Dividend usually is a payment made by a company to its shareholders out of distributable profit. In layman term, it is a share of profit for a shareholder. The Companies Amendment Act, 2017 read with notification dated 9th February 2018 amended law related to declaration of dividend. This post discusses law related to dividend after recent amendment in the Companies Act, 2013.
DECLARATION OF DIVIDEND (SECTION 123):
A company shall declare a dividend and pay it, only out of the profit of the company for the financial year or out of the undistributed profit of any previous financial year or out of both. The profit for a declaration of dividend shall be arrived after providing depreciation. [Section 123(1)(a)]
In computing profits any amount representing:
- unrealized gains,
- notional gains or
- revaluation of assets and any change in carrying an amount of an asset or of a liability on the measurement of the asset or the liability at fair value
shall be excluded. [Newly inserted Proviso to Section 123(1)(a)]
Before the 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. [First Proviso to Section 123(1)]
Where a company has no adequate profit or any profit in a financial year, it may declare dividend out of any accumulated profit earned in the previous year and transferred by the company to the free reserves. Such declaration from free reserve shall be in accordance with the rules made by the government. [Second Proviso to Section 123(1)] This proviso shall not apply to a government company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments. [Exemption Notification G.S.R. 463(E) dated 5th June 2015]
Rule made under this proviso has discussed earlier here.
A company may pay the dividend only from free reserves, not from any other reserves. [Third Proviso to Section 123(1)]
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. [Fourth Proviso to Section 123(1)]
In case, any guarantee is given by any Government (Central or State), the company may declare and pay a dividend out of money provided by that government for payment of dividend. [Section 123(1)(b)]
For the purpose of calculation of distributable profit, depreciation shall be calculated as per Schedule II. [Section 123(2)]
The Board of Directors may declare interim dividend during any financial year out of surplus in profit and loss account. The Board may declare such interim dividend after the closure of relevant financial year till holding of the annual general meeting. Such dividend may be declared:
- out of surplus in profit and loss account;
- out of profits of the financial year for which such interim dividend is sought to be declared; or
- out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend [Section 123(3)]
Here is a catch, Can a company declare an interim dividend in Second Quarter of following year (say 15th Sept 2018) for the year (now say 2017-18)? May the be negative?
In case, a company is incurring the loss as per financials of the latest quarter, the interim dividend shall not be declared at a higher rate than average dividend declared by the company during last three financial years. [Proviso to Section 123(3)]
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. [Section 123(4)]
This proviso shall not apply to a government company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments. [Exemption Notification G.S.R. 463(E) dated 5th June 2015]
The dividend shall be paid to the shareholder or to his banker in cash not otherwise. [Section 123(5)]
However issue of bonus shares out of distributable profit or free reserve is permitted and not be deemed to be a violation of this provision. Making a partly paid share, fully paid through payment from distributable profit and the free reserve is permitted. [1st Proviso to Section 123(5)]
Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder. [1st Proviso to Section 123(5)]
In case of a Nidhi Company, 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. [Exemption Notification G.S.R. 465(E) dated 5th June 2015]
Prohibition on Dividend
A company which has defaulted under Section 73 and 74 related to deposit and repayment of deposit or interest thereon may not declare a dividend.