Dividend is the portion of the profits of the company which is allocated to the shareholders of that company. The payment of dividend by a company is not obligatory on it but the shareholders can claim right over the dividend if it has been declared.
The dividend of a company has to be declared according to the Section 123 of Companies Act 2013. Recently, with an amendment to Companies (Audit and Auditors) Rules, 2014, it has been made compulsory for the auditor's report to include comments on whether the dividend was declared or paid in compliance with Section 123 of the Act, in the financial year.
Under the Companies Act, a company can declare or pay two types of dividends:
According to the Section 123 of company Act 2013
The process of declaration of final dividend goes as follows:
The Board of Directors may declare interim dividend during a financial year or at any time during the period from closure of financial year to holding of the annual general meeting, out of the surplus in profit and loss account or out of the profits of that financial year.
Interim dividend cannot be paid out of reserves. It can be paid more than once for a financial year.
However, in case the company has incurred losses during that financial year upto the end of the preceding quarter, the interim dividend should not be declared at a rate higher than the average dividend declared by the company during the last three financial years.
The company may, before declaration of dividend, transfer such percentages of its profit as it may consider appropriate, to the reserves of the company.
In an event where there is inadequacy or absence of profits in a financial year and the company proposes to declare dividend out of accumulated profits earned by it in previous years and from the profits that it has previously transferred to the reserves, such declaration can only be made from the free reserves.
Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014 provides for following the conditions in which a company may declare dividend out of free reserves:
The amount of dividend, including interim dividend, should be deposited in a scheduled bank in a separate account within 5 days from the date of declaration.
The amount of dividend including interim dividend has to be deposited in a separate bank account within five days from the date of such declaration.
Therefore, a company cannot use the amount even upto the period of thirty days and it is obligatory on the part of the company to keep the entire amount of the dividend into a separate bank account, which shall be exclusively utilised for payment of the dividend.
In respect of shares held in physical form, dividend should be paid by the company to the registered shareholder of such shares or to the person he has asked to or to his banker in the form of cash which may be payable through cheque or warrant or in any electronic mode.
In respect of shares held in electronic form, dividend should be paid to those persons whose names appear as beneficial owners in the statement furnished by the depository as on the close of the market, a day prior to book closure (in case of final dividend) or on the record date (in case of interim dividend).
Before the year 2020, Companies were required to pay Dividend Distribution Tax on its declared dividends. Therefore, the receivers were exempted from the tax. However, the Finance Act, 2020, deleted the Dividend Distribution Tax requirement and now:
In case the company fails to comply with the provisions of Section 73 (Acceptance of deposits from public) and Section 74 (Repayment of deposits, etc.), it should not declare any dividends on its equity shares so long as these failures continue. Deposits are a source available to a company to meet its short term or long term financial needs. The company can receive these deposits from the public but Section 73 puts up conditions on companies for accepting these deposits, which includes issuing circular for such deposits, ensuring an insurance on these deposits, providing security for the repayment of the deposits. Section 74 further compels the company to repay the deposits within one year from the dates the payment of deposits is due. If a company fails to comply with one or both of these Sections then it is restricted to declare dividends on the shares that do not have a fixed dividend i.e. equity shares.
When a dividend has been declared by the company, it is to be paid within 30 days from the date of declaration to every shareholder entitled to the payment.
Where dividend has been declared but not paid within 30 days, every director who is knowingly party to such default is punishable with imprisonment upto 2 years and with fine which is not less than 1,000 rupees for every day during which such default continues. The company is also liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.
No offence would be said to have been committed in the following cases: