Distribution of Profits (Dividend)

Dividend 

• As per section 2(35) of the companies Act, 2013 Dividend includes any interim dividend
• In simple words dividend is a portion of profit available for distribution among its shareholders by the company.
• Profits available for dividend to shareholders are known as divisible profits. 
• Dividend payable to preference shareholders are called preference dividend and Dividend payable to equity shareholders are called equity dividend.

Types Of Dividend 

1. Final Dividend :

• Recommend by board of directors in board meeting, or
• Declared in annual general meeting by members.
• SS-3 defines final dividend so as to mean the dividend recommended by the Board of Directors and declared by the Members at an Annual General Meeting.
• According to section 134(3)(k), Board of directors must state in the Directors’ Report the amount of dividend, if any, which it recommends to be paid.

2. Interim Dividend : 

• Recommend and declared by board of directors in board meeting.
• SS-3 defines interim dividend so as to mean the Dividend declared by the Board of Directors.
•  it is declared by the Board of Directors between two annual general meetings of the company, if board of directors believes that company has surplus profit.
• All the provisions relating to the payment of dividend shall be applicable on the interim dividend also.

Important Provisions Related to Declaration of Dividend (Section 123)

1. Declaration of dividend shall be authorized by AOA.

2. Sources of declaration of dividend: 

(i) Out of current year profit, or
(ii) Out of any previous year profit or accumulated profit arrived after providing depreciation
(iii) Or both (i) and (ii) , or
(iv) Out of money provided by the Central Government or a State Government for the payment of dividend;
3. Before the declaration of any dividend in any financial year, transfer such percentage of profits for that financial year as it may consider appropriate to the reserves of the company;
4. Before the declaration of dividend company shall provide depreciation to its all depreciable assets.
5. Dividend to be paid to registered shareholder only.
6. Dividend to be declared from free reserves only.

7. A company shall also not declare Dividend in following situations :

(a) As per SS-3 a company shall not declare Dividend on its equity shares in case of non-compliance of provisions relating to the acceptance of deposits under the Act, till such time the deposits accepted have been repaid with interest in accordance with the terms and conditions of the agreement entered with the depositors. 

(b) A company shall also not declare any Dividend, if it has defaulted in –

• Redemption of debentures or payment of interest thereon or creation of debenture redemption reserve, 
• Redemption of preference shares or creation of capital redemption reserve, 
• Payment of Dividend declared in the current or previous financial year(s), or
• Repayment of any term loan to a bank or financial institution or interest thereon, till such time the default is subsisting. 

(c) No Dividend shall be declared by the company during the extended time, if any, granted by the Tribunal/ Court for repayment of above liabilities.

8. Dividend in case of absence or inadequacy of profits:

As per section 123(1)(c) read with rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014, A company can declare dividend in absence of profits in any financial year but subject to following conditions :

• 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. This shall not apply to a company which has not declared any dividend in each of preceding 3 financial years. 
• 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. 
• The amount so drawn shall first be utilized 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. 
• 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.