Dividend: About Process, Payment and More

Companies required funds to manage their business operation successfully. Shareholders in a company play an important role in raising funds. The shareholders of the company provide funds to the directors of the company and the directors use these to perform the business operations. The profits arising out of such business operations are distributed to the shareholders of the company in the form of a Dividend. Shareholders are also considered the true owners of the company; therefore, they are entitled to get a dividend. 

The term “Dividend” has its origin in the Latin term “Dividendum”. It means a thing to be divided. Dividend way of the reward offers to shareholders by the company, in cash or otherwise. Dividends can be given in various forms, such as cash payment, inventory, or some other form. It is decided by its Board of directors and requires the approval of the shareholders.

Dividends Under The Companies Act,2013

The Companies Act, 2013 does not provide the exact definition of a dividend, as per section 2(35) of the Act Dividends include any interim dividend.

• A dividend is a portion of the company’s earnings distributed to its shareholders, decided and managed by the board of directors of the company, and paid to a class of its shareholders.
•  Dividends can be paid on both Equity shares or preference shares of the company.
• The dividend is paid to shareholders of the company in proportion to the amount paid up on the share held by them.
• Preference shareholders always give preference for payment of dividends over equity shareholders. 

Sources For Payment Of Dividend

1. From the profit of current financial
2. From the profit of the previous financial year or years 
3. Out of the amount provided by the Central Government or State Government for the payment of dividends in pursuance of the guarantee given.

[NOTE: Profit refers to profits after tax. It can be either revenue profit or Capital profits or both.]

Condition For Declaring Dividend:

1. Declaring dividend out of the current financial year’s profit

Depreciation:

The company has to make provisions for depreciation in the profit and loss account of the current year, there is no balance left of un-provided depreciation of any earlier year or years. Depreciation shall be calculated following the provisions of Schedule II to the Companies Act, 2013. 

Reserve:

Before the declaration of a dividend, a company may transfer a portion of its profit to the reserves of the company. it’s not mandatory to transfer the amount to the reserve of the company. company is free to decide the percentage for such transfer to the reserve. 

Previous year loss:

Before declaring the dividend, the Company must set off the carried forward previous year's loss from the current year's profit.

Free Reserve:

No dividend shall be paid from reserves other than free reserves. Section 2 (43) of the Company Act 2013 defines the Free reserve as such reserve which, as per the latest audited balance sheet of a Company, is available for distribution of profit.

2. Declaring Dividend in case of inadequacy or absence of profits in any 

Rate of dividend: The rate of declared shall not exceed the average of the declared dividend of three immediately preceding years.

Withdrawal amount: The total amount drawn from accumulated reserves shall not exceed 1/10th of the paid-up share capital and free reserves as per the latest audited financial statement.

Utilization of money withdrawn: Such withdrawn money from accumulated reserves shall be first utilized to set off the previous year’s loss before declaring a dividend for the current year.

Balance of reserve: The balance of surplus reserve after such withdrawal shall not fall below fifteen percent of its paid-up share capital as per its latest financial statement.

Different Modes Of Payment Of Dividends:

Clause 5 of section 125 of the Companies Act prescribed the following ways for payment of dividend 

• Cash 
• Cheque
• Dividend Warrant
• In any electronic Manner. 

Point to be remembered:

1. Dividends should be paid by cheque or warrant sent through post to the shareholders at their address registered with the company.
2. Dividends cannot be paid in any other “kind” i.e. in form of gifts, goods, or bonus share
3. Payment of dividends to another person as per the order of the shareholder of the company is allowed.

Types of Dividends:

1. Interim dividend:

An Interim Dividend will be declared by the board of directors of the company any time before the closure of the financial year till the holding of the annual general meeting. The Board of Directors of the company can declare an interim dividend, only if authorized by the AOA of the company.

1. Final dividend:

The final dividend is declared after the finalization of accounts and paid at the end of the closure of the financial year on AGM.

1. Preference share dividend:

The dividend which is paid on preference share capital is termed a Preference share dividend. Preference shareholders always give preference for payment of dividends over equity shareholders

PROHIBITION ON DECLARATION OF DIVIDEND:

A company cannot declare dividend if the company fails to comply with acceptance of deposits u/s section 73 of the Act and repayment of deposits accepted u/s 74 of the Act before the commencement of this Act.

PROCESS FOR DECLARATION AND PAYMENT OF FINAL DIVIDEND

The following steps are required to be followed by a company in respect of the declaration and payment of the final dividend:

1. Issue notice for holding a meeting of the Board of directors of the company following Section 173 of the Companies Act. It must state the time, date, and location of the meeting and details of the business to be considered at the meeting and be sent to all the directors at their usual address in India either by post or by hand delivery, or by electronic means. 
2. In the case of listed companies, the informed stock exchange where the securities of the company are listed, at least 2 working days before the date of the meeting of its Board of Directors for considering the recommendation of final dividend is to be considered
3. Convene and hold a Board meeting to pass the following resolutions: 

• Consider and approve the annual accounts of the (balance sheet and profit and loss account of the company for the year ended);
• Recommending the quantum of the final dividend and the source of funds for the payment thereof and the amount to be transferred from the current profits to the reserves of the company.
• Fixing time, date, and location for holding the next annual general meeting of the company for declaration of dividend recommended by the Board
• Approving notice for the annual general meeting and authorizing the company secretary or any other competent officer of the company to issue the notice of AGM on behalf of directors of the company to all shareholders, directors, auditors, and anyone entitled to receive the same.

1. Decide the date of closure of the register of members and the register of share transfer of the company as per Section 91 of the Companies Act, 2013, and the citation agreements in the case of listed companies. In the case of listed companies, the first day of closure of the transfer books should not be on the day following a holiday. The date also does not clash with the clearance program in the stock exchange.
2. Check whether the required percentage of profits as decided by the Board of Directors is transferred to the company’s reserves.
3. In the case of a listed company, publish notice of book closure at least seven days before the date of commencement of book closure in a newspaper circulating in the district. in which the registered office of the company is located. The time gap between two book closures and the record date is not more than 30 days.
4. Close the register of members and the share transfer register of the company as decided.
5. Hold a Board meeting or committee meeting for approving the registration of transfer/ transmission of the shares of the company, which have been received by the company before the commencement of book closure.
6.  Convene and hold the annual general meeting and pass an ordinary resolution for declaring the payment of dividends to the shareholders of the company as recommended by the Board. 

[Note: The shareholders shall not declare the final dividend at a rate higher than the one recommended by the Board. However, shareholders may declare the final dividend at a rate lower than the one recommended by the Board.]

1. Prepare a statement of dividends in respect of each shareholder.
2. Open a separate bank account for making dividend payments and credit the said bank account with the total amount of dividend payable within five days of declaration of the dividend.
3. Dispatch dividend warrants within 30 days from the date of declaration of the dividend.
4. Arrange transfer of unclaimed dividend to a special account named “Unpaid dividend Account” within 7 days after the expiry of the period of 30 days from the date of declaration of dividend.
5. Transfer unpaid or unclaimed dividend amount to the Investor Education and Protection Fund (IEPF) after the expiry of seven years from the date of transfer to the unpaid dividend Account.
6. The amount of dividend as recommended by the Board shall be disclosed in the Directors’ Report.

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