Declaration and Payment of Dividend under Companies Act

Dividend represents the portion of profits distributed by a company to its shareholders. It is a return on investment made by shareholders and reflects the financial health and profitability of the company. The declaration and payment of dividend is governed by a detailed legal framework under the Companies Act, 2013, primarily contained in Sections 123 to 127, along with relevant rules.

The law ensures that dividends are declared in a prudent manner, safeguarding the interests of creditors, investors, and the company itself. It imposes conditions relating to availability of profits, treatment of reserves, compliance with accounting principles, and procedural requirements for payment and handling of unpaid dividends.

Meaning and Nature of Dividend

Dividend is the distribution of a company’s accumulated profits to its shareholders in proportion to the shares held by them. It may be declared as:

• Final Dividend: Declared at the Annual General Meeting (AGM) after approval of shareholders.
• Interim Dividend: Declared by the Board of Directors during the financial year.

Dividend is not a matter of right unless declared. Until it is declared, shareholders do not have a legal claim over the profits.

Sources from Which Dividend Can Be Declared

The Companies Act, 2013 clearly specifies the sources from which dividend can be declared. These are:

Profits of the Current Financial Year

Dividend can be declared out of profits of the current financial year, provided that:

• Depreciation has been properly provided for in accordance with Schedule II.
• Profits are computed in compliance with applicable accounting standards.

This ensures that the company does not distribute unrealised or inflated profits.

Accumulated Profits from Previous Years

In situations where current year profits are inadequate or absent, dividend may be declared out of accumulated profits transferred to reserves in previous years.

However, such declaration is subject to compliance with the Companies (Declaration and Payment of Dividend) Rules, 2014.

Free Reserves

Dividend shall be declared or paid only out of free reserves. Free reserves refer to those reserves which are available for distribution as dividend, excluding revaluation reserves and certain other restricted reserves.

Requirement of Providing for Depreciation

One of the fundamental conditions for declaration of dividend is the provision for depreciation.

Depreciation must be provided in accordance with Schedule II of the Companies Act, 2013, which prescribes the useful life of assets. This requirement ensures that the value of assets is not overstated and profits are not artificially inflated.

Failure to provide for depreciation results in an incorrect calculation of profits and makes the declaration of dividend invalid.

Treatment of Past Losses and Depreciation

Before declaring dividend, the company must ensure that:

• Losses carried forward from previous years are set off.
• Depreciation not provided in earlier years is adjusted.

This requirement prevents distribution of profits when the company has accumulated losses. It promotes financial discipline and protects creditors.

Dividend cannot be declared unless these adjustments are made against the profits of the current year.

Transfer to Reserves: Position under the Act

Under earlier law, companies were required to transfer a prescribed percentage of profits to reserves before declaring dividend beyond a certain limit. However, the Companies Act, 2013 has removed this mandatory requirement.

Now, it is not compulsory to transfer a specific portion of profits to reserves before declaring dividend. The decision is left to the discretion of the company.

This provides flexibility but also requires responsible financial management by the Board.

Restrictions on Declaration of Dividend

The Act imposes certain restrictions to ensure that dividend is declared only when the company is financially sound.

Default in Repayment of Deposits

A company cannot declare dividend if:

• There is a default in acceptance or repayment of deposits; and
• Such default continues at the time of declaration.

This restriction protects depositors and ensures that companies do not prioritise shareholder returns over their obligations to creditors.

Interim Dividend

The Board of Directors has the power to declare interim dividend during any financial year.

Conditions for Declaration

Interim dividend may be declared:

• Out of surplus in the Profit and Loss Account; or
• Out of profits of the financial year in which it is declared.

Restriction in Case of Loss

If the company has incurred a loss in the current financial year up to the end of the quarter immediately preceding the declaration of interim dividend, then:

• The rate of interim dividend shall not exceed the average rate of dividend declared during the preceding three financial years.

This restriction ensures that companies do not distribute excessive dividends during financially unstable periods.

Procedure for Declaration and Payment of Dividend

The declaration and payment of dividend involves a structured process:

Recommendation by the Board

• The Board of Directors recommends the amount of dividend.
• In case of interim dividend, the Board directly declares it.

Approval by Shareholders

• Final dividend is declared by shareholders at the AGM.
• Shareholders cannot increase the recommended amount but may reduce it.

Payment of Dividend

• Dividend must be paid within 30 days from the date of declaration.
• Payment may be made through cash, cheque, warrant, or electronic transfer.

Failure to pay dividend within the prescribed period attracts legal consequences.

Unpaid Dividend Account

When dividend is declared but not claimed or paid within 30 days, the company is required to transfer the amount to a special account.

Transfer to Unpaid Dividend Account

• The amount must be transferred within 7 days after expiry of the 30-day period.
• This account is known as the “Unpaid Dividend Account”.

Disclosure Requirements

Within 90 days of transferring the amount, the company must:

• Prepare a statement containing names, last known addresses, and amount unpaid for each shareholder.
• Place this information on the company’s website.
• Also upload the details on a website approved by the Central Government.

This promotes transparency and enables shareholders to claim their dues.

Transfer to Investor Education and Protection Fund (IEPF)

If the amount in the Unpaid Dividend Account remains unclaimed or unpaid for seven years, it must be transferred to the Investor Education and Protection Fund.

Nature of IEPF

The IEPF is a statutory fund established to promote investor awareness and protect investor interests.

Transfer of Amount

• All unpaid dividends lying in the account for seven years are transferred to IEPF.
• The company loses control over these funds after transfer.

Transfer of Shares to IEPF

In addition to transfer of unpaid dividend, the law also mandates transfer of shares associated with such dividends.

Requirement

• Shares in respect of which dividend has remained unpaid or unclaimed for seven consecutive years must be transferred to IEPF.

Purpose

This provision ensures that dormant shares and unclaimed benefits are centrally managed, reducing misuse and maintaining accountability.

Claim of Refund from IEPF

Even after transfer to IEPF, the rightful owner retains the right to claim:

• Refund of dividend amount; and
• Re-transfer of shares.

Procedure

• A claim must be made in accordance with prescribed rules.
• Supporting documents must be submitted to establish ownership.

This ensures that the rights of investors are preserved despite transfer to the Fund.

Consequences of Non-Compliance

Failure to comply with provisions relating to declaration and payment of dividend may result in:

• Penalties for the company and its officers.
• Liability for wrongful declaration.
• Legal action for non-payment within prescribed timelines.

These consequences reinforce the importance of strict adherence to statutory requirements.

Conclusion

The declaration and payment of dividend under the Companies Act, 2013 is governed by a comprehensive legal framework that balances the interests of shareholders, creditors, and the company. Dividend can be declared only out of genuine profits or permissible reserves, after accounting for depreciation and past losses.

The law imposes clear restrictions in cases of financial instability, such as default in repayment of deposits or current year losses. It also provides detailed procedures for payment, handling of unpaid dividends, and transfer to the Investor Education and Protection Fund.