Process for declaration and payment of Dividend

“Dividend” means a distribution of any sums to Members by the Company out of profits and wherever permitted out of free reserves available with the Company.

Dividend is basically a return on investment made by an investor in any Company. Generally when business of any company is thriving, Company either resorts to reinvest the profits into the business or distribute a part of their earning among the shareholders as dividend on shares.

Procedure for declaration of Dividend

  1. Any director or person authorised by the Board will dispatch a notice to call for Board Meeting. Notice shall be give as per section 173 of Companies Act, 2013 read with secretarial standard 1 on Board Meetings.
    Where a company has an Audit Committee, this Committee shall consider the financial results which shall thereafter be submitted to the Board for its consideration and declaration of Interim Dividend.
  2. Conduct Board Meeting to consider payment of dividend and the quantum of dividend. Generally such decisions were taken by the Board of the Company at the Meeting of the Board in which accounts are approved and recommended for shareholders’ approval.
    Board will also take decision regarding opening of a scheduled bank account for purpose of depositing the amount of dividend.
  3. After taking decision on declaration of dividend, dispatch notices for calling an Annual General Meeting (AGM) to all the members in accordance with provisions section 101 of Companies Act,2013 read with secretarial standard 2 on General Meetings
  4. Approval of members will be sought through ordinary resolution for declaration of dividend.
  5. Within five days from the date of AGM, submit the amount of dividend into the scheduled bank account as opened by the Company.
  6. Distribute the dividend within 30 days from the date of AGM.

Aforesaid process is to be followed for declaration of final Dividend, In case of interim dividend, approval of members is not sought at AGM and Board approves the proposal of interim dividend.

Points to consider while declaring dividend

As per section 123 of Companies Act, 2013 and other relevant rules Company has to consider below given provisions at the time of declaration and payment of dividend

  • Dividend shall be paid only out free reserve.
  • Dividend shall be paid only to registered shareholder or to his order or to his banker.
  • Preference Shareholders shall be paid Dividend before Dividend is paid to the equity Shareholders of the company.
  • Arrears of Dividend on cumulative preference shares shall be paid before payment of any Dividend on equity shares.
  • Dividend on equity shares shall be paid in accordance with the rights of the respective classes, if any, of such shares.
  • The Register of Members and Share Transfer Books of the Company will needs to be for ascertaining the number of shareholders for the purpose of payment of final dividend at the AGM.
  • Dividend shall be payable in cash not in kind.
  • Dividend payable in cash can be paid through cheque, warrant, or any other electronic mode.
  • Dividend, once declared, becomes a debt and shall not be revoked.
    Dividend when proposed does not become a debt. The right of Members to claim Dividend arises only after the Dividend is declared either by the company in an Annual General Meeting or, in the case of Interim Dividend, by the Directors in a Board Meeting. Until and unless it is so declared, no Member has any claim against the company in respect thereof, even though the company may have sufficient profits [Bacha F. Guzdar v Commissioner of Income Tax 1955 AIR SC 740]. Members cannot compel the company by any process of law to declare Dividend [C.W. Spencer v. ITO, (1957) 27 Comp. Cases 15, 25 (Mad)]. A Dividend once declared becomes a debt due to the Members and hence cannot be revoked. It gives rise to an enforceable obligation or creates a debt enforceable immediately or in the future.
  • The amount to be distributed as dividend shall be deposited by the Company in a scheduled bank account within 5 days from declaration of dividend
  • Dividend shall be paid to the shareholders within 30 days of its declaration.
  • A duplicate Dividend cheque or warrant shall be issued only after obtaining requisite indemnity/ declaration from the concerned Member and after ascertaining the encashment status of the original Dividend cheque or warrant.
  • The Dividend cheque or warrant shall be accompanied by a statement in writing showing the amount of Dividend paid, Folio no./DP ID and Client ID nos., number of shares held by the concerned Member as on the record date, amount paid up on each share and the financial year to which the Dividend pertains
  • A company is prohibited to issue Bonus shares in lieu of Dividend.
  • All requisite approvals shall be obtained before declaration of Dividend. Dividend shall not be declared subject to any condition such as the approval of financial institutions/ banks or foreign collaborators or compliance with any other contractual obligation.
  • The amount of Interim Dividend, if any, paid during the financial year and final Dividend recommended by the Board of directors shall be disclosed in the Board’s Report.
  • With effect from Assessment Year 2021-22, the domestic company isn’t required to pay dividend distribution tax on any amount declared, distributed or paid by such company by way of dividend. Dividend received from domestic company is taxable in hands of shareholders.

Unpaid Dividend

The amount of Dividend which remains unpaid or unclaimed after thirty days from the date of its declaration shall be transferred to a special bank account titled as ‘Unpaid Dividend Account’ to be opened by the company with any scheduled bank.

Such transfer shall be made within seven days from the date of expiry of the thirty days period from the date of declaration of Dividend.

Further if the amount in the bank account remains unclaimed/unpaid for seven years then it will be transferred to a fund called as Investor Education & Protection Fund.

Restriction on Declaration of Dividend

Although Company is required to comply with conditions as given above for declaration and payment of dividend, there are certain cases in which company is restricted to declare dividend.

Section 123(6) of Companies Act, 2013 and the rules made thereunder, states that a Company cannot declare dividend on equity shares if it fails to comply any of the provisions with respect to acceptance and repayment of deposit taken by Companies.

Company will be restricted to declare dividend as long as the failure continues.

Punishment for failure to Distribute Dividends

If any Company failed to make payment of dividend within 30 days of its declaration then as per section 127 of Companies Act,2013 below given will be the penalty.

Penalty on Directors

Every director of Company, if committed default intentionally:

Imprisonment: Upto 2 years

+

Fine : Minimum Rs.1000 for every day during which such default continues

Penalty on Company

Company has to an interest @ 18% p.a. during the period for which such default continues

Exemption for punishment

Company Act, 2013 has prescribed certain situation whereby if a company has not paid dividend in 30 days, it will not liable for punishment as mentioned above.

As per section proviso of section 127 of Companies Act, 2013 no offence will be deemed to be committed if:

  • Dividend could not be paid due to operation of law.
    For example: If any court has passed an order which restricts the Company in making payment of already declared dividend, such situation will not be considered as offence.
  • Dividend could not be paid as shareholder has given company certain instruction for payment of dividend and the same has not been fulfilled and company has communicated the issue with the shareholder.
    For example: Company has received instruction from the shareholder to make e-payment of the dividend and provided bank details for the same. It may happen due to any discrepancy in bank details provide by shareholder the amount bounced back, in such situation the Company has to intimate the shareholder regarding the issue else it would treated as default in payment of dividend.
  • When the ownership of share is under dispute.
    For example: If two or more person are making claim as owner of shareholding for the Company and ownership is not yet decided, then Company is not under any obligation to pay dividend on such shares.
  • When dividend is adjusted among some payment which were due from shareholder legally.
    For example: Company may not pay amount of dividend to any shareholder from whom company has yet to receive any payment like any member has asked for  inspection of minute books but not yet paid for the same .In such case Company can adjust the amount of dividend from the same.
  • If the default in payment of dividend is beyond control of Company.
    For example: There may occur some situation when Company was unable to pay dividend , like in situation of lockdown, company may not able to dispatch dividend warrant and pay dividend only whose bank details are available with the Company.

During Covid-19 pandemic crisis, SEBI has granted relaxation vide SEBI/HO/CFD/CMD1/CIR/P/2020/79 dated May 12,2020 wherein under regulation 12 of SEBI(LODR), 2018, listed Company is mandatorily required to dispatch dividend warrant if dividend exceed Rs. 1500/-. This regulation was relaxed till the normalisation of postal services.

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