Basics of Dividend

Understanding Dividend

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

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

Based on the profit or retained earnings, management of the Company may decide for quantum of the dividend to be paid.

Why Company’s declare dividend?

Companies declare dividend for various reasons some of which are enumerated below:

• To reward the investors: Shareholders of the Company invest amount in Companies with an expectation of increase in value of shares along with distribution of part of profit in form of dividend. Thus, declaring dividend is a reward for the investors for keeping their investment in the Company.
• To create goodwill: Investors are willing to put their money in those entities which declares high value dividend on frequent basis, as it shows that the Company is a profit-making entity and company is also concerned towards their investors. This creates a brand value and goodwill of the company in the market.
• To maintain the consistency in payment of dividend: It may happen for a Company that, it has been declaring dividend from past eight to ten years but due to adverse market conditions, company is not able to declare dividend in current year due to inadequate profit. Further if the loss in the Company subsists, it will not be able to declare dividend.  In such scenario, investors of the company may start feeling that their investment is no longer safe in the Company since they are not declaring dividend. To mitigate such assumptions among investors, Company inspite of incurring losses in particular year, declares dividend which maintains the consistency in the Company
• To attract investment: Dividend declaration is generally an indicator of successful business and as mentioned earlier it creates goodwill of the company in the market. Prima facie, investors/lender may incline to provide financial assistance to a company instead of a non-dividend declaring company.

Types of Dividend

Final Dividend: Dividend declared by any Company at the Annual General Meeting of the Company is known as final dividend.

Corporates can ascertain its actual financial position in any year only after closing of its books of account at the end of financial year. After assessment of books of account, the Company takes decision for quantum of dividend.

Company at its Board Meeting then decides to declare dividend and approves for its recommendation at the Annual General Meeting.

Further at the Annual General Meeting of the Company, Members approve the declaration of dividend through ordinary resolution.

Interim Dividend: During any financial year, when company ascertains that it has earned sufficient profit on basis of quarter or half year financial results of the Company, it may decide to declare dividend even before the Annual General Meeting of the Company.  Such 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.

It is important to note that as per section 2(35) of Companies Act, 2013 “dividend” includes any interim dividend.

Although the term “Dividend” has been defined in the Act to the effect that it Includes Interim Dividend. The Act neither specifically defines the term Dividend nor makes any distinction between Interim and Final Dividend.

The term Final Dividend is more relevant in use for those Companies which often declares interim dividend and to distinguish it, the term final dividend is used.

Otherwise Companies in general use the term “Dividend” instead in “Final Dividend” for its declaration at Annual General Meeting.

Sources for payment of dividend

Companies generally distributes dividend out of profit of year in which dividend is declared or it may utilise the fund from free reserves of the Company. However as mentioned earlier Act also permits the payment of dividend even when the Company has not earned adequate profit to distribute dividend or incurred losses.

Section 123 of Companies Act, 2013 regulates the distribution of dividend and states the provision as regarding the sources from which Company may declare dividend and in what manner.

Below given is a summary of provisions for payment of dividend

Apart from above, Dividend can also be distributed out of money provided by the Government by virtue of guarantee given by the Government to any Company