DIVIDENDS
Every Company requires funds to operate its business successfully. Shareholders are an
integral part of every company where they raise funds and in the process of same become
its stakeholders. They have a control over the share of profits in proportion to the money
they invest. This share of profit by shareholders is termed as dividend. A dividend is a share
of profits and retained earnings that a company pays out to its shareholders. When a
company generates a profit and accumulates retained earnings, those earnings can be either
reinvested in the business or paid out to shareholders as a dividend.
The rights of shareholders on profits as dividends only arise after the declaration of
dividends by the company done generally on the approval of board of directors. There are
two types of dividends: Interim dividends and Final dividends.
Interim dividends which refer to the dividend declared by company’s board during any time
of the year before official closing of financial year and calling of Annual General Meeting.
According to the Act the company can declare interim dividend out of profits accumulated of
current or previous financial years. The provisions of the Act which are generally for final
dividend are applicable to interim dividends also.
Final dividends the dividends declared by the company after closing of the financial year and
approval of Board of Directors in AGM. Majority of the provisions for both Interim and Final
are same but there are some differentiated provisions for the Interim dividends in the Act.
The liability on default arises only in case of declaration of Final Dividend and not Interim
dividend.
Source of dividend: The dividends can be declared out of –
1. It can be paid after providing for depreciation fund out of the profits of the current or
previous financial year.
2. It can also be paid out of the money which Central or State Governments provide
against a guarantee for the payment of dividend.
Transfer of share: The Company before declaring the dividends has to reserve the
required amount of cash to run the affairs of the company. These are the appropriate
reserves of the company to manage its affairs.
Declaration of dividends: If the company decides to declare dividend on the basis of
profit accumulated in the previous years, such declaration has to be made on the basis of
prescribed rules and the dividend paid has to be from free reserves only. The dividends
can be declared only after approval of board of directors generally done in a ¡¥general
meeting. There cannot be any declaration of dividend unless the same is approved by
Board and by General body of the company.
Separate account for dividends: The amount of dividends has to be kept in a separate
bank account within 5 days from the date of declaration.
To be paid only in cash: The dividend has to be paid only in cash (includes payment by
cash or other electronic means) and is payable only to the registered shareholder himself
or to his banker. The objective of specifying payment in cash is to necessitate that some
assets of the company have flown out to the shareholder
Failure of section 73&74: If a company fails to adhere to provisions in section 73 and 74
which are related to borrowings from public and repayment of deposits, such company
cannot declare any dividend as long as failure continues.
Unpaid Dividend Account
Sometimes, there may arise a situation that after declaration of dividend, the dividends
remain unpaid or unclaimed and the amount may be unused in the bank. The Act well
defines provisions in case such situation arises:
Transfer of unclaimed dividend: When the dividend has been declared by the
company but has not been claimed by the shareholder within thirty days, then within
7 days of expiry of period of 30 days (that is within 30-37 days of the declaration), the
company has to transfer the unpaid amount to the special account in the bank
known as Unpaid Dividend Account. If the company defaults on transferring the
amount to unpaid dividend account within specified time period, the company has to
pay a set interest on the sum unpaid at 12 %per annum.
Notification of it on the website: After transferring money to unpaid dividend
account, within the period of ninety days, the company is required to prepare a
statement containing names of, addresses of (last known) and the amount of
dividend to be paid to the shareholder and put the same on its website and on any
other website provided by central government for the same.
Transfer of unpaid dividend to Investor Education and Protection Fund : The Act
provides for a fund which has to be established by central government. If any
amount remains unclaimed for more than 7 years has to be transferred to the
Investor Education and Protection Fund and the declaration of same has to be made
to the authority maintaining the fund.
The fund also includes grants by governments, donations made to the company,
matured debentures and various other funds in the requirements of the Act.
After the declaration of dividend, the company has to pay it within 30 days from the date of
declaration. If there is default then the directors are liable to be punished with
imprisonment which may extend to two years and with fine which won’t be less than Rs.
1000 per day which might continue till the default continues with a simple interest of 18%.
