Chapter 8 Declaration & Payment of Dividend

Meaning of Dividend

 Section 2(35) of the Companies Act, 2013, while defining the term dividend simply states
that “dividend” includes any interim dividend.

 In common parlance, “Dividend” implies a distribution of any sums to members

 out of profits and

 wherever permitted out of free reserves available for the purpose.

 Dividend is the shareholders’ return on their investment / capital in the company.

Dividend is part of the distributable profits which has been paid out to them.

 In simple words, it is a distribution of profits i.e. a portion of profits earned and

allocated as payable to the shareholders whenever declared.

Features of Dividend
 Dividend is recommended by Board of Directors in the Board’s Report [Section 134 (3)
(k)] and approved by Shareholders at the Annual General Meeting.

 Dividend is not a liability unless it is declared by the shareholders at a validly

constituted general meeting by passing an ordinary resolution at the rates
recommended by the Board or such lower rates as they may decide.

Note : Declaration of dividend by the company at a rate higher than the rate
recommended by the Board is not permitted.

Note : As per section 102 (2) declaration of any dividend at the AGM is an ordinary
business requiring ordinary resolution. At any other general meeting(EGM) it will be
special business.

 Dividend is Declared as a proportion of Nominal or Face Value of a share.

Example 1: AB Ltd. has issued equity shares having face value of ` 10 per share. The
shares are currently quoting on the NSE at ` 250/- per share. The company at its AGM
held on 27.7.24 has declared a dividend of 20%. Mr. Shekar owns 1000 shares which he
purchased at ` 300/- per share. What is the amount of dividend he will receive?

The dividend is to be calculated on Face Value i.e. ` 10/-. So dividend per share is 20% of `
10/- = ` 2/- per share. So, Mr. Shekar will receive ` 2 * 1000 shares =` 2000/-.

Example 2: The shareholders at an annual general meeting unanimously passed a resolution

for payment of dividend at a rate higher than that recommended by the directors.
Discuss the validity of the resolution.

Articles of Association companies usually contain provisions with regard to declaration of

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 1

dividend on the pattern of regulations 80 to 85 of Table F to Schedule I of the
Companies Act, 2013. Under regulation 80, although the power to declare a dividend
vests with the shareholders however under no circumstances they can declare dividend
exceeding the amount recommended by the Board of Directors.

Classification/Types of Dividend

I. Classification based on time i.e. when declared

1. Interim Dividend Section 123 (3)
 Interim dividend may be declared by the Board of Directors at any time
 during the financial year, or
 during the period from closure of financial year till holding of the annual general
meeting.
 The declaration of interim dividend is done out of profits before the final adoption
of the accounts by the shareholders and therefore, interim dividend is said to
be declared and paid between two AGMs.
 Sources for declaration of Interim Dividend :
 Surplus in the profit and loss account; or
 Profits of the financial year in which such dividend is sought to be declared; or
 Profits generated in the financial year till the quarter preceding the date of
declaration of the interim dividend.
 Max. Rate of Interim Dividend : If the company has incurred loss during the
current financial year up to the end of the quarter immediately preceding the
date of declaration of interim dividend, such interim dividend shall not be
declared at a rate higher than the average (rate of) dividend declared by the
company during the three immediately preceding financial years.

Example 3: If a company declared dividend at the rate of 16% during the

immediately preceding three financial years, then in case the company incurs loss in
the current financial year, it is permitted to declare interim dividend at a rate
which is not higher than 16%.
 All provisions which are applicable to the payment of dividend (final
dividend) shall also apply in case of interim dividend.

 It can be revoked with the consent of all shareholders.

2. Final Dividend

 When the dividend is declared at the Annual General Meeting of the

company, it is known as ‘final dividend’. 
 Final dividend is the dividend recommended by the board of directors

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 2

  After end of financial year

 After preparation of financial statements.

Note : the rate of dividend recommended by the Board cannot be increased by the
members.
 It cannot be revoked with the consent of even all shareholders.


BASIS FOR INTERIM DIVIDEND FINAL DIVIDEND

COMPARISON

Definition Interim dividend is declared Final dividend is the dividend

and paid during the financial recommended by the board of
year, i.e. before the finalization directors, and approved by
of accounts for the year. shareholders at the company's
Annual General Meeting, after
the close of financial year.

Announcement Announced by Board of Recommended by Board of

Directors. Directors and approved by
shareholders by passing an
ordinary resolution.
Time of Before preparation of financial After preparation of
Declaration statements. financial statements.

Revocation It can be revoked with the It cannot be revoked.

consent of all shareholders.

II. Classification based on Nature of Shares does not require any specific provision in
the articles.

Shares can be classified into two categories i.e. preference shares and equity shares. The
manner of payment of dividend is dependent upon the nature of shares.
1. Preference Shares: According to Section 43 of the Companies Act, 2013,
shareholders holding preference shares are assured of a preferential dividend at a
fixed rate during the life of the company and repayment of capital at the time of
winding up of company.
Classification of preference shares on the basis of payment of dividend is as follows:
(a) Cumulative Preference Shares: A cumulative preference share is one in
respect of which dividend gets accumulated and any arrears of such
dividend arising due to insufficiency of profits during the current year

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 3

 is payable from the profits earned in the later years.

Note : Until and unless dividend on cumulative preference shares is paid in full,
including arrears, if any, no dividend is payable on equity shares.

(b) Non-cumulative Preference Shares: A non-cumulative preference share is

one where the dividend is payable only in a year of profit. There is no
accumulation of profit as in the case of cumulative preference shares. In case
no dividend is declared in a year due to any reason, the right to receive
such dividend for that year lapses and the holder of such a share is not
entitled to be paid arrears of dividend out of future year profits.

2. Equity Shares: Equity shares are those shares, which are not preference shares.
They do not enjoy any preferential rights in the matter of payment of dividend or
repayment of capital. The rate of dividend on equity shares is recommended by
the Board of Directors and may vary from year to year (no fixed rate of
dividend).

Section 123 Provisions relating to declaration and payment of dividend

A. Sources for Declaration of Dividend

According to Section 123 (1), the dividend for any financial year shall be declared or paid
from the following sources:
(a) Profits of the current financial year- Profits arrived at after providing for depreciation
in accordance with Schedule II.

(b) Profits of any previous financial year or years- Profits of any previous financial year(s)
arrived at after providing for depreciation in accordance with Schedule II and
remaining undistributed i.e. credit balance in profit and loss account and free reserves.
It is to be noted that only free reserves and no other reserves are to be used for
declaration or payment of dividend.

(c) Both (a) and (b).

Section 2 (43) defines the term ‘free reserves’ to mean such reserves which, as per the
latest audited balance sheet of a company, are available for distribution as dividend.
However, following items shall not be treated as free reserves:

 any amount representing unrealised gains, notional gains or revaluation of assets,

whether shown as a reserve or otherwise; or
 any change in carrying amount of an asset or of a liability recognised in equity,
including surplus in profit and loss account on measurement of the asset or the
liability at fair value.
(d) Provision of money by the Government- Money provided by the Central Government
or a State Government for the payment of dividend by the company in pursuance of a

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 4

 guarantee given by that Government.

Note : Capital profits are not same as distributable profits because they are not earned in the
normal course of business; and therefore, normally not available for distribution as dividend.

Need for providing for depreciation out of profits before declaring dividend

Dividend is an apportionment from revenue profits. Therefore, dividend should never be

declared out of capital. This is also the reason for prohibition on issue of shares at a
discount which you studied in the topic Share Capital and Debentures.

"Depreciation" is a notional estimate of the reduction in the value of an asset due

to

i. wear and tear,

ii. efflux of time,

iii. improvements in technology etc.

If depreciation is not provided for there will be two consequences:

i. The value of the asset will be overstated in Balance Sheet

ii. The profits of the current year will be overstated.

Example 4: Shreyas Mechanics Limited owns a plot of land which was purchased long
before. As the property rates are going up, it is decided to revalue the plot at fair value
which is moderately ten times the original price, thus resulting in a revaluation profit of `
20,00,000. The Board of Directors is keen to utilize this ` 20,00,000 along with free
reserves of ` 24,00,000 for declaration of dividend at the forthcoming Annual General
Meeting (AGM) to be held on 28th September, 2023. But according to Proviso to
Section 123(1)(a), the amount of ` 20,00,000 cannot be considered as it does not form
part of Free Reserves as the same cannot be utilized towards declaration of dividend.

B. Transfer to Reserves
Transfer of profits to reserves for any financial year has been left to the discretion of the
company. Therefore, a company is free to transfer any portion of its profit (no fixed %)
to reserves as it may deem fit. It may also decide not to transfer any amount to
reserves.

Illustration 1: For the current year, Alma Watches Limited proposes to transfer more than
10% of its profits to the reserves before declaration of dividend at the rate of 12%. Can the
company do so?

Answer: The amount to be transferred to reserves out of profits for any financial year before
the declaration of dividend has been left to the discretion of the company. Therefore, Alma
Watches Limited is free to transfer any part of its profits to reserves as it may deem fit.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 5

Illustration 2: Brix Shipyards Limited has earned a profit of ` 1,000 crore for the financial year
2023-24. It has proposed a dividend @ 8.75%. However, it does not intend to transfer any
amount to the reserves out of the profits earned. Can the company do so?

Answer: The amount to be transferred to reserves out of profits for any financial year has
been left to the discretion of the company. The company is free to transfer any part of its
profits to reserves as it may deem fit or it may even not transfer any profits to reserve if it
is deemed appropriate before the declaration of dividend. Thus, Brix Shipyards Limited is
justified in its action if it does not transfer any amount of profits to the reserves.

C. Declaration of Dividend when there is inadequacy or Absence of Profits (Second

Proviso to Sec. 123)
Where in any year there are no adequate profits for declaring dividend, the company
may declare dividend out of the accumulated profits earned by it in previous years and
transferred by it to the free reserves only in accordance with the procedure laid down in
Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.

Under Rule 3 such declaration shall be subject to the following conditions:

CONDITION I

The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the immediately three preceding financial
years.

Note : However, this condition shall not apply if the company has not declared any
dividend in each of the three preceding financial year.
CONDITION II
The total amount to be drawn from such accumulated profits shall not exceed 10% of its
paid-up share capital and free reserves as appearing in the latest audited financial
statement.

CONDITION III

The amount so drawn shall first be utilised to set off the losses incurred in the financial
year in which dividend is declared and only thereafter, any dividend in respect of equity
shares shall be declared.
CONDITION IV

The balance of reserves after such withdrawal shall not fall below 15% of its paid up
share capital as appearing in the latest audited financial statement.

Exemption to Government Company

The conditions prescribed by Rule 3 are not applicable to a Government company in

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 6

which the entire paid up share capital is held by the Central Government, or by any State
Government or Governments or by the Central Government and one or more State
Governments.

Illustration 3: Capricorn Industries Limited has a paid-up capital of ` 200 lakh and
accumulated Reserves of ` 240 lakh. Loss for the year ending 31st March 2024 is ` 30 lakh.
Dividend was declared at the following rates during the three years immediately preceding.

Year 1 9%

Year 2 10%

Year 3 12%

What is the maximum rate at which the company can declare dividend for the
current year?

Answer: In the given case, Capricorn Industries Limited has not made adequate profits
during the current year ending on 31st March, 2024, but it still wants to declare dividend.
Let us apply the conditions:

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 7

D. Depositing of Amount of Dividend
In terms of section 123(4), the amount of the dividend (including interim dividend), shall
be deposited in a separate account maintained with a scheduled bank. This is to be
done within 5 days from the date of declaration of dividend.(Next 5 Days)
Note : this requirement shall not apply to a Government Company in which the entire paid
up share capital is held by the Central Government, or by any State Government or
Governments or by the Central Government and one or more State Governments or by one
or more Government Company.
Example 5: The authorised and paid-up share capital of Avantika Ayurvedic Products
Limited is ` 50 lakh divided into 5,00,000 equity shares of ` 10 each. At its Annual
General Meeting (AGM) held on 24th September, 2024, the company declared a dividend of
` 2 per share by passing an ordinary resolution. The amount of dividend must be
deposited in a scheduled bank in a separate account latest by 29th September, 2024.

E. Payment of Dividend
Section 123(5) contains provisions regarding payment of dividend. These are stated as
under:

(a) Dividend shall be payable only to the registered shareholder or to his order or to his
banker.
 In case a shareholder informs the company to pay dividend to a particular banker and
if the payment is so made by the company, then it shall be deemed to be made to
the shareholder himself.
 A purchaser of shares whose name is not entered in the Register of Members
cannot claim payment of dividend to him though he might have made full payment to
the seller of shares. In this regard we will, later in this chapter, see Section 126
which provides for keeping of dividend etc., in abeyance pending registration of
transfer of shares, unless the registered holder has authorized the company to pay
the dividend to the purchaser.

Illustration 5: The Directors of East West Limited proposed dividend at 15% on equity shares for
the financial year 2023-2024. The company announced 7th September 2024 as the record date
for payment of dividend. The dividend was approved in the Annual General Meeting held on 3rd
September 2024.

Mr. Binoy was the holder of 2000 equity of shares since 31st March, 2018, but he transferred the
shares to Mr. Mohan in 2024, whose name has been entered in the register of members on 18th
June, 2024. Who will be entitled to the above dividend?

Answer: According to section 123, dividend shall be paid by a company only to the
registered shareholder of such share.
Record date is the date announced by the company for determining entitlement to dividend.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 8

All those persons whose name is included in the register of members on that date shall be
entitled to dividend.
In the instant case, on the date announced by the company as the record date, Mr.
Mohan’s name is present in the register of members (i.e. Mr. Binoy’s name is NOT
present therein). Therefore, the dividend should be paid to Mr. Mohan who is the
registered shareholder on the record date.

Note: In terms of section 51, a company may, if so authorised by its articles, pay
dividend in proportion to the amount paid-up on each share. Suppose, some of the
shareholders have paid only ` 5 (face value ` 10) on each share held by them. In case of
declaration of dividend at the rate of ` 5 per share, the company, if authorised by its
articles, shall be justified in paying dividend of ` 2.50 per share in respect of such partly
paid shares.

(b) Dividends are payable in cash and not in kind. Dividends that are payable to the
shareholders in cash may also be paid by cheque or dividend warrant or through
any electronic mode.

Section 127 requires that the declared dividend must be paid to the entitled shareholders
within the prescribed time limit of 30 days from the date of declaration of dividend.
In case dividend is paid by issuing dividend warrants, such warrants must be posted
at the registered addresses within the prescribed time.
Note: Dividends shall be paid only in cash. The exception to this is the capitalization of
profits or reserves of a company for the purpose of issuing fully paid-up bonus shares
or paying up any amount for the time being unpaid on any shares held by the
members of the company.
But you may note that while Declaration of dividend does not affect the company’s power to
issue fully paid up bonus shares, such shares cannot be issued in lieu of dividend.
Applicability of Section 123 (5) to Nidhis: In terms of Notification No. GSR 465 (E), dated
05-06-2015, this sub-section shall apply to the Nidhis, subject to the modification that
any dividend payable in cash may be paid by crediting the same to the account of the
member, if the dividend is not claimed within 30 days from the date of declaration of the
dividend.

F. Prohibition on Declaration of Dividend Section 123(6)

In the following cases declaration and payment of dividend is prohibited.
(i) Prohibition in case of any Defaulting Company: A company which fails to comply
with the provisions of section 73 (Prohibition on acceptance of deposits from
public) and section 74 (Repayment of deposits, etc., accepted before the
commencement of this Act of 2013) shall not, so long as such failure continues,
declare any dividend on its equity shares.
(ii) Prohibition in case of Section 8 Companies: According to section 8(1), a company
having licence under Section 8 (Formation of companies with charitable objects, etc.) is
Piyush Sir(Bikaneri)Notes based on ICAI Material Page 9
 prohibited from paying any dividend to its members. Its profits are intended to be
applied only in promoting the objects for which it is formed.

Question 1:

For the current year, Alma Watches Limited proposes to transfer more than 10% of
its profits to the reserves before declaration of dividend at the rate of 12%. Is the
company allowed to do so?
Answer:

The amount to be transferred to reserves out of profits for any financial year before the
declaration of dividend has been left at the discretion of the company. Therefore,Alma
Watches Limited is free to transfer any part of its profits to reserves as it may deem fit.
Question 2:

Brix Shipyards Limited has earned a profit of ` 1,000 crores for the financial year 2018-
19. It has proposed a dividend @ 8.75%. However, it does not intend to transfer any
amount to the reserves out of the profits earned. Can the company do so?
Answer:

The amount to be transferred to reserves out of profits for any financial year has been left at
the discretion of the company. The company is free to transfer any part of its profits to
reserves as it may deem fit or even it may not transfer any profits to reserve if it is deemed
appropriate before the declaration of dividend. Thus, Brix Shipyards Limited is justified in its
action if it does not transfer any amount of profits to the reserves.
Question 3 SUGGESTED QUESTION / NOV- 20/ 2+2 = 4 MARKS

AB Limited is a public company having its registered office in Coimbatore. The

company has incurred a net loss of ` 20 lakhs in the Financial Year (FY) 2019-20. The
Board of Directors (BOD) wants to declare dividend for the FY 2019-20. The balances of
the company as per the latest audited financial statements are as follows:

1. Equity Share Capital (` 10 each) - 100 lakhs

2. General Reserve - 150 lakhs
3. Debenture redemption Reserve - 50 lakhs
The company has not declared any dividend in the preceding three financial years.
Decide whether AB Limited is allowed to declare dividend or not for the FY 2019-20 by
explaining the relevant provisions of the Companies Act in this regard.

If allowed to declare dividend then state the maximum amount of dividend that can be
paid by AB Limited as per the Section 123 of Companies Act 2013.

Answer

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 10

 In the given case, AB Limited has not made adequate profits during the current year ending
on 31st March, 2020, but it still wants to declare dividend. Therefore, Rule 3 of the
Companies (Declaration and Payment of Dividend) Rules, 2014 will be applied
According to the said rule, the required conditions are:
Condition I: The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the three years immediately preceding that year.
Since the company has not declared any dividend in the preceding three financial years,
hence condition I is not applicable in this case.
Condition II: The total amount to be drawn from such accumulated profits shall not exceed
10% of its paid-up share capital and free reserves as appearing in the latest audited financial
statement.
Paid-up capital+Free reserves = ` (100+150) Lakhs (General reserves are free reserves)
= ` 250 Lakhs
10% thereof = ` 25 Lakhs
Condition III: The amount so drawn shall first be utilized to set off the losses incurred in the
financial year in which dividend is declared before any dividend in respect of equity shares is
declared.
The amount drawn as stated above = ` 25 Lakhs
Less: loss for the financial year 2019-2020 = ` 20 Lakhs
Amount available = ` 5 Lakhs
Hence, the quantum of dividend is further restricted to ` 5 lakhs.
Condition IV: The balance of reserves after such withdrawal shall not fall below 15% of its
paid up share capital as appearing in the latest audited financial statement.
Accumulated Reserves `150 Lakhs
Less : Amount of loss ` 20 Lakhs
Proposed withdrawal declaration of dividend ` 5 Lakhs
Balance of Reserves ` 125 Lakhs
This is more than 15% of paid-up capital (i.e. 15% of ` 100 Lakhs) i.e. ` 15 lakhs. Thus, the
company can declare a dividend of ` 5 lakhs.

Hence, by following above provisions, AB Limited is allowed to declare dividend for the FY
2019-2020 and the maximum amount of dividend that can be paid is ` 5 Lakhs.
Question 4.

TAT Ltd. incurred loss in business upto current quarter of financial year 2017 -18. The
company has declared dividend at the rate of 12%, 15% and 18% respectively in the
immediate preceding three years. Inspite of the loss, the Board of Directors of the
company have decided to declare interim dividend @ 15% for the current financial
year. Examine the decision of TAT Ltd. stating the provisions of declaration of interim
dividend under the Companies Act, 2013.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 11

Answer

Interim Dividend: According to section 123(3) of the Companies Act, 2013, the Board of
Directors of a company may declare interim dividend during any financial year or at any
time during the period from closure of financial year till holding of the annual general
meeting out of the surplus in the profit and loss account or out of profits of the financial
year for which such interim dividend is sought to be declared or out of profits generated in
the financial year till the quarter preceding the date of declaration of the interim dividend.
However, in case the company has incurred loss during the current financial year up to the
end of the quarter immediately preceding the date of declaration of interim dividend, such
interim dividend shall not be declared at a rate higher than the average dividends declared
by the company during the immediately preceding three financial years.

In the instant case, Interim dividend by TAT Ltd. shall not be declared at a rate higher
than the average dividends declared by the company during the immediately preceding
three financial years [i.e. (12+15+18)/3 = 45/3 =15%]. Therefore, decision of Board of
Directors to declare 15% of the interim dividend for the current financial year is tenable.

Question 5

The Board of Directors of ABC Tractors Limited proposes to declare dividend at the rate
of 20% to the equity shareholders, despite the fact that the company hasdefaulted in
repayment of public deposits accepted before the commencement of this Act.

Answer

Section 123(6) of the Companies Act, 2013, specifically provides that a company
which fails to comply with the provisions of section 73 (Prohibition of acceptance of
deposits from public) and section 74 (Repayment of deposits, etc., accepted before the
commencement of this Act) shall not, so long as such failure continues, declare any dividend
on its equity shares.
In the given instance, the Board of Directors of ABC Tractors Limited proposes to declare
dividend at the rate of 20% to the equity shareholders, in spite of the fact that the
company has defaulted in repayment of public deposits accepted before the commencement
of the Companies Act, 2013. Hence, according to the above provision, declaration of
dividend by the ABC Tractors Limited is not valid.
Question 6 [SM MAY 2022 ONWARDS EXAM]

Alpha Herbals, a Section 8 company is planning to declare dividend in the Annual

General Meeting for the Financial Year ended 31-03-2019. Mr. Chopra is holding 800
equity shares as on date. State whether the act of the company is according to the
provisions of the Companies Act, 2013.

Answer

Prohibition in case of Section 8 Companies: According to section 8 (1), a company having

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 12

licence under Section 8 (Formation of companies with charitable objects, etc.) is prohibited
from paying any dividend to its members. Its profits are intended to be applied only in
promoting the objects for which it is formed. Hence, in the instant case, the proposed act of
Alpha Herbals, a company having licence under Section 8 of the Companies Act, 2013, which
is planning to declare dividend, is not according to the provisions of the Act of 2013.

Question 7

YZ Ltd is a manufacturing company & has proposed a dividend @ 10% for the year
2017-18 out of the current year profits. The company has earned a profit of ` 910
crores during 2017-18. YZ Ltd. does not intend to transfer any amount to the general
reserves of the company out of current year profit. Is YZ Ltd. allowed to do so?
Comment.

Answer

Transfer to reserves (Section 123 of the Companies Act, 2013): A company may, before the
declaration of any dividend in any financial year, transfer such percentage of its profits for
that financial year as it may consider appropriate to the reserves of the company. Therefore,
the company may transfer such percentage of profit to reserves before declaration of
dividend as it may consider necessary. Such transfer is not mandatory and the percentage to
be transferred to reserves is at the discretion of the company.

As per the given facts, YZ Limited has earned a profit of ` 910 crores for the financial year
2017-18. It has proposed a dividend @ 10%. However, it does not intend to transfer any
amount to the reserves of the company out of current year profit.

As per the provisions stated above, the amount to be transferred to reserves out of profits for
a financial year is at the discretion of the YZ Ltd. acting vide its Board of Directors.
Question 8

GK Associate Public Limited has earned a total profit of ` 85 lakhs during the past
six years. It has not declared any dividend during these years. Now, the company
proposes to appropriate a part of this amount for making payment of dividend for
the current year in which it has earned a profit of ` 8 lakhs. The Board of Directors
proposes a payment of dividend of ` 25 lakhs i.e. 25% on paid up capital. Can GK
Associate Public Limited declare dividend out of its past accumulated profits and
reserves? Explain the provisions of the Companies Act, 2013, in this regard.
ANSWER

1. According to Section 123(1)(a) of the Companies Act, 2013, no dividend shall be

declared or paid by a company for any financial year except out of the profits of the
Company for that year arrived at after providing for depreciation in accordance with the
provisions of sub section (2), or out of the profits for any previous financial year or years
arrived at after providing for depreciation in accordance with the provisions of that sub

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 13

 section and remaining undistributed or out of both.
2. According to Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014, in
the event of inadequacy or absence of profits in any year, a company may declare
dividend out of free reserves subject to the fulfillment of the following conditions,
namely:—
a. The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by it in the 3 years immediately preceding that year:
Provided that this sub-rule shall not apply to a company, which has not declared any
dividend in each of the 3 preceding financial year.

b. The total amount to be drawn from such accumulated profits shall not exceed
1/10th of the sum of its paid-up share capital and free reserves as appearing in the
latest audited financial statement.
c. The amount so drawn from reserves shall first be utilised to set off the losses
incurred in the financial year for which dividend is declared.
d. The balance of reserves after such drawl shall not fall below 15% of its paid up
share capital as per the latest audited financial statement.
3. In the instant case, as GK Associate Public Limited has not declared any dividend during
last six years,
a. the total amount to be drawn from such accumulated profits and reserves shall not
exceed 1/10th of the sum of its paid up share capital and free reserves as appearing
in the latest audited financial statement.
(i) Proposed dividend: ` 25 Lakh i.e. 25% of paid up capital
(ii) Thus, Paid up capital: ` 1 crore
(iii) Accumulated Profits & Reserves: ` 85 Lakh
Hence, the total amount to be drawn from such accumulated profits: 1/10th of `185
Lakh (1 Crore + 85 Lakh): ` 18.5 Lakh.

b. The amount to be drawn is ` 17 Lakh (` 25 Lakh being proposed dividend – ` 8

Lakh being current profit) <= ` 18.5 Lakh.
Hence, this condition is satisfied.

c. Further, balance in reserves (as per rules) after such withdrawal >= 15% of its
paid up share capital,
(i) 15% of paid up share capital = ` 15 Lakh
(ii) Balance in reserves after withdrawal = ` 85 Lakh – ` 17 Lakh = `68 Lakh > =
` 15 Lakh.
Hence, this condition is also satisfied.

4. So, in the given case, the company can declare dividend by appropriation of
past accumulated profits and reserves (whether accumulated profits or reserves) for
Piyush Sir(Bikaneri)Notes based on ICAI Material Page 14
 payment of dividend in the current year and can also utilise current profits of ` 8 Lacs
for payment of dividend as per Section 123 (1)(a) of the Companies Act, 2013.

Question 9

The dividends declared by Alpha Limited, during the immediately preceding 5 years
was 6%, 9%, 8%, 14%, 15% respectively. The company has incurred losses upto the
quarter ending 30-09-2020 during the current financial year. To maintain the
confidence of the shareholders in the company, the Board of Directors of Alpha
Limited, declared an interim dividend @ 12% in its Board meeting held on 19-10-2020
to be paid to the shareholders of the company.

(i) Advise, whether the declaration of an interim dividend is permissible, considering

that the company is making losses in the current financial year, as per provisions of
Section 123(3) of the Companies Act, 2013.
(ii) Would your advice be different if the above company was a Section 8 company?
Answer

(i) As per Section 123(3) of the Companies Act, 2013, the Board of Directors of a Company
may declare interim dividend during any financial year out of the surplus in the profit
and loss account and out of profits of the financial year in which such interim dividend is
sought to be declared.
Provided that in case the Company has incurred loss during the current financial year up
to the end of the quarter immediately preceding the date of declaration of interim
dividend, such interim dividend shall not be declared at a rate higher than the average
dividends declared by the company during the immediately preceding three financial
years [sub-section 3, (proviso)].

According to the given facts in the question, Alpha Ltd. has incurred losses upto the
quarter ended 30.09.2020 during the financial year 2020-21. In the immediate preceding
three financial years, the company declared dividend at the rate of 15%, 14% and 8%
respectively. Accordingly, the rate of dividend declared shall not exceed 12.33%, the
average of the rates (15+14+8= 37/3 = 12.33) at which dividend was declared by it
during the immediately preceding three financial years.

Therefore, the act of the Board of Directors of Alpha Limited as to declaration of interim
dividend at the rate of 12% during the F.Y 2020-2021 is valid and permissible.
(ii) Legal Position if the Company was a Section 8 Company
According to Section 8(1) of the Companies Act, 2013, the Companies licenced under
Section 8 of the Act (Formation of Companies with Charitable Objects, etc.) are
prohibited from paying any dividend to their members. Their profits are intended to be
applied only in promoting the objects for which they are formed.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 15

Hence, in the instant case, the proposed act of Alpha Limited, a Company licenced under
Section 8 of the Companies Act, 2013, to declare dividend, is not valid.
Question 10 [SM MAY 2022 ONWARDS EXAM]

The Directors of East West Limited proposed dividend at 15% on equity shares for the
financial year 2017-2018. The company announced 28th September 2018 as the record date
for payment of dividend. The dividend was approvedin the Annual General Meeting held on
30th September 2018.
Mr. Binoy was the holder of 2000 equity of shares on 31st March, 2018, but he transferred
the shares to Mr. Mohan, whose name has been entered in the register of members on 18th
June, 2018. Who will be entitled to the above dividend?

Answer

According to section 123, dividend shall be paid by a company only to the registered
shareholder of such share.
Record date is the date announced by the company for determining entitlement to dividend.
All those persons whose name is included in the register of members on that date shall be
entitled to dividend.

In the instant case, on the date announced by the company as the record date, Mr. Mohan’s
name is present in the register of members (i.e. Mr. Binoy’s name is NOT present therein).
Therefore, the dividend should be paid to Mr. Mohan who is the registered shareholder on
the record date.
Question 11 SUGGESTED/SEPT.2024/ 5 MARKS

XYZ Limited is a company having a paid up equity share capital of ` 75 crore. Though it
was performing well in the recent years it suffered losses in the first and second
quarter of the financial year 2023 - 2024. In order to sustain its image, the Board of
Directors declared an interim dividend at the rate of
30 percent on the paid-up equity share capital on 4/10/2023. The following are the
additional information extracted from the books of account for the past 5 Financial
Years:
Financial year ending 31st March Rate of Dividend declared
2019 20%
2020 15%
2021 15%
2022 15%
2023 30%
Examining the provisions of the Companies Act, 2013, decide the validity of the Board's
declaration of 30% interim dividend.

ANSWER
As per section 123(3) of the Companies Act, 2013, the Board of Directors of a company may
Piyush Sir(Bikaneri)Notes based on ICAI Material Page 16
declare interim dividend during any financial year out of the surplus in the profit and loss
account and out of profits of the financial year in which such interim dividend is sought to be
declared.
Provided that in case the company has incurred loss during the current financial year up to
the end of the quarter immediately preceding the date of declaration of interim dividend,
such interim dividend shall not be declared at a rate higher than the average dividends
declared by the company during the immediately preceding three financial years.
According to the given facts, XYZ Ltd. is facing losses in business during the first and second
quarter of financial year 2023-2024. In the immediately preceding three financial years, the
company declared dividend at the rate of 15%, 15% and 30% respectively. Accordingly, the
rate of dividend declared shall not exceed 20%, the average of the rates (15+15+30=60/3) at
which dividend was declared by it during the immediately preceding three financial years.

Therefore, the act of the Board of Directors as to declaration of interim dividend at the rate of
30% during the F.Y. 2023-2024 is not valid.

Question 12 MTP NOV. 2024

MNO Limited are finalising its financial statements and found that the value of one of
its properties has increased. The company came across certain other transactions also
and got confused as to what should be included as ‘free reserves’.
The company has approached you to define to them the meaning of the term "free
reserves" for dividend distribution as per the provisions of the Companies Act, 2013.

Answer
As per section 2(43) of the Companies Act, 2013, free reserves means such reserves which, as
per the latest audited balance sheet of a company, are available for distribution as dividend:
Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair
value, shall not be treated as free reserves.

Question 13 MTP MARCH. 2025

Green Ltd., a power generating company, attracted numerous investors due to its strong
growth potential. Mr. Arju, one of the investor purchased a significant number of shares in
Green Ltd., expecting regular returns in the form of dividends. Over the years, Green Ltd.
performed well and consistently declared dividends. However, in 2023-2024, despite
reporting profits, the board of directors decided not to distribute dividends, citing the need
to reinvest earnings for future expansion.
Seeing this, Mr. Arju argued that as a shareholder, he had an absolute right to receive
dividends. He believed that since the company was in profitable state, dividends should be
mandatorily distributed. He raised his concerns at the Annual General Meeting (AGM),
questioning the board’s decision. Looking at the given scenario, assess the argument of Mr. Arju
in the light and support of the relevant legislation.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 17

Answer
Section 2(35) of the Companies Act, 2013, defines the term “dividend” as any distribution of
profits by a company to its shareholders, whether in cash or in kind, out of free reserves
available for the purpose.
The above statement implies that shareholders do not have an inherent or guaranteed right
to receive dividends from a company.
The decision to declare dividends lies with the board of directors, subject to shareholder
approval and legal provisions under the Companies Act, 2013. The board of directors has the
authority to recommend dividends. If they believe distributing dividends is not in the best
interest of the company, they may choose not to declare them, even if the company has
sufficient profits. Shareholders cannot force the company to declare dividends.
A company can declare dividends only out of:
a. Current year’s profits after providing for depreciation.
b. Previous years profits transferred to reserves.
c. Money provided by the government (in case of guaranteed companies).
Before declaring a dividend, the company must set aside a specified percentage of profits in
reserves if required.
Shareholders can approve the dividend recommended by the board at the Annual General
Meeting (AGM), but they cannot demand a higher dividend.
The board may declare an interim dividend before the final accounts are prepared if they find
it appropriate. If dividends remain unpaid for 30 days, the company must transfer them to a
separate Unpaid Dividend Account.
Thereby, the distribution of dividends is subject to multiple considerations, including the
company’s profitability, legal compliance, and the board’s discretion. The Companies Act,
2013, ensures that dividends are declared in a financially responsible manner, protecting both
the company and its investors. Since shareholders cannot demand dividends as a matter of
right, it is evident that dividends are not an absolute right but a discretionary benefit
provided when the company deems it appropriate.
Validity of the Argument:
As per the stated facts, Mr. Arju argued that as a shareholder, he had an absolute right to
receive dividends. He believed that since the company was in profitable state, dividends
should be mandatorily distributed. His expectation of dividends was based on his investment,
but the law does not guarantee an absolute right to dividends. The board has the authority
to withhold dividends if it deems reinvestment necessary for the company’s long-term
growth. Therefore, while shareholders have a reasonable expectation of returns, they do not
possess an unconditional entitlement to dividends.
Therefore, the argument of Mr. Arju is invalid in the light of the legal provision given in section
123 of the Companies Act, 2013.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 18

Question 14 MTP MARCH. 2018
During the financial year 2016-17, Perfect Limited declared an interim dividend for the
second time. After declaration, the Board of Directors decided to revoke the second
interim dividend as its financial position was poor, to accommodate the said interim
dividend.
(i) Examine the validity of the Board's decision under the provisions of the Companies
Act, 2013.
(ii) Examine what will be your answer, if the Board proposes to transfer more than 10%
of the profits of the company to the reserves for the current year before the
declaration of any dividend?

Answer
According to section 123(3) of the Companies Act, 2013, the Board of Directors of a company
may declare interim dividend during any financial year out of the surplus in the profit and
loss account and out of profits of the financial year in which such interim dividend is sought
to be declared.
Further a dividend when declared becomes a debt and a shareholder is entitled to recovery
of the same after expiry of 30 days as prescribed under Section 127 of the Companies Act,
2013. Section 2(14A) of the Act defines dividend to include interim dividend. Therefore,
dividend once declared becomes a debt and payable within 30 days of declaration.
In the present case, Perfect Limited declared an interim dividend for the second time. After
declaration, the Board of Directors decided to revoke the second interim dividend as its
financial position was poor.

However, in view of the above, the Board of directors cannot revoke the second interim
dividend. Therefore, decision of the Board to revoke the declared 2 nd Interim dividend is
invalid.
Question 15

GK Associate Public Limited has earned a total profit of ` 85 lakhs during the past six
years. It has not declared any dividend during these years. Now, the company proposes
to appropriate a part of this amount for making payment of dividend for the current
year in which it has earned a profit of ` 8 lakhs. The Board of Directors proposes a
payment of dividend of ` 25 lakhs i.e. 25% on paid up capital. Can GK Associate Public
Limited declare dividend out of its past accumulated profits and reserves? Explain the
provisions of the Companies Act, 2013, in this regard.
Answer

1. According to Section 123(1)(a) of the Companies Act, 2013, no dividend shall be declared
or paid by a company for any financial year except out of the profits of the Company for
that year arrived at after providing for depreciation in accordance with the provisions of
sub section (2), or out of the profits for any previous financial year or years arrived at
after providing for depreciation in accordance with the provisions of that sub section and
remaining undistributed or out of both.
2. According to Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014, in

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 19

 the event of inadequacy or absence of profits in any year, a company may declare
dividend out of free reserves subject to the fulfillment of the following conditions,
namely:—
a. The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by it in the 3 years immediately preceding that year:
Provided that this sub-rule shall not apply to a company, which has not declared any
dividend in each of the 3 preceding financial year.

b. The total amount to be drawn from such accumulated profits shall not exceed
1/10th of the sum of its paid-up share capital and free reserves as appearing in the
latest audited financial statement.
c. The amount so drawn from reserves shall first be utilised to set off the losses
incurred in the financial year for which dividend is declared.
d. The balance of reserves after such drawl shall not fall below 15% of its paid up share
capital as per the latest audited financial statement.
3. In the instant case, as GK Associate Public Limited has not declared any dividend during
last six years,
(a) the total amount to be drawn from such accumulated profits and reserves shall not
exceed 1/10th of the sum of its paid up share capital and free reserves as appearing
in the latest audited financial statement.
(i) Proposed dividend: ` 25 Lakh i.e. 25% of paid up capital
(ii) Thus, Paid up capital: ` 1 crore

(iii) Accumulated Profits & Reserves: ` 85 Lakh

Hence, the total amount to be drawn from such accumulated profits: 1/10th of `185
Lakh (1 Crore + 85 Lakh): ` 18.5 Lakh.

(b) The amount to be drawn is ` 17 Lakh (` 25 Lakh being proposed dividend – ` 8 Lakh
being current profit) <= ` 18.5 Lakh.
Hence, this condition is satisfied.

(c) Further, balance in reserves (as per rules) after such withdrawal >= 15% of its paid
up share capital,
(i) 15% of paid up share capital = ` 15 Lakh
(ii) Balance in reserves after withdrawal = ` 85 Lakh – ` 17 Lakh = `68 Lakh > = ` 15
Lakh.
Hence, this condition is also satisfied.

4. So, in the given case, the company can declare dividend by appropriation of past
accumulated profits and reserves (whether accumulated profits or reserves) for payment
of dividend in the current year and can also utilize current profits of ` 8 Lacs for payment
of dividend as per Section 123 (1)(a) of the Companies Act, 2013.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 20

Section 124 Unpaid Dividend Account

Section 124 of the Act contains the provisions relating to Unpaid Dividend Account
(UDA). These are as follows:

(i) Unpaid or Unclaimed Dividend to be transferred to the Unpaid Dividend

Account-

(a) Time period for transfer of amount : Where a dividend has been declared by a
company but has not been paid or claimed within thirty (30) days from the date
of declaration, the company shall, within seven (7) days from the expiry of the
said period of 30 days, transfer the total amount of unpaid or unclaimed
dividend to a special account called the Unpaid Dividend Account (UD A/c).

(b) The UDA shall be opened by the company in any scheduled bank.

(ii) Preparing of Statement of the Unpaid Dividend-

(a) Time Period for preparation of Statement : Within 90 days of transferring any
amount to the Unpaid Dividend Account,

(b) Contents of Statement : the company shall prepare a statement containing the
names, last known addresses and the amount of unpaid dividend to be paid
to each person and

(c) Placing of Statement : place such statement on its web-site, if any, and also on
any other web-site approved by the Central Government for this purpose.

(iii) Payment of Interest if default is made in transferring the Amount-

(a) Rate of Interest : If any default is made in transferring the total unpaid dividend
amount or any part thereof to the Unpaid Dividend Account, the company shall
pay, from the date of such default, interest at the rate of 12 per cent per
annum on the amount not so transferred to the said account.

(b) The interest accruing on such amount shall ensure i.e. be available to the
benefit of the members of the company in proportion to the amount
remaining unpaid to them.

(iv) Claimant to apply for payment of Claimed Amount- Any person claiming to be
entitled to any money transferred to the Unpaid Dividend Account may apply to the
company concerned for payment of the money so claimed.

(v) Transfer of Unclaimed Amount to Investor Education and Protection Fund

(IEPF)-

(a) Time period for transfer : Any money transferred to the Unpaid Dividend
Account which remains unpaid or unclaimed for seven (7) years from the

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 21

 date of such transfer shall be transferred by the company along with interest
accrued thereon to the Investor Education and Protection Fund within 30 days
from expiry of such 7 years

(b) Further, the company shall send a prescribed statement containing the details of
such transfer to the IEPF Authority and in turn, the Authority shall issue a
receipt to the company as evidence of such transfer.

(vi) Transfer of Shares to IEPF- All shares in respect of which dividend has not been paid
or claimed for 7 consecutive years or more shall be transferred by the company in
the name of Investor Education and Protection Fund along with a statement
containing the prescribed details.

By way of Explanation, it is clarified that in case any dividend is paid or claimed for
any year during the said period of seven consecutive years, the share shall not be
transferred to Investor Education and Protection Fund.

(vii) Right of Owner of ‘transferred shares’ to Reclaim- Any claimant of shares so

transferred to IEPF shall be entitled to reclaim the ‘transferred shares’ from Investor
Education and Protection Fund in accordance with the prescribed procedure and
on submission of prescribed documents.

(viii) Punishment for Contravention- If a company fails to comply with any of the
requirements of this section,

(a) such company shall be liable to a penalty of 1,00,000 rupees and in case of
continuing failure, with a further penalty of 500 rupees for each day after
the first during which such failure continues, subject to a maximum of
10,00,000 rupees and

(b) every officer of the company who is in default shall be liable to a penalty of
25,000 rupees and in case of continuing failure, with a further penalty of
100 rupees for each day after the first during which such failure continues,
subject to a maximum of 2,00,000 rupees.
Question 16

RST Ltd. declared dividend at the rate of 20% for the financial year 2017-2018 in the
AGM scheduled on 15th June 2018. As RST Ltd. is left with certain unpaid and
unclaimed dividend, it transferred amount of unpaid and unclaimed dividend to UDA
(unpaid dividend account). After remaining unpaid and unclaimed for more than 2
years in the UDA, some of the entitled shareholders made liable RST Ltd. for
noncompliance of section 124, and claimed for their unpaid dividend amount. RST Ltd.
denies saying that there were certain legal issues on the entitlement of the dividend
amount to the respective shareholders.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 22

State in the light of the given facts, whether the allegation marked by shareholders and
claim for the divided amount, against RST Ltd. is justifiable?

Answer

As per section 124 of the Companies Act, 2013, where a dividend has been declared by a
company but has not been paid/claimed to/by shareholder within 30 days from the date of
the declaration, the company shall, within 7 days from the date of expiry of the said period of
30 days, transfer the total amount of dividend which remains unpaid/unclaimed to the
Unpaid Dividend Account.
The company shall, within a period of 90 days of making any transfer of an amount, prepare a
statement containing the names, their last known addresses and the unpaid dividend to
be paid to each person and place it on the web-site of the company, if any, and also on any
other web- site approved by the Central Government for this purpose, in such form, manner
and other particulars as may be prescribed.
Accordingly, in the given situation, RST Ltd. failed to give statement of Unpaid/unclaimed
dividend and so liable for the said noncompliance of section 124 of the Companies Act,
2013. Any person claiming to be entitled to any money transferred under section 124(1) to
the Unpaid Dividend Account of the company may apply to the company for payment of
the money claimed. Since RST Ltd. failed to comply with the requirements of this section as
to the preparing of a statement of unpaid dividend, so shall be punishable with fine which
shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees
and every officer of the company who is in default shall be punishable with fine which
shall not be less than one lakh rupees but which may extend to 5 lakh rupees.
Question 17 SUGGESTED QUESTION /JAN- 21/(Q.No.3B) 5 MARKS

Mr. R, holder of 1000 equity shares of ` 10 each of AB Ltd. approached the Company in
the last week of September, 2019 with a claim for the payment of dividend of ` 2000
declared @ 20% by the Company at its Annual General Meeting held on 31.08.2011
with respect to the financial year 2010-11. The Company refused to accept the request
of R and informed him that his shares on which dividend has not been claimed till date,
have also been transferred to the Investor Education And Protection Fund.

Examine, in the light of the provisions of the Companies Act, 2013, the validity of the
decision of the Company and suggest the remedy, if available, to him for obtaining the
unclaimed amount of dividend and re-transfer of corresponding shares in his name.

Answer

According to section 124 of the Companies Act, 2013:

(1) Unpaid or Unclaimed Dividend to be transferred to the Unpaid Dividend Account -
Where a dividend has been declared by a company but has not been paid or claimed
within thirty (30) days from the date of declaration, the company shall, within seven (7)
days from the expiry of the said period of 30 days, transfer the total amount of unpaid or
unclaimed dividend to a special account called the Unpaid Dividend Account (UDA). The

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 23

 UDA shall be opened by the company in any scheduled bank.
(2) Transfer of Unclaimed Amount to Investor Education and Protection Fund(IEPF) –
Any money transferred to the Unpaid Dividend Account which remains unpaid or
unclaimed for a period of seven (7) years from the date of such transfer shall be
transferred by the company along with interest accrued thereon to the Investor
Education and Protection Fund.
(3) Transfer of Shares to IEPF- All shares in respect of which dividend has not been paid or
claimed for 7 consecutive years or more shall be transferred by the company in the name
of Investor Education and Protection Fund along with a statement containing the
prescribed details.
(4) Right of Owner of ‘transferred shares’ to Reclaim - Any claimant of shares so
transferred to IEPF shall be entitled to reclaim the ‘transferred shares’ from Investor
Education and Protection Fund in accordance with the prescribed procedure and on
submission of prescribed documents.
As per the provisions of sub-section (3) of section 125 of the Companies Act, 2013, read
with rule 7 of Investor Education and Protection Fund Authority (Accounting, Audit,
Transfer and Refund) Rules, 2016, any person, whose unclaimed dividends have been
transferred to the Fund, may apply for refund, to the Authority, by submitting an online
application.
In the given question, Mr. R did not claim the payment of dividend on his shares for a
period of more than 7 years (i.e. expiry of 30 days from 31.08.2011 to last week of
September 2019). As a result, his unclaimed dividend (` 2,000) along with such shares
(1,000 equity shares) must have been transferred to Investor Education and Protection
Fund Account. Therefore, the company is justified in refusing to accept the request of Mr.
R for the payment of dividend of ` 2,000 (declared in Annual General Meeting on
31.8.2011).
In terms of the above stated provisions, Mr. R should be advised as under:
(i) If Mr. R wants to reclaim the transferred shares, he should apply to IEPF authorities
along with the necessary documents in accordance with the prescribed procedure.
(ii) He is also entitled to get refund of the dividend amount, which was transferred to the
above fund; in accordance with the prescribed rules.

Section 125 Investors Education and Protection Fund(IEPF)

1. Establishment of Fund : This fund, being established by the Central Government, shall
be credited with specified amounts and utilized for refund of unclaimed and unpaid
amounts, promotion of investors’ awareness and protection of the interests of investors,
etc.

2. Credit of Specified Amounts to the Fund: Following specified

amounts shall be credited to the Fund:

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 24

 (a) Amount given by the Central Government- The amount given by the Central
Government by way of grants after due appropriation made by Parliament;
(b) Donations by the Central Government- Donations given by the Central
Government, State Governments, companies or any other institution for the
purposes of the Fund;
(c) Amount lying in the Unpaid Dividend Account- The amount lying in the Unpaid
Dividend Account (UDA) of companies which is transferred by them to the Fund
under section 124(5) i.e. after 7 years;
(d) Amount in the General Revenue Account of the Central Government- The
amount in the General Revenue Account of the Central Government which had been
transferred to that account under section 205A(5) of the Companies Act, 1956 as it
stood immediately before the commencement of the Companies (Amendment) Act,
1999 and remaining unpaid or unclaimed on the commencement of the Act of
2013;
(e) Amount in IEPF- The amount lying in the Investor Education and Protection Fund
under section 205C of the Companies Act, 1956;
(f) Income from Investments- The interest or other income received out of
investments made from the Fund;
(g) Amount received through disgorgement or disposal of Securities- The amount
received under section 38(4) i.e. amount received through disgorgement or
disposal of securities seized from a person who has been convicted for
personation for acquisition of securities as provided in section 38(3);
Note: Disgorgement is the legally enforced repayment of ill-gotten gains imposed
on wrongdoers by the courts. Funds that were received through illegal or unethical
business transactions are disgorged, or paid back, often with interest and/or
penalties to those affected by the action.
(h) Application Money- The application money received by companies for
allotment of any securities and due for refund (only if such amount has remained
unclaimed and unpaid for a period of 7 years from the date it became due for
payment);
(i) Matured Deposits- Matured deposits with companies other than banking
companies (only if such amount has remained unclaimed and unpaid for a
period of 7 years from the date it became due for payment);
(j) Matured Debentures- Matured debentures with companies (only if such amount
has remained unclaimed and unpaid for a period of 7 years from the date it
became due for payment);
(k) Interest- Interest accrued on the amounts referred to in clauses (h) to (j);
(l) Amount received from Sale Proceeds- Amount received from sale proceeds of
fractional shares arising out of issuance of bonus shares, merger and
amalgamation for 7 or more years;

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 25

 (m) Redemption Amount- Redemption amount of preference shares remaining
unpaid or unclaimed for 7 or more years
(n) Other Amounts- Such other amounts as prescribed in Rule 3 of the Investor
Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund)
Rules, 2016. They are as under:
(i) all shares in accordance with section 124 (6) i.e. all those shares in whose
case dividends have not been claimed or paid for 7 consecutive years or
more
(ii) all the resultant benefits arising out of shares held by the Authority under
clause (b) above;
(iii) all grants, fees and charges received by the Authority under these rules;
(iv) all sums received by the Authority from such other sources as may be decided
upon by the Central Government;
(v) all income earned by the Authority in any year;
(vi) all shares held by the Authority in accordance with proviso of sub-section
(9) of section 90 of the Act i.e. Shares of SBO and all the resultant benefits
arising out of such shares, without any restrictions;

3. Utilization of the Fund: According to section 125 (3) the Fund shall be utilized for:
(a) refund of unclaimed dividends, matured deposits, matured debentures, the
application money due for refund and interest thereon;

(b) promotion of investors’ education, awareness and protection;

(c) distribution of any disgorged amount among eligible and identifiable
applicants for shares or debentures, shareholders, debenture-holders or
depositors who have suffered losses due to wrong actions by any person, in
accordance with the orders made by the Court which had ordered
disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits
under sections 37 and 245 by members, debenture-holders or depositors as
may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto in accordance with the rules framed under
the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer
and Refund) Rules, 2016.
4. Application to the Authority for payment: According to section 125 (4), any
person claiming to be entitled to the amount referred in section 125 (2) may apply
to the Authority constituted under section 125 (5) for the payment of the money
claimed.

5. Other Provisions governing the IEPF

(i) Constitution of the Authority for Administration of Fund-, an Authority is

being constituted for the administration and maintenance of accounts as well
Piyush Sir(Bikaneri)Notes based on ICAI Material Page 26
 as other relevant records of the Fund.

Composition of Authority :

 the Secretary, Ministry of Corporate Affairs shall be the ex-officio Chairperson

of the Authority.

 In addition, there shall be 6 members (maximum limit seven) and

 a Chief Executive Officer who shall be the convenor of the Authority.

(ii) Provision of required Resources by the Central Government for Administration

of the Fund- The Central Government may provide to the Authority such offices,
officers, employees and other resources.
(iii) Authority to work in consultation with CAG of India- The Authority shall
administer the Fund and maintain separate accounts and other relevant records
in relation to the Fund in such form as may be prescribed after consultation
with the Comptroller and Auditor- General of India.
(iv) Spending of Money- The Authority shall be competent to spend money out of
the Fund for carrying out the objects specified in section 125 (3) i.e. purposes
for which the fund shall be utilized.

(v) Audit of accounts of the Fund- The accounts of the Fund shall be audited by the
Comptroller and Auditor-General of India at such intervals as may be specified by
him. Such audited accounts together with the audit report thereon shall be
forwarded annually by the Authority to the Central Government.

(vi) Preparation of Annual Report by the Authority- For each financial year, the
Authority shall prepare in the prescribed form and at prescribed time its annual
report giving full account of its activities during the financial year and forward
a copy thereof to the Central Government. In turn, the Central Government shall
cause the annual report and the audit report given by the Comptroller and
Auditor- General of India to be laid before each House of Parliament.

Section 126 Right of dividend, bonus shares and right shares to be held in abeyance
due to pending registration of transfer of shares

According to Section 126, in case any instrument of transfer of shares has been delivered
by a shareholder for registration and the transfer of such shares has not been
registered by the company, such company shall take the following steps:

(a) Transfer the dividend in relation to such shares to the Unpaid Dividend Account
Exception : it is authorised by the registered holder of such share in writing to pay
such dividend to the transferee specified in the instrument of transfer; and
(b) Keep in abeyance in relation to such shares any offer of rights shares under section

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 27

 62 (1) (a) and any issue of fully paid-up bonus shares in pursuance of first proviso
to section 123 (5) i.e. till pending registration.

Section 127 Punishment for failure in payment of declared dividend or posting of

dividend warrant within prescribed time

Section 127 of the Act contains time limit for distribution of dividends and punishment for
failure to distribute dividend on time. Certain exemptions from punishments are also
provided. These provisions are stated as under:

A. Time Limit for Distribution of Dividends

 Where a company declares dividend, it must be paid or the dividend warrant
thereof must be posted within 30 days from the date of declaration of
dividend to the shareholders entitled to the same.

 Posting of dividend warrants within 30 days absolves the company from any
punishment irrespective of whether it is received by the shareholder
concerned within this time or not.

 The offence is committed only when the company fails to post dividend
warrants to the registered address of the members within 30 days of
declaration. Non-receipt of dividend warrants by the shareholders within the
prescribed time does not attract any punishment.

B. Punishment for Failure

In case a company fails to pay declared dividends or fails to post dividend warrants
within 30 days of declaration, following punishments are applicable:

(i) Every director of the company shall be punishable with

 imprisonment of up to 2 years, if he is knowingly a party to the default, and
 he shall also be liable to pay minimum fine of ` 1,000 for every day during
which such default continues.
(ii) The company shall be liable to pay simple interest at the rate of 18% p.a.
during the period for which such default continues.

C. Exemption from Punishment

Under the following cases, where the company has failed to pay declared dividend
within 30 days of declaration, no offence shall be deemed to have been committed and
therefore, no punishment is attracted:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment
of the dividend and those directions cannot be complied with and the same has

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 28

 been communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any
sum due to it from the shareholder;
(e) where, for any other reason, the failure to pay the dividend or to post the warrant
within the prescribed period of 30 days was not due to any default on the part
of the company.
Illustration 6: Mr. Alok, holding equity shares of face value of ` 10 lakh, has not paid `
80,000 towards call money due on shares. Can the dividend amount payable to him be
adjusted against such dues? Give reasons for your answer.
Answer: Yes. As per clause (d) of Proviso to Section 127, where the dividend is declared
by a company and there remains calls in arrears or any other sum due from a member,
then the dividend can be lawfully adjusted by the company against any such dues.

Thus, the action of the company adjusting dividend payable to Mr. Alok towards call money
due on shares amounting to ` 80,000 is justified and therefore, no punishment is attracted.

Applicability of Section 127 to Nidhis subject to the following modification

In case the dividend payable to a member is ` 100 or less, it shall be sufficient compliance
of the provisions of the section 127, if the declaration of the dividend is announced in
the local language in one local newspaper of wide circulation and announcement of the
said declaration is also displayed on the notice board of the Nidhis for at least 3
months.

Question 18

Karan was holding 5000 equity shares of ` 100 each of M/s. Future Ltd. A final call of `
10 per share was not paid by Karan. M/s. Future Ltd. declared dividend of 10%.
Examine with reference to relevant provisions of the Companies Act, 2013, the amount
of dividend Karan should receive.

Answer

As per the proviso to section 127 of the Companies Act, 2013, no offence will be said to have
been committed by a director for adjusting the calls in arrears remaining unpaid or any other
sum due from a member from the dividend as is declared by a company.

Thus, as per the given facts, M/s Future Ltd. can adjust the sum of ` 50,000 unpaid call money
against the declared dividend of 10%, i.e. 5,00,000 x 10/100 = 50,000. Hence, Karan’s unpaid
call money (` 50,000) can be adjusted fully from the entitled dividend amount of `50,000/-.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 29

Question 19

Mars Ltd. declared and paid dividend in time to all its equity holders for the financial
year 2016 - 17, except in the following two cases:

(i) Mrs. Sheetal, holding 250 shares had mandated the company to directly deposit
the dividend amount in her bank account. The company, accordingly remitted the
dividend but the bank returned the payment on the ground that there was
difference in surname of the payee in the bank records. The company, however, did
not inform Mrs. Sheetal about this discrepancy.
(ii) Dividend amount of Rs. 50,000 was not paid to Mr. Piyush, deceased, in view of
court order restraining the payment due to family dispute about succession.
You are required to analyse these cases with reference to provisions of the Companies
Act, 2013 regarding failure to distribute dividends.

Answer

(i) Section 127 of the Companies Act, 2013 provides for punishment for failure to
distribute dividend on time. One of such situations is where a shareholder has given
directions to the company regarding the payment of the dividend and those
directions cannot be complied with and the same has not been communicated to her.
In the given situation, the company has failed to communicate to the shareholder Mrs.
Sheetal about non-compliance of her direction regarding payment of dividend. Hence,
the penal provisions under section 127 will be applicable.
(ii) Section 127, inter-alia, provides that no offence shall be deemed to have been
committed where the dividend could not be paid by reason of operation of law.
In the present circumstance, the dividend could not be paid because it was not allowed to be
paid by the court until the matter was resolved about succession. Hence, there will not be any
liability on the company and its Directors etc.

Question 20

The Director of Rom Limited proposed dividend at 12% on equity shares for the
financial year 2016-17. The same was approved in the annual general meeting of the
company held on 20th September, 2017. The Directors declared the approved
dividends. They seek your opinion on the following matters:

(i) Mr. A, holding equity shares of face value of Rs. 10 lakhs has not paid an amount of
Rs. 1 lakh towards call money on shares. Can the same be adjusted against the
dividend amount payable to him?
(ii) Ms. N was the holder of 1,000 equity shares on 31st March, 2017, but she has
transferred the shares to Mr. R, whose name has been registered on 20th May,
2017. Who will be entitled to the above dividend?

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 30

Answer

The given problem is based on the proviso provided in the section 127 (d) of the Companies
Act, 2013. As per the law where the dividend is declared by a company and there remains
calls in arrears and any other sum due from a member, in such case no offence shall be
deemed to have been committed where the dividend has been lawfully adjusted by
thecompany against any sum due to it from the shareholder.
(i) As per the facts given in the question, Mr. A is holding equity shares of face value of Rs.
10 Lakhs and has not paid an amount of Rs. 1 lakh towards call money on shares.
Referring to the above provision, Mr. A is eligible to get Rs. 1.20 lakh towards dividend,
out of which an amount of Rs. 1 lakh can be adjusted towards call money due on his
shares. Rs. 20,000 can be paid to him in cash or by cheque or in any electronic mode.
(ii) According to section 123(5), dividend shall be payable only to the registered shareholder
of the share or to his order or to his banker. Facts in the given case state that Ms. N, the
holder of equity shares transferred the shares to Mr. R whose name has been registered
on 20 th May 2017. Since, he became the registered shareholder before the declaration
of the dividend in the Annual general meeting of the company held on 20th September
2017, so, Mr. R will be entitled to the dividend.
Question 21

MTP QUESTION/SEPT.2022/MARKS 6 [SM MAY 2022 ONWARDS EXAM]

The Annual General Meeting of ABC Bakers Limited held on 30th May, 2019, declared
a dividend at the rate of 30% payable on its paid-up equity share capital as
recommended by Board of Directors. However, the Company was unable to post the
dividend warrant to Mr. Ranjan, an equity shareholder, up to 25th July, 2019. Mr.
Ranjan filed a suit against the Company for the payment of dividend along with
interest at the rate of 20 percent per annum for the period of default. Decide in the
light of provisions of the Companies Act, 2013, whether Mr. Ranjan would succeed?
Also, state the directors’ liability in this regard under the Act.

Answer

Section 127 of the Companies Act, 2013 lays down the penalty for non-payment of dividend
within the prescribed time period of 30 days. According to this section where a dividend has
been declared by a company but has not been paid or the warrant in respect thereof has
not been posted within 30 days from the date of declaration of dividend to any shareholder
entitled to the payment of dividend:
(a) every director of the company shall, if he is knowingly a party to the default, be
punishable with imprisonment maximum up to two years and with minimum fine of
rupees one thousand for every day during which such default continues; and
(b) the company shall be liable to pay simple interest at the rate of 18% per annum
during the period for which such default continues.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 31

 Therefore, in the given case Mr. Ranjan will not succeed if he claims interest at 20% interest
as the limit under section 127 is 18% per annum.
Question 22 [SM MAY 2022 ONWARDS EXAM]

The Board of Directors of Future Fashions Limited at its meeting recommended a

dividend on its paid-up equity share capital which was later on approved by the
shareholders at the AGM. In the meantime the directors at another meeting of the
Board decided by passing a board resolution to divert the total dividend to be paid to
the shareholders for purchase of certain short-term investments in the name of the
company. As a result, dividend was paid to shareholders after 45 days.

Examining the provisions of the Companies Act, 2013, state whether the act of
directors is in violation of the provisions of the Act and if so, state the consequences
that shall follow for the above violative act.

Answer

According to section 124 of the Companies Act, 2013, where a dividend has been declared
by a company but has not been paid or claimed within 30 days from the date of the
declaration, the company shall, within 7 days from the date of expiry of the said period of 30
days, transfer the total amount of dividend which remains unpaid or unclaimed to a special
account to be opened by the company in any scheduled bank to be called the Unpaid
Dividend Account.
Further, according to section 127 of the Companies Act, 2013, where a dividend has been
declared by a company but has not been paid or the warrant in respect thereof has not
been posted within 30 days from the date of declaration to any entitled shareholder, every
director of the company shall, if he is knowingly a party to the default, be liable for the
punishment.
In the present case, the Board of Directors of Future Fashions Limited at its meeting
recommended a dividend on its paid-up equity share capital which was later on approved
by the shareholders at the Annual General Meeting. In the meantime, the directors at
another meeting of the Board decided by passing a resolution to divert the total dividend to
be paid to the shareholders for purchase of certain short-term investments in the name of
the company. As a result, dividend was paid to shareholders after 45 days.
1. Since, declared dividend has not been paid within 30 days from the date of the
declaration to any shareholder entitled to the payment of dividend, the company shall,
within 7 days from the date of expiry of the said period of 30 days, transfer the total
amount of dividend which remains unpaid or unclaimed to a special account to be
opened by the company in any scheduled bank to be called the Unpaid
DividendAccount.
2. The Board of Directors of Future Fashions Limited has violated section 127 of the
Companies Act, 2013 as it failed to pay dividend to shareholders within 30 days due to
its decision to divert the total dividend to be paid to shareholders for purchase of
certain short-term investments in the name of thecompany.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 32

 Consequences: The following are the consequences for violation of the above provisions:
(a) Every director of the company shall, if he is knowingly a party to the default, be
punishable with maximum imprisonment of two years and shall also be liable for a
minimum fine rupees one thousand for every day during which such default
continues.
(b) The company shall also be liable to pay simple interest at the rate of 18% p.a. during
the period for which such default continues.

Question 23 SUGGESTED QUESTION / NOV- 20/ 4 MARKS

Sun Light Limited was incorporated on 22nd January 2019 with the objects of
providing software services. The Company adopted its first financial year as from 22nd
January 2019 to 31st March 2020. The financial statement for the said period, after
providing for depreciation in accordance with Schedule II of the Companies Act, 2013
revealed net profit. The Board of Directors declared 20% interim dividend at their
meeting held on 7th July 2020, before holding its first Annual General Meeting. In the
light of the provisions of the Companies Act, 2013 and Rules made thereunder:

(i) Whether the Company has complied due diligence in declaring interim dividend?
(ii) Whether the Company can declare dividend in case it was registered under
Section8 of the Companies Act, 2013?
(iii) What are the penal consequences in case of failure to pay the interim dividend?
Answer

(i) According to section 123(3) of the Companies Act, 2013, the Board of Directors of a
company may declare interim dividend during any financial year or at any time during
the period from closure of financial year till holding of the annual general meeting out of
the surplus in the profit and loss account or out of profits of the financial year for which
such interim dividend is sought to be declared or out of profits generated in the financial
year till the quarter preceding the date of declaration of the interim dividend.
In the instant case, Sun Light Limited has complied due diligence in declaring interim
dividend as the Interim Dividend was declared by Board of Directors at their meeting
held on 7th July, 2020 before holding its first Annual General Meeting. Also, the financial
statement revealed net profit so the interim dividend can be paid out of profits of the
financial year ending 31st March, 2020.
(ii) According to section 8 (1) of the Companies Act, 2013, a company having licence under
Section 8 (Formation of companies with charitable objects, etc.) is prohibited from
paying any dividend to its members. Its profits are intended to be applied onlyin
promoting the objects for which it is formed.
(iii) Penal consequences: According to section 127 of the Companies Act, 2013, where a
dividend has been declared by a company but has not been paid or the warrant in

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 33

 respect thereof has not been posted within thirty days from the date of declaration to
any shareholder entitled to the payment of the dividend, every director of the company
shall, if he is knowingly a party to the default, be punishable with imprisonment which
may extend to two years and with fine which shall not be less than one thousand rupees
for every day during which such default continues and the company shall be liable to pay
simple interest at the rate of eighteen per cent per annum during the period for which
such default continues.
Question 24 SUGGESTED QUESTION /JULY- 21/(Q.No. 1B(ii)/ 3 MARKS

ASR Limited declared dividend at its Annual General Meeting held on 31-12-2020. The
dividend warrant to Mr. A, a shareholder was posted on 22nd January, 2021. Due to
postal delay Mr. A received the warrant on 5th February, 2021 and encashed it
subsequently. Can Mr. A initiate action against the company for failure to distribute the
dividend within 30 days of declaration under the provisions of the Companies Act,
2013?

Answer

Section 127 of the Companies Act, 2013, requires that the declared dividend must be paid to
the entitled shareholders within the prescribed time limit of thirty days from the date of
declaration of dividend. In case dividend is paid by issuing divi dend warrants, such warrants
must be posted at the registered addresses within the prescribed time. Once posted, it is
immaterial whether the same are received within thirty days by the shareholders or not.
In the given question, the dividend was declared on 31.12.2020 and the dividend warrant was
posted within 30 days from date of declaration of dividend (posted on 22nd January, 2021). It
is immaterial if Mr. A has received it on 5th February 2021 (i.e., post 30 days from 31.12.2020).
Hence, Mr. A cannot initiate action against the company for failure to distribute the dividend
within 30 days of declaration.

Question 25 [SM MAY 2022 ONWARDS EXAM]

Mr. Alok, holding equity shares of face value of `10 lakhs, has notpaid ` 80,000 towards
call money due on shares. Can the dividend amount payable to him be adjusted against
such dues? Give reasons for your answer.
Answer

Yes. As per clause (d) of Proviso to Section 127, where the dividend is declared by a company
and there remains calls in arrears or any other sum due from a member, then the dividend
can be lawfully adjusted by the company against any such dues.
Thus, the action of the company adjusting dividend payable to Mr. Alok towards call money
due on shares amounting to ` 80,000 is justified and therefore, no punishment is attracted.

Question 26

Subhash is a debtor as well as a member of JUMBO Ltd., a listed company. The

company declares a dividend of `2500 on the shares owned by Subhash and proposes

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 34

to adjust the said amount against the debt of `5000 due from him.ls this adjustment
valid ? Would your answer differ if JUMBO is a Private limited company?

Answer

1. In terms of the proviso to Section 127 of the Companies Act, 2013 where dividend has
been lawfully adjusted by the company against any sum due to it from the shareholder,
there is no contravention of the said Section.
2. In the given case, JUMBO Ltd. may adjust the amount of dividend only on account of
calls or otherwise in relation to the shares of the company, if any due from Subhash in
the capacity of a Member and not otherwise. Therefore, the amount due from Subhash
in the capacity of trade debtor will not be adjusted and the company need to pay
dividend amount to Subhash.

3. In the above example if JUMBO is a private limited company, still Section 127 of the
Companies Act, 2013 (in view of Section 5(6) and 6 of the Companies Act, 2013) are
applicable to it and the Board of Jumbo Ltd., can adjust the amount due from Subhash
only on account of calls or otherwise in relation to the shares of the company, if any and
not otherwise.

Question 27 MTP MARCH 2023

The Annual General Meeting of Angels Limited held on 30th May, 2022, declared a
dividend at the rate of 30% payable on its paid-up equity share capital as
recommended by Board of Directors. However, the Company was unable to post the
dividend warrant to Mr. A, an equity shareholder, up to 25th July, 2022. Mr. A filed a
suit against the Company for the payment of dividend along with interest at the rate of
20 percent per annum for the period of default. Decide in the light of provisions of the
Companies Act, 2013, whether Mr. A would succeed? Also, state the directors’ liability
in this regard under the Act.

Answer
Section 127 of the Companies Act, 2013 lays down the penalty for non-payment of dividend
within the prescribed time period of 30 days. According to this section where a dividend has
been declared by a company but has not been paid or the warrant in respect thereof has not
been posted within 30 days from the date of declaration of dividend to any shareholder
entitled to the payment of dividend:
(a) every director of the company shall, if he is knowingly a party to the default, be
punishable with imprisonment maximum up to two years and with minimum fine of
rupees one thousand for every day during which such default continues; and
(b) the company shall be liable to pay simple interest at the rate of 18% per annum during
the period for which such default continues.
Therefore, in the given case Mr. A will not succeed if he claims interest at 20% interest as the
limit under section 127 is 18% per annum.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 35

Question 28 RTP/MAY. 2023

The dividend amounts received or receivable on equity shares held by Mr. Vaibhav for
the financial year 2021-22 was as follows:
Name of the Dividend Dividend Remarks
Company Declaration Date Amount (`)
Suvaas Limited 25.08.2022 800 Dividend was paid on
23.10.2022.
Bhandol Nidhi 04.09.2022 100 Dividend was not paid within
Limited the stipulated time period.
Also, Mr. Vaibhav holds 100 cumulative preference shares of face value ` 1,00,000, in
aggregate, of Jipanti Limited on which dividend payable is at the rate of 8% p.a.
However, during financial year 2021-22, Jipanti Limited did not earn any profits.
In the context of aforesaid case-scenario, please answer to the following question(s):-
(a) What could be the punishment to the company (ies) aforesaid in the table, with
respect to delayed payment of dividend amount(s)?
(b) Whether Jipanti Ltd. is required to pay dividend on cumulative preference shares
for financial year 2021-22?

Answer
(a) According to Section 127 of the Companies Act, 2013
In case a company fails to pay declared dividends or fails to post dividend warrants within 30
days of declaration, then the company shall be liable to pay simple interest at the rate of 18%
p.a. during the period for which such default continues.
Further, in terms of Notification No. GSR 465 (E), dated 05-06-2015, section 127 dealing with
punishment shall apply to the Nidhis, subject to the following modification:
In case the dividend payable to a member is ` 100 or less, it shall be sufficient compliance of
the provisions of section 127, if the declaration of the dividend is announced in the local
language in one local newspaper of wide circulation and announcement of the said
declaration is also displayed on the notice board of the Nidhi company for at least 3 months.
(i) In case of Suvaas Limited
Dividend was declared on 25.08.2022 but was paid on 23.10.2022 to Mr. Vaibhav, its share-
holder.
The dividend declared should have been paid or dividend warrants should have been posted,
to each of its share-holder, within 30 days of dividend declaration i.e. by 24.09.2022.
Accordingly, the interest payable by Suvaas Limited would be calculated as follows:
Dividend Amount (`) Dividend Declaration Interest @ 18% to be Interest (`)
Date calculated from 25.09.2022 to
23.10.2022
800 25.08.2022 800×18%×29/365 11

(iii) In case of Bhandol Nidhi Limited

(ii) Here, Bhandol Nidhi Limited is a Nidhi company and the dividend payable to Mr.
Vaibhav was ` 100.
So, in such a case, it would have been sufficient compliance of the provisions of section 127,

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 36

if the dividend declared was announced by the company in local language in one local
newspaper of wide circulation and announcement of the said declaration was also displayed
on the notice board of the company for at least 3 months i.e. till 04.12.2022 (3 months from
04.09.2022).
Accordingly, if the aforesaid compliances have been made by Bhandol Nidhi Limited then no
punishment could be imposed upon it, otherwise, it would be liable for punishment.

(b) A cumulative preference share is one in respect of which dividend gets accumulated and
any arrears of such dividend arising due to insufficiency of profits during the current year
is payable from the profits earned in the later years.

Until and unless dividend on cumulative preference shares is paid in full, including arrears, if
any, no dividend is payable on equity shares.
Here, it is given that during financial year 2021-22, Jipanti Limited did not earn any profits
and accordingly, in such case the company may accumulate such dividend for financial year
2021-22 to be carried forward to following financial year(s) and such arrears of dividend
would be payable from the following financial year(s) profits.

Question 29 MTP/MARCH. 2024/ 2 MARKS

Smart Limited declared dividend at its Annual General Meeting held on 31 -07-2023.
The dividend warrant to Mr. A, a shareholder was posted on 22nd August, 2023. Due to
postal delay Mr. A received the warrant on 5th September, 2023 and encashed it
subsequently. Can Mr. A initiate action against the company for failure to distribute the
dividend within 30 days of declaration under the provisions of the Companies Act,
2013?

Answer
Section 127 of the Companies Act, 2013, requires that the declared dividend must be paid to
the entitled shareholders within the prescribed time limit of 30 days from the date of
declaration of dividend. In case dividend is paid by issuing dividend warrants, such warrants
must be posted at the registered addresses within the prescribed time. Once posted, it is
immaterial whether the same are received within 30 days by the shareholders or not.
In the given question, the dividend was declared on 31.07.2023 and the dividend warrant was
posted within 30 days from date of declaration of dividend (posted on 22nd August, 2023). It
is immaterial if Mr. A has received it on 5th September 2023 (i.e., after 30 days from
31.07.2023). Hence, Mr. A cannot initiate action against the company for failure to distribute
the dividend within 30 days of declaration.

Question 30 MTP NOV. 2024

Anoj Limited declared a final dividend to its shareholders at the Annual General
Meeting on 1st August, 2024. As per the decision, the dividend payment was to be
made within the stipulated 30-day period. However, due to internal financial
constraints, the company failed to pay the declared dividend and did not dispatch the
dividend warrants to the shareholders within the required timeframe. The default
continued until 15th October, 2024, leading to shareholder complaints.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 37

In light of this scenario, what specific punishments and liabilities could the company
and the directors face due to this failure to pay the declared dividend within the 30-day
period? Give your answer as per the provisions of the Companies Act, 2013.
Answer
According to section 127 of the Companies Act, 2013, in case a company fails to pay declared
dividends or fails to post dividend warrants within 30 days of declaration, following
punishments are applicable:
(i) Every director of the company shall be punishable with imprisonment of up to two years,
if he is knowingly a party to the default. And, he shall also be liable to pay minimum fine
of ` 1,000 for every day during which such default continues.
(ii) The company shall be liable to pay simple interest at the rate of 18% p.a. during the
period for which such default continues.

Case Study 1 MTP OCT. 2020

Mr. Abhinav Gyan is a tech expert and one among the promoter of Doon Technology Limited
(DTL). He did his engineering from one of the prestigious IIT in CSE and then perused masters
in management from IIM. He started DTL fifteen years back. DTL is famous for advance
technologies such as artificial intelligence, block-chain solutions and many others. The
company went public a decade ago but not listed. Since DTL is expanding its operations in
wake of opportunities arises out of industrial revolution, hence willing to retain the profit for
growth of the company, but shareholders are seeking dividend; because for shareholders
larger the bottom line means larger the dividend. The outbreak of COVID-19 is another
reason which forced the directors to retain the earnings. After the closure of books of
account for year 2019-20, directors proposed the dividend of 10% against the expectation of
20% by shareholders. But considering the extended lock-down which causes a delay in
delivering the projects (results in deferment of revenue and additional cost), directors are of
the opinion to revoke the dividend. Shareholders seeks appointment of internal auditor for
audit on a concurrent basis, whereas management of DTL states it does not require to
appoint an internal auditor under the law and it will cause an unnecessary financial burden on
the company. The excerpts from financial statements of the preceding financial year 2019-20
are as under:
Particulars Amount in Crores
Paid-up share capital 45
Turnover 495
Outstanding loans or borrowings* 105
Outstanding deposits 22#

*Includes inter-corporate loan of INRs 25 crores

# up-till 31st January, 2020 the outstanding deposit was INRs 30 crores
Mr. Gyan, one of the shareholder of DTL, out of his savings bought 40,000 shares of another
company Time Consultancy Services (TCS) of face value 10 each. On such shares, the final call
of 2 is due but unpaid by Mr. Gyan. In the meantime, TCS declared the dividend at a rate of
15%. Out of total dividend of INRs 8.4 crores declared on 31st August 2020, INRs 0.42 crores
Piyush Sir(Bikaneri)Notes based on ICAI Material Page 38
remain unpaid as on 30th September 2020 at the end of TCS. Out of such INRs 0.42 crores,
INRs 12 lakhs are on account of the operation of law and INRs 3 lakhs on account of legal
disputes of right. The unpaid dividend was finally paid on 12th December, 2020 in full.
Mr. Gyan came from humble background, hence as part of ethical commitment to uplift the
society by promoting education to children of the economically weak section, he decided to
form a section 8 company around 2 years back with the support of fellow professional, who
later become a member of such a company. Receipts are excess of expenditure hence it was
decided that Gyan foundation will declare some dividend to its members.
On the basis of above facts, answer the following MCQs [4 MCQs of 2 Marks each: Total
8 Marks]:

(i) Regarding un-paid call money by Mr. Gyan, in light of dividend due to him from
TCS, state which of following statements hold truth?
(a) Dividend can’t be adjusted against the unpaid call money
(b) The dividend of INRs 48,000 can be adjusted against unpaid call money
(c) The dividend of INRs 48,000 can be adjusted against unpaid call money, if consent is
given by Mr. Gyan
(d) The dividend of INRs 64,000 can be adjusted against unpaid call money, if consent is
given by Mr. Gyan
(ii) Does DTL is required to appoint Internal Auditor under section 138 of
Companies Act, 2013?
(a) No, because DTL is unlisted company
(b) No, because paid-up share capital is less than INRs 50 crores
(c) Yes, because turnover is more than INRs 200 crores
(d) Yes, because outstanding loan is above INRs 100 crores
(iii) With reference to the declaration of dividend by Gyan Foundation, state which of
following statements hold truth?
(a) Gyan Foundation can declare dividend out of the capital as well.
(b) Gyan Foundation can declare dividend either out of current years or previous years’
profit, but need to transfer a certain % to reserve.
(c) Gyan Foundation can’t declare the dividend because three years has not been
elapsed since its incorporation.
(d) Gyan Foundation can’t declare the dividend in any case.
(iv) What will be the amount of penalty which TCS needs to pay under section 127
of the Companies Act, 2013?
(a) Up-to INRs 1000 per day till the default continues
(b) INRs 64,800
(c) INRs 97,200

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 39

 (d) INRs 1,08,000
ANSWER
(i) (b)
(ii) (c)
(iii) (d)
(iv) (c)

Case Study 2 MTP APRIL 2023

Waste Papers Ltd. is company engaged in the business of collecting waste papers and old
newspapers and manufacture from these wastes the corrugated boxes which are used in
packing of the products by various suppliers.
The company is earning good profit margin and paying dividend consistently, which can be
seen by the following information:
(` in Lakh)
Year Payment of Paid-up share capital Free Reserves
dividend
2012-13 to 2017-18 10 100 45
2018-19 15 100 60
2019-20 20 100 75
2020-21 22 100 95
2021-22 24 100 120
During the year 2022-23, the company’s business was severally affected due to low demand
of the corrugated boxes on account of recession situation (slow- down of economy)
prevailing all over the country. The company showed a loss of ` 20 lakh in the annual
accounts.
However, the company wants to maintain its image of consistently dividend paying company
and for this year also, it also wants to declare dividend. The company have accumulated free
reserves in its hand and want to declare dividend @ 26% (since there is increasing trend of
2% from the preceding years).
During the year 2022-23, Somesh, a shareholder of the company died due to cardiac arrest.
He was having 10,000 shares in his D-mat account in which he has made nomination in
favour of his son Romesh. When Romesh applied for transmission of the shares, his sister
Sanjana, objected and filed a case in the court that she also has right in the property of her
father and mere making of nomination do not dilute the rights of the legal heirs to claim
share in the property. The matter is sub-judice in the court of law awaiting decision.
The company has business dealing with Mahesh Kumar, who is also a shareholder of the
company. The company has supplied some goods to Mahesh Kumar worth ` 10,000, but he
was not making payment to the company. The company while making payment of the
dividend to Mahesh Kumar deducted the due amount, and as a result, nothing was payable
to Mahesh Kumar towards the dividend. Mahesh Kumar threated to take action against the
company.

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 40

Based on the above facts, answer the following MCQs [3 MCQs of 2 Marks each: Total 6
Marks]

1. Whether Waste Papers Ltd, who suffered losses in year 2022-23, can make payment
of dividend to the shareholders:
(a) In case of losses, the company can’t pay dividend
(b) Company may pay dividend out of profits of previous years (which are free reserves),
subject to the fulfilment of conditions prescribed for declaration of dividend when
there is inadequacy of profits in a particular year
(c) Company may dividend out of Asset Revaluation Reserve Account
(d) Company may dividend without any restriction as it has enough amount in its Free
reserves
2. Romesh (son of the deceased) made a complaint, that even after declaration of
dividend, the company has not posted the dividend warrant at the address given in
his transmission form. Which is the most correct statement in this regard:
(a) The company is not liable to pay dividend to a deceased person
(b) The company is not liable to pay dividend to the legal heirs of the deceased person
(c) The company should deposit the dividend in the court, where the matter is under
consideration
(d) The company is not liable where there is a dispute regarding the right to receive the
dividend.
3. In the given case, the amount due to be recovered from Mahesh Kumar was
deducted by the company and nothing was now payable to him on account of
dividend. Is the action of the company right:
(a) No, payment of dividend is a separate matter and should not be clubbed with
any other matter
(b) Yes, Mahesh Kumar can take action against the company for not paying any
dividend to him
(c) The company can adjust the any sum, due to it, from the shareholder
(d) The company should take into confidence and consent of Mahesh Kumar’s family
members to adjust its dues.
ANSWER
1. (b)
2. (d)
3. (c)

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 41

TEST YOUR KNOWLEDGE
Multiple Choice Questions
1. When the dividend is declared at the Annual General Meeting of the
company, it is known as ….

(a) Final Dividend

(b) Interim Dividend
(c) Dividend on preference shares

(d) Scrip Divided

2. Amount to be transferred to reserves out of profits before any declaration of

dividend is

(a) 5%
(b) 7.5%

(c) 10%
(d) at the discretion of the company.
3. The Board of Directors of Vidyut Limited are contemplating to declare interim
dividend in the last week of July, 2024 but the company has incurred loss
during the current financial year up to the end of June, 2024. However, it is noted
that during the previous five financial years i.e., 2019-20, 2020-21, 2021-22,
2022-23 and 2023-24, the company had declared dividend at the rate of 8%,
9%, 12%, 11% and 10% respectively. Advise the Board as to the maximum rate at
which they can declare interim dividend despite incurring loss during the current
financial year.

(a) Maximum at the rate of 10%.

(b) Maximum at the rate of 11%.
(c) Maximum at the rate of 10.5%.

(d) Maximum at the rate of 11.5%.

4. The amount accumulated in the Investor Education and Protection Fund shall
not be used for:

(a) refunds in respect of unclaimed dividends, matured deposits, matured

debentures, application money due for refund and interest thereon.
(b) reimbursement of legal expenses incurred in pursuing class action suits under

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 42

 section 37 and 245.

(c) grants or donation to the Central Government for the purpose of investor’s
education and training.

(d) distribution of any disgorged amount among eligible and identifiable applicants
who have suffered losses.
5. In case a company fails to pay declared dividends or fails to post dividend warrants
within 30 days of declaration, company shall be liable to pay simple interest at the
rate of ………during the period for which such default continues.

(a) 6% p.a.
(b) 12% p.a.

(c) 15% p.a.

(d) 18% p.a.

6. Which of the following amount is not credited to IEPF Account
(a) Unpaid dividend account of company
(b) Matured deposit with company
(c) Profit on sale of asset
(d) Matured debentures with companies.

Answer to MCQ based Questions

1. (a) Final Dividend

2. (d) at the discretion of the company.

3. (b) Maximum at the rate of 11%

4. (c) grants or donation to the Central Government for the purpose of
investor’s education and training.
5. (d) 18% p.a.
6. (c) Profit on sale of asset

Piyush Sir(Bikaneri)Notes based on ICAI Material Page 43