we have the Companies (Declaration and Payment of Dividend) Rules 2014 as notified on 31st March 2014 for discussion.

These Rules explains procedure under Section 123 of the Companies Act, 2013 and need to be read with the Section 123. According to Second and Third Proviso to sub – section of Section 123; 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.

Now, Rule 3 of the Companies (Declaration and Payment of Dividend) Rules 2014 makes rules for declaration of dividend out of reserve.

 In the event of adequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfillment of the following conditions, namely:-

(1) 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 sub-rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.

(2) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

(3) The amount so drawn shall first be utilised 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) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement.

(5) No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.

UPDATE: This provision has been “proposed to be amended” to be in force from the date of its publication in Official Gazettee and I have not found it in Gazettee until 30th June 2014 to read:

“No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company of the current year.”

Reader may enlighten me, in case found copy in Official Gazettee.

Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.




  1. CS Shazia Afzal

    If a private Co. wants to declare dividend for FY 2013-2014, Will section 123 of Companies Act 2013 and Dividend payment rules 2014 shall be applicable for 2013-2014 or Old CA1956 ?

    Pls specify ..


  2. If a Company wants to declare final dividend and if Company incur losses in the preceding last quarter in which Annual general Meeting of the Company is held, whether proviso to sub section (3) of Section 123 is applicable in case of final dividend or not????


  3. Is it mandatory to open a separate bank account with schedule bank within five days from the date of declaration of dividend. What are the possibilities if company wants to pay dividend to the shareholder in cash or by cheque, the next day on which dividend is declared without opening separate bank account. can a Company can do so??????


  4. Does it mean that it is not mandatory for the Company to transfer amount to reserve for declaration of final dividend for year ending March 31, 2014?


    • Under Companies Act 2013, 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.

      But, Accounts for year ended on 31.03.2014 are being prepared under provisions of Companies Act, 1956. It may be prudent to follow law as on that date or the law which is more stringent.



  6. Pingback: Index of Companies Law Posts | AishMGhrana

  7. Pingback: Dividend – post 9th Feb 2018 | AishMGhrana

No professional query in comments (but in mail). Only academic discussion here. Comments moderated. Sometime, I reply to your mail ID.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.