DECLARATION OF DIVIDEND

The dividend is a share of profit for a shareholder which they get in return for owning a share in a Company. As per Section 2 (35) of the Companies Act, 2013, “dividend” includes any interim dividend. Section 123 of the Companies Act, 2013 deals with the Declaration of Dividend.

1.????? Section 123 (1) of the Companies Act, 2013 provides that Dividend can be declared out of:

a)????? 1. Profits for that year, after providing depreciation.

2. Profit for previous year after providing depreciation and setting off carried forward losses.

b)????? Money given by Central or State Government for payment of dividend.

A company may transfer a part of profits to reserves of the Company before declaration of dividend.

In case of inadequate profits or losses in any year, the Company may declare dividend subjected to:

• Maximum rate of Dividend = Average rate of dividend of preceding three financial years.
• Amount so drawn shall be first utilised to set off the losses incurred in the financial year in which dividend is declared.
• Maximum amount to be drawn from free reserves= 10% of the paid up share capital and free reserves.
• Minimum balance of reserves after withdrawal= 15% of the paid up share capital. ?

The Company can declare Dividend only out of free reserves.

2.????? Section 123(2) of the Companies Act, 2013 provides that for calculation of Dividend, the Depreciation shall be provided in accordance with the provisions of Schedule-II.

3.????? Section 123(3) of the Companies Act, 2013 provides that in case the Company has incurred losses during the current financial year, up to the end of quarter immediately preceding the declaration of Interim Dividend then the rate of Interim Dividend cannot be higher than the average rate of dividend for last 3 years.

4.????? Section 123(4) of the Companies Act, 2013 states that the Company shall deposit the amount of Dividend along with Interim Dividend in a separate account of a Schedule Bank within 5 days of such declaration.

5.????? Section 123(5) of the Companies Act, 2013 states that the Company shall pay the Registered Shareholders or to his order or to his banker by cash, cheque, warrant or electronic mode.

6.????? Section 123(6) of the Companies Act, 2013 provides that any company shall not declare dividend on equity shares if it fails to comply with the provisions of Section-73 and 74 of the Companies Act, 2013 till the failure continues.

CASE LAW:

?Now let us understand the significance of the above mentioned Section with the help of an Order for penalty for violation under Section 123 of the Companies Act, 2013, in the matter of IDP Education Exam Services Private Limited passed by the Registrar of Companies.

Facts of the Case: In the given case, the Board of Directors of the Company conducted Board Meeting on 19.03.2021 where in the interim dividend was declared out of accumulated surplus in Profit & Loss Statement as on 31st, March 2020 and the profits of the current financial year 2020-21.

As per Section 123(4) of the Companies Act, 2013, the Company was required to deposit the amount of Interim Dividend in a separate bank account of a Schedule Commercial Bank within 5 days from the date of its declaration i.e., till 24.03.2021 but the Company has deposited the same with delay of 7 days thereby results in violation of Section 123(4) of the Companies Act, 2013.

The Company and its officers were hereby directed to rectify the default and were imposed penalty of Rs. 17,000 for violation of Section 123 of the Companies Act, 2013.