Process for payment of Interim Dividend

What is Interim Dividend?

After closure of books of accounts for any financial year, Companies became aware of their financial status for that particular year. On the basis of profit earned, Company decides to declare dividend for the shareholders of the Company which are approved by the members at the Annual General Meeting of the Company.

However it may happen that during any financial year, company ascertains that it has earned sufficient profit on basis of quarter or half year financial results of the Company and it may decide to declare dividend even before the Annual General Meeting of the Company.

Such dividend is approved by the Board of Directors of the Company and distributed to the members.

Thus dividend which is paid during any financial year or at any time after closure of financial year and before annual general meeting of the Company is called as interim dividend.

Sources for payment of Interim Dividend

Since the annual accounts of the Company are not finalised at the time of declaring dividend, Companies Act, 2013 has prescribed limited sources form where company can fund the payment of interim dividend to the shareholders.

As per section 123 of Companies Act, 2013 (“Act”), Interim dividend is declared by the Board of the Directors of the Company and the source of fund can be as follow:

  • out of the surplus in the profit and loss account.
  • out of profits of the financial year for which such interim dividend is sought to be declared
  • out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend

Consideration of financial result of the Company for declaring Interim Dividend

The Board of Director of the Company should before declaring the interim dividend, satisfies that the financial figures of the Company justifies and supports the payment of interim dividend.

The financial results shall take into account:

  1. depreciation for the full year,
  2. tax on profits of the company including deferred tax for full year,
  3. other anticipated losses for the financial year,
  4. dividend that would be required to be paid at the fixed rate on preference shares,
  5. the losses incurred, if any, during the current financial year upto the end of the quarter, immediately preceding the date of declaration of Interim Dividend

The Board should satisfy itself that the outflow on account of payment of the Interim Dividend will not jeopardize the ability of the company to meet the other requirements such as paying Dividend at the contracted rate on preference shares.

The Board should also ensure that all arrears of preference Dividend are paid before declaring any Interim Dividend.

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 interim dividend and the quantum of dividend.
    Board can consider declaring interim dividend while adopting quarterly or half yearly results of the Company, as it gives the Company more clear vision regarding the financial stature of the Company.
    Board will also take decision regarding opening of a scheduled bank account for purpose of depositing the amount of dividend.
    Board of directors of the Company will also decide the record date for ascertaining number of members to whom dividend will be paid.
  3. Within five days from the date of Board Meeting, submit the amount of dividend into the scheduled bank account as opened by the Company.
  4. Distribute the dividend through dividend warrants/Cheque or e-transfer within 30 days from the date of Board Meeting.
  5. Any amount which remains unpaid/unclaimed within 30 days, transfer such amount to an unpaid dividend bank account as opened by the Company.
  6. Amounts which remain unclaimed/unpaid for seven years in the unpaid bank account of the Company will be transferred by the Company to Investor Education and Protection Fund.

Points to Remember

  • It is important to note that in the event of a loss or inadequacy of profits during a financial year, no Interim Dividend shall be declared/ paid out of Free Reserves However, Final Dividend may be declared / paid out of Free Reserves
  • Once an Interim Dividend is declared by the Board, it’s noting, approval, confirmation or ratification in a general meeting is not required. However, the Board’s Report should mention the amount of Interim Dividend paid by the company.
  • Where a company has issued equity shares with differential rights as to voting only, no differentiation shall be made in the declaration of Interim Dividend on such shares, unless the terms of issue provide otherwise.
  • The declaration of a Dividend need not be only once a year. It may be at any time the directors choose, and there may be several declarations in the course of one year.
  • When the Board declares Interim Dividend on equity shares, it is not necessary to declare Interim Dividend on preference shares.
  • Besides the above points Company must consider other provisions which are required for declaration and payment of final dividend
  • It is pertinent to note that the above stated regulatory framework are as per Companies Act, 2013 only, If any Company is registered with other any regulatory bodies like SEBI, RBI, MSME, IRDA , Companies have to follow additional compliance as prescribed by different regulators under which Company is registered.

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