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. 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. [NOTE: Profit refers to profits after tax. It can be either revenue profit or Capital profits or both.] 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. Clause 5 of section 125 of the Companies Act prescribed the following ways for payment of 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. The final dividend is declared after the finalization of accounts and paid at the end of the closure of the financial year on AGM. 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: [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.] Onlinexbrl.com provide advisory related to company law matters. Contact us now. Dividends Under The Companies Act,2013
Sources For Payment Of Dividend
Condition For Declaring Dividend:
Different Modes Of Payment Of Dividends:
Point to be remembered:
Types of Dividends:
Interim dividend:
Final dividend:
Preference share dividend: