Dividends - Interim and Final | Provisions of Companies Act' 2013 | Company Law Notes for BCom, BBA and MBA | CBCS Pattern

Dividends - Interim and Final

Provisions of Companies Act' 2013

Company Law Notes for BCom, BBA and MBA

MEANING OF DIVIDEND AND ITS TYPES

Shareholders expect some return for the money invested by them in the company. They get the return on their investment in the form of dividends given to them from time to time. Thus, dividends are the profits of the company distributed amongst the shareholders. The company may declare dividends in general meeting, but no dividend shall exceed the amount recommended by the Board of Directors. Thus, shareholders in annual general meeting can only reduce the amount of dividends but cannot increase the amount of dividends recommended by the Board of Directors. The directors may not recommend dividend even if there are profits if they think that distribution of dividend will impair the financial position of the company.

Dividends are usually paid on the paid up value shares in the absence of any indication to the contrary in the Articles of Association. For example, if a company has share capital of 1,00,000 equity shares of Rs. 10 each, Rs. 7 per share called up, and paid up and if the rate of dividend is 15%, total dividend paid will be 15% of Rs. 7,00,000 paid up capital (i.e. 1,00,000 shares @ 7 each) i.e. Rs. 1,05,000.

Dividends may be of the following two types:

1)      Interim Dividend.

2)      Final Dividend.

Interim Dividend: This dividend is declared between two annual general meetings. Section 123 of the Companies Act, 2013 provides that 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 which interim dividend is sought to be declared. It further provides 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. The Board may from time to time pay to the shareholders such interim dividends as appear to it to be justified keeping in view the profits of the company.

Final Dividend: It is a dividend which is declared at the annual general meeting of the shareholders and is declared by the shareholders only on the recommendation of the directors. The dividend proposed by the directors is provided for in the final accounts of the company and is paid only after it has been passed at the annual general meeting of the shareholders.  

Distinction between Interim Dividend and Final Dividend

1)      Interim dividend is the dividend which is paid in anticipation of profits. It is dividend paid by the directors any time between the two annual general meetings of the company, that is, on the basis of less than a full year’s results. Final dividend is recommended by the directors and declared by the shareholders in the Annual General meeting.

2)      The payment of interim dividends depends much more upon estimates and opinions than the declaration of a final dividend which is made upon the information contained in the Final Balance Sheets.

3)      Once a final dividend is declared, it is a debt payable to the shareholders and cannot be revoked or reduced by any subsequent action of the company. But declaration of interim dividend does not create a debt against the company and can be rescinded or reduced at any time before payment.

4)      For declaration and payment of interim dividend, the directors need to satisfy that there are adequate distributable profits and payment of interim dividend would not result in payment out of capital. 

Provisions of the Companies Act’ 2013 relating to distribution of dividend:

1. General meeting resolution: Dividend to be paid to the shareholders are recommended by the directors and declared at annual general meeting of the company. Shareholders cannot declare dividend on shares.

2. Payment of Dividend on paid up value: Dividends are usually paid on the paid up value shares in the absence of any indication to the contrary in the Articles of Association.

3. Sources of Declaring Dividend: As per Section 123 of the Companies Act, 2013 dividend may be declared out of the following three sources:

a)    Out of Current Profits: Dividend may be declared out of the profits of the company for the current year after providing depreciation. The company must transfer the prescribed percentage of its profits to general reserve before declaring dividends. This percentage depends on the percentage of dividend declared.

b)   Out of Past Reserves: Dividend may be declared out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of Schedule II of the Companies Act, 2013 and remaining undistributed. Section 123 of the Act, requires that dividend can be declared out of the reserves only in accordance with the rules framed by the Central Government in this behalf.

c)    Out of both mentioned above.

d)   Out of Money provided by the Government: A company can also declare dividend out of the moneys provided by the Central Government for payment of such dividend in pursuance of guarantee given by the Government. 

4. Divisible Profits: The term “Divisible Profit” is a very complicated term because all profits are not divisible profits. Only those profits are divisible profits which are legally available for dividend to shareholders. Dividends cannot be declared except out of profits, i.e. excess of income over expenditure; ordinarily capital profits are not available for distribution amongst shareholders because such profits are not trading profits. Thus, profits arising from revaluation or sale of fixed assets or redemption of fixed liabilities should not be available for distribution as dividend amongst shareholders. The principles of determination of the divisible profit are given in Sec 123 of the Companies Act, 2013. According to Section 123 of the Companies Act, 2013 no dividends can be declared unless:

Ø Depreciation has been provided for in respect of the current financial years for which dividend is to be declared;

Ø Arrears of depreciation in respect of previous years have been deducted from the profits; and

Ø Losses incurred by the company in the previous years.

Ø After transferring to reserves of the company prescribed percentage of its profits before declaring dividend.

5. Transfer to Reserves: Section 123 of the Companies Act, 2013 provides that before any dividend is declared or paid a certain percentage of profits for that financial year may be transferred to the reserves of the company. The company is free to decide the percentage for such transfer to the reserves. Mandatory transfer to specific reserves is now not required under companies Act’ 2013.

6. Interim dividend also included in dividend: The term dividend include both interim and final dividend and all the provisions of the Companies Act relating to dividend declared at the AGM shall also apply to interim dividend.

5. Deposit of amount of dividend in a bank: Dividend must be deposited in a bank within 5 days after declaration as per Sec 123 of the Companies Act’ 2013.

7. Declaration of dividends in case of absence or inadequacy of profits: In the absence of profits or inadequate profits, a company can pay dividend out of past year’s profits transferred to reserves, provided:

a)    The rate of dividend declared shall not exceed the average of the rate of dividend which was declared, if any, by it in preceding 3 years,

b)   The total amount to be drawn from such past reserves shall not exceed 1/10^th of the sum of its paid-up share capital and free reserves as per latest audited financial statements.

c)    The balance of reserves after such withdrawal shall not fall below 15% of the current shareholders’ fund.

e)   Current year’s losses and depreciation must be set off before declaring dividend out of past reserves.

8. Default in repayment of deposit: In case of default in repayment of deposit as per the provisions of Sec 73 and Sec 74, no company shall declare dividend on its equity shares.

9. Mode of payment of dividend: The dividend is to be paid in cash or by cheque or by dividend warrant or any electronic mode to the shareholders. Also, there is no prohibition on the company for 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 unpaid on any shares held by the members of the company.

10. Time within which dividend is to be paid: Dividend declared must be paid to the shareholders within 30 days from the date of its declaration (Sec. 124). In case of default, the defaulting directors of the company is punishable with simple imprisonment upto 2 years together with a fine of Rs. 1,000 plus interest @18% p.a. during the period for which such default continues.

11. Unpaid or unclaimed dividend: If dividend is not paid or not claimed within 30 days from the date of the declaration, the company shall within 7 days from the date of the expiry of 30 days, transfer such dividends unpaid dividend accounts. If such funds are unclaimed for 7 years from the date of such transfer, it must be transferred to the Investor education and protection fund. After such transfer, no claim will be entertained.