Declaration and Payment of Dividend

The dividend refers to something “that is to be divided”. In simple terms, companies share their profits with the shareholders in the form of a dividend. The companies in their growing stage generally choose not to distribute the profits but rather invest the same for further business expansion. The declaration and payment of the dividend are subject to the provisions of the Companies Act, 2013 (“the Act”).

From the discussion below, we can learn about the declaration and payment of dividends.

What is a Dividend?

A dividend is the amount of profit earned by the company. It is not retained and distributed among the shareholders in proportion to the paid-up amount on their shares.

The dividend is categorized as Interim Dividend, Final Dividend, and Preference Share Dividend. Further, Section 2 (35) of the Act states that “dividend” includes any interim dividend.

What are the applicable provisions of Declaration and Payment of Dividends?

Declaration of dividend section:

  • Section 2(35): Definition of dividend
  • Section 51: Proportion for Payment of Dividend
  • Section 123: Declaration of Dividend
  • Section 124: Unpaid Dividend Account
  • Section 126: Right to Dividend
  • Section 127: Punishment

Declaration of dividend rules

  • Rule 3 of Chapter VIII The Companies (Declaration and Payment of Dividend) Rules, 2014

What is the process for Declaration and Payment of Dividends?

  1. Issue notice for the Board meeting and hold a meeting of the Board of Directors to consider the matter of declaration of dividend.
  2. The company must open a separate Bank account for dividend payment and credit the total amount of dividend payable within five days of dividend declaration.
  3. Fix date, time, venue for the ensuing AGM of the Company.
  4. The required profits percentage must be transferred to Company’s Reserves.
  5. Hold the Annual General Meeting and pass the necessary resolution. It is important to note that the Shareholders in the meeting cannot declare the final dividend at a higher rate than the one recommended by the Board. But, they may declare the final dividend at a lower rate than the one recommended by the Board.
  6. A statement of the dividend must be prepared in respect of each shareholder.
  7. Make sure that the dividend tax is paid within the prescribed time.
  8. Make arrangements for payment of the dividend.
  9. Within 30 days from the declaration date, one must make dividend payment.

If a company fails to pay the dividend within thirty (30) days from the date of the declaration to any shareholder entitled to the dividend payment. In that case, Section 127 of the Act will be attracted, which states the following punishment:

Director/(s) of the company (if he is knowingly a party to the default) shall be punishable with:

  • Imprisonment which may extend to two (02) years and
  • Rupees one thousand as minimum fine for every day during which such default continues.

Company shall be liable:

  • For payment of simple interest at eighteen percent (18%) per annum during the period for which such default continues.
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