Declaration Of Dividend As Per Companies Act 2013

What is Dividend?

Section 2(35) of the Companies Act, 2013 defines the word ‘Dividend’ as ‘including any interim dividend’. In easy terms, it can be defined as the portion of profits that are distributed by the Company amongst its shareholders. It can be paid to Equity shareholders as well as preference shareholders.

If the dividend is declared in between a Financial Year or before Annual General Meeting (AGM) has been called, it shall be considered as an Interim Dividend. If the dividend is declared in the AGM, it shall be called the Final Dividend. In case the company has incurred losses during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, the rate of interim dividend to be declared shall not be more than the average dividends declared by the company during the last 3 financial years.

Process of Declaring Dividend by Company

As per provisions of the Companies Act, 2013, the dividend is declared by the Company in the following way-

(1) The Board of Directors (BOD) calls a Board meeting for deciding how much dividend to declare. The Board can only recommend the amount of dividend. The final authority for declaring dividend lies with the shareholders of the Company.

(2) The Company then sends a notice to the shareholders for holding the General Meeting. The notice consists of the resolution for declaring dividends.

(3) The General Meeting is held. In the General Meeting, the amount of dividend proposed by the BOD can be passed or rejected by the shareholders. To declare the proposed dividend, an ordinary resolution is required to be passed.

(4) Once the dividend is declared, it must be paid to the shareholders within 30 days.

Points to be taken into consideration-

• The rate of dividend proposed by the BOD may be reduced by the shareholders.

• The rate of dividend proposed by the BOD cannot be increased by the shareholders.

• Preference shareholders are prioritized over Equity shareholders during the payment of dividends.

• Dividends can be either declared in AGM or EGM.

Sources from which Dividend can be paid

It can be declared/paid out of-

(1) Profits of the Company for the current year after providing for depreciation.

(2) Profits of the previous financial year(s) after providing for depreciation for previous years.

(3) Money provided by Central/State Government in pursuance of a guarantee given by that Government.

Points to be taken into consideration-

• While calculating profits, any amount representing notional gains, unrealized gains or revaluation of assets, and any change in the carrying amount of an asset/liability on measurement of asset/liability at fair value, shall be EXCLUDED.

• A Company can, before declaring a dividend, transfer any number of profits to a reserve. However, it is up to the Company how much to transfer, or it may choose not to transfer any amount as well.

• Depreciation shall be provided as per SCHEDULE III of the Companies Act, 2013.

Section 123 of the Companies Act, 2013

[Declaration of Dividend]

Section123 - (1) No dividend shall be declared or paid by a company for any financial year except—

(a) out of the profits of the company for that year arrived at after providing for depreciation by the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation by the provisions of that sub-section and remaining undistributed, or out of [both:]

[Provided that in computing profits any amount representing unrealized gains, notional gains or revaluation of assets and any change in carrying amount of an asset or liability on measurement of the asset or the liability at fair value shall be excluded; or]

(b) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government:

Provided that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company:

Provided further that where owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and [transferred by the company to the free reserves], such declaration of dividend shall not be made except by such rules as may be prescribed in this behalf:

Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves.

[Provided also that 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 for the current year.]

(2) For clause (a) of sub-section (1), depreciation shall be provided by the provisions of Schedule II.

[(3) The Board of Directors of a company may declare an interim dividend during any financial year or at any time during the period from the closure of the financial year till the holding of the annual general meeting out of the surplus in the profit and loss account or 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:

Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.]

(4) The amount of the dividend, including the interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

(5) No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or his banker and shall not be payable except in cash:

Provided that nothing in this subsection shall be deemed to prohibit the capitalization of profits or reserves of a company to issue fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company:

Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.

(6) A company that fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares.