Declaration of Dividend

When a business generates a profit or surplus, it can distribute a portion of that profit to shareholders in the form of a dividend. Any remaining funds are withdrawn and reinvested back into the company. applicable rules: Read Sections 123 to 127 of Chapter VIII, "Declaration and Payment of Dividend," along with the 2014 Companies (Declaration and Payment of Dividend) Rules. The interim dividend is included in the definition of the dividend under section 2(35) of the 2013 Companies Act.?

There are two types of dividend, which are:

1. Final Dividend
2. Interim Dividend?

Final Dividend?

This type of dividend is declared only once in a year in the annual general meeting. The rate of such dividend is higher when compared to interim dividend. Further, final dividend is recommended by the board of directors and it cannot be revoked once announced. No special provision is required in the Articles of the company for the distribution of final dividend.

Interim Dividend

Normally, very few companies declare interim dividends. It can be announced more than once in a year and can also be revoked once declared. It further needs authorization by the Articles of the company to be distributed.?

Sources of Dividend

Section 123(1) of the Act, declares the sources from where a company can pay its dividend.

1. From the company's current-year income, after depreciation has been taken into account.
2. After depreciation is taken into account, the company's profits from any prior fiscal year.
3. Any sum received for the payment of dividends from the central or state governments.

A company should consider following points, before declaring dividend:?

1. Any change in the carrying amount of an asset or a liability upon measurement of the asset or the liability at fair value shall not be taken into consideration for the dividend.
2. Prior to declaring a dividend, the corporation must transfer any portion of profit that it may deem appropriate for the reserve.
3. The corporation may only declare and pay dividends from the General Reserve as its reserve.
4. A corporation cannot issue a dividend unless it deducts from its profit for the current year any losses and depreciation from the prior year that were not included in the prior year or years.

Inadequacy of Profits

?A company may issue a dividend out of free reserves in the event of insufficiency or absence of earnings in any year, provided that the following requirements are met, namely:-

1. The rate of dividend declaration must not be higher than the average rate of dividend declaration over the previous three years. If a corporation has not declared a dividend in the last three years, this regulation does not apply.
2. The total amount of accumulated earnings that may be taken should not be greater than one-tenth of the total of paid-up share capital and free reserves.
3. Before any dividend with regards to equity shares is declared, the amount withdrawn must first be used to offset losses made in the fiscal year in which the dividend is declared.
4. The reserve balance following such withdrawal must not be less than 15% of the company's paid-up share capital as shown in the most recent audited financial statement.

?A company's interim dividend cannot exceed the average dividend it issued over the previous three fiscal years, provided that it is experiencing a loss as of the most recent quarter of financial results.

?Mode of payment of dividend

?Provision: Any dividend that is due in cash may be paid to the shareholder by check, warrant, or other electronic means.

?Section 123(2) states that depreciation must be provided in line with Schedule II rules.

?Section 123(3) The Board of Directors of a company may declare an interim dividend at any time during a fiscal year, from the end of the fiscal year until the annual general meeting, or from profits of the fiscal year for which the interim dividend is sought to be declared, or from profits generated during the fiscal year up until the quarter before the date of the declaration of the interim dividend.

?Section 123(4) states that within five days of the dividend's declaration date, the money must be deposited in a separate account with a scheduled bank. When the corporation declares a dividend, the shareholder has 30 days from the deposit date to claim that portion of the profit.

?Section 123(5) states that no dividend may be paid by a firm in respect of any share therein other than to the registered shareholder of such share, to his order, or to his banker, and may not be payable in any form other than cash.

?Section 124(1) states that if the dividend is not paid or claimed by the shareholder within 30 days of the declaration date, the amount will be transferred to the Unpaid Dividend Account within 3 days. The Company shall open such a special account in the name of Unpaid Dividend.

?Thus, it will take 30 + 7 = 37 days to transfer the unpaid or unclaimed dividend sum to the unpaid dividend account.

?According to Section 124(2), the company must prepare a statement containing each person's name, last known address, and the unpaid dividend that must be paid to them within 90 days of transferring any money to the Unpaid Dividend Account. If the company has a website, it must also post the statement there as well as on any other website designated by the Central Government for this purpose.

As per Section 124(3), the company must pay interest at a rate of 12% per year on any amount that has not been transferred in full or in part to the Unpaid Dividend Account of the company as of the date of the default. The interest accruing on such an amount will go to the benefit of the company's members in proportion to the amount still owed to them.

Section 124(4) allows anyone claiming to be entitled to funds transferred to the firm's Unpaid Dividend Account to request payment from the company.

According to Section 124(5), any funds transferred to a company's Unpaid Dividend Account that go unpaid or unclaimed for seven years after the transfer date must be transferred by the company, along with any interest that may have accrued, to the IEPF Fund established. The company must send a statement in the prescribed form detailing the transfer to the authority that manages the said Fund, and that authority must then issue a receipt to the company.

?Section 124(6) requires the firm to transfer all shares in the name of the Investor Education and Protection Fund together with a statement containing any necessary information for shares for which a dividend has not been paid or claimed for at least seven consecutive years.

?Section 126:

Dividend rights, rights shares, and bonus shares must be suspended until the registration of share transfers.

?When a share transfer document is presented to a corporation for registration but the company fails to register the transfer of the shares, Unless the corporation has a written authorization from the registered owners of the shares to pay the dividend, transfer the dividend related to those shares to the Unpaid Dividend Account.

?What happens if a company fails to pay a dividend on time?

?When a company declares a dividend but does not pay it within 30 days after the date of the declaration, there is a fine levied on the director as well as on the defaulting company.

?Every Director: When a default occurs, there is a minimum fine of Rs. 1000 and a maximum sentence of 2 years in jail.

Company: Simple Interest at an annual rate of 18% while the default lasts.

?No violation of this section shall be considered to have occurred if,

1. A shareholder is given instructions regarding the payment of a dividend.
2. When a law prevents the payment of a dividend.
3. When there is a dividend dispute.
4. When the corporation properly offsets a dividend payment against a shareholder payment.
5. Where for any other reason, the failure to pay dividend within the specified period.

Conclusion

It is at the discretion of the company to announce dividends or not. However, when a company declares a dividend for its shareholders it adds to the credibility of the company and eventually helps in to pool more number of investors. It is also to be noted that Section 8 companies are exempt for the payment of dividend.