This article throws light upon the top four legal and procedural aspects of payment of dividend. The legal and procedural aspects are: 1. Source of Declaring Dividend 2. Transfer to Reserves 3. Declaration of Dividend out of Past Profits or Reserves 4. Other Provisions and Aspects of Payment of Dividend.
Legal and Procedural Aspects of Payment of Dividend:
- Source of Declaring Dividend
- Transfer to Reserves
- Declaration of Dividend out of Past Profits or Reserves
- Other Provisions and Aspects of Payment of Dividend
Legal and Procedural Aspect # 1. Source of Declaring Dividend:
(a) Out of current profits. Dividend can be declared by a company out of profits for the current year arrived at after providing depreciation.
(b) Out of past profits. Dividend can also be declared out of the undistributed profits of the company for any previous financial year or years arrived at after providing depreciation in accordance with the provisions of the Act.
(c) Out of moneys provided by the Government. A company may also declare dividend out of the moneys provided by the Central Government for the payment of dividend in pursuance of a guarantee by the government.
It may, however, be noted that no dividend can be declared or paid by a company unless:
(i) Depreciation has been provided for in respect of the current financial year.
(ii) Arrears of depreciation in respect of the previous year’s falling after the commencement of the companies (Amendment) Act, 1960 have been set off against profits of the company.
(iii) Losses, if any incurred by the company in previous years falling after 28th December, 1960 have been written off against profits of the company for which dividend is proposed to be declared.
Legal and Procedural Aspect # 2. Transfer to Reserves:
The companies (Transfer of Profits to Reserves) Rules, 1975 require a company providing more than 10 per cent dividend to transfer a certain percentage of the current year’s profits to reserves as specified below:
(a) Where the dividend proposed exceeds 10 per cent but dos not exceed 12.5 per cent of the paid up capital, the amount to be transferred to the reserves shall not be less than 2.5 per cent;
(b) Where the dividend proposed exceeds 12.5 per cent but does not exceed 15 per cent of the paid up capital, the amount to be transferred to reserves shall not be less than 5 per cent;
(c) Where the dividend proposed exceeds 15 per cent but does not exceed 20 per cent of the paid up capital, the amount to be transferred to reserves shall not be less than 7.5 per cent; and
(d) Where the proposed dividend exceeds 20 per cent of the paid up capital, the amount to be transferred to reserves shall not be less than 10 per cent of the current year’s profits.
It may, however, be noted that that a company may voluntarily transfer a higher percentage of profits to reserves.
Legal and Procedural Aspect # 3. Declaration of Dividend out of Past Profits or Reserves:
If a company wants to declare dividend out of accumulated profits or reserves, it has to comply with the following conditions:
(a) The rate of dividend should not exceed the average of the rates at which dividend was declared by it in five years immediately preceding that year or ten per cent of its paid up capital, whichever is less.
(b) The total amount to be drawn for the declaration of dividend from the accumulated profits should not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves and the amount so drawn should first be utilised to set-off the losses incurred in the financial year.
(c) The balance of reserves after such drawl should not fall below fifteen per cent of its paid up capital.
Legal and Procedural Aspect # 4. Other Provisions and Aspects of Payment of Dividend:
(a) The decision in regard to the payment of final dividend is taken at the annual general meeting of the shareholders only on the recommendation of the directors. The shareholders themselves cannot declare dividend. However, interim dividend is declared by the directors and there is no need for a meeting of the shareholders to sanction the payment of such a dividend.
(b) Dividend on equity shares can be paid only after declaration of dividend on preference shares.
(c) When dividend is declared by a company, it must be paid by the company within 30 days of declaration of dividend.
(d) According to section 205 of the Companies Act, no dividend shall be payable except in cash: Provided that nothing in this section prohibits the capitalisation of profits or reserves of a company for the purpose of issuing fully paid up bonus shares.
(e) Any dividend payable in cash may be paid by cheque or warrant sent through the post directed to the registered address of the shareholder entitled to the payment of the dividend.
(f) In the absence of any specific provision in the Articles of Association of the company, dividend is paid on the paid up capital of the company. If there are calls in arrears, dividend is paid on the amount actually paid by the shareholders.
(g) No dividend can be paid on calls in advance.
(h) As per Finance Act, 1997 dividends paid or declared are subject to corporate dividend tax. At present (Assessment Year 2012-13) the rate of corporate dividend tax is 15% plus 7.5% surcharge and 3% education cess.