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Posted on February 17, 2022
Distribution of Dividend by a Domestic Company as per Companies Act 2013
Dividend can be defined as the sum of money which is paid by a company to its shareholders, out of the profits which are earned or made by the company utilizing the shareholder’s funds or investment in the same. The company would declare and pay the dividend to its shareholders based on the number of shares which are held by each of them and should be authorized by the Articles of Association (AOA).
As per the Companies Act, we can say that there are three major sources from which the dividend will be paid by a company and this includes:
- Current Years Profits earned by company,
- Accumulated or Undistributed Profits about the previous years,
- Out of the money which is paid by the Government i.e., Central or State Government for the payment of dividend by the company to its shareholders, in pursuance of guarantee which was given by the Government for paying such dividend.
Payment of Dividend
A company can declare and pay such dividends only in the form of cash and not in any other form. The same can be paid in the form of a cheque, warrant, or other electronic mode to the shareholders who are entitled to receive the same.
It is to be noted that in the case of a company that has defaulted compliance to sections 73 and 74 of Companies Act, cannot declare a dividend and would be barred from doing such act. Section 73 and 74 of the Companies Act is dealing with the acceptance and repayment of deposits.
What is an Interim Dividend?
A company may declare dividends out of the profits earned during the year or the accumulated or undistributed profits of the company during the interim period of a financial year or any time during the period between the closure of the financial year and holding of the annual general meeting.
And in case the company has made a loss during the current financial year up to the end of the quarter which is immediately preceding the date on which the interim dividend was declared, then it is to be noted that such interim dividend shall not be declared at a rate which is higher than the average dividends declared by the company during the 3 financial years which are immediately preceding the current or relevant financial years.
It should also be noted that, as per the Companies Act definition given for dividend, the same includes, interim dividend which makes it clear that all the provisions of the said Act which is applicable to the final dividend shall be applicable to the interim dividend as well.
Procedure for Declaring and Paying Dividend
- The company holds a meeting of the Board of Directors and decides the amount of dividend that would be declared and paid during the year or on an interim basis.
- Company then issues a notice of the General Meeting, stating the intention to declare dividends for its shareholders.
- Then the General Meeting will be conducted and a resolution declaring dividend will be passed along with record date.
It should be noted that, in case of the declaration of annual dividend, the members or shareholders who were considered to be members of the company as on date of the annual general meeting (AGM) shall be held as eligible for receiving the dividend as the same is accepted by those shareholders who are the members of the company on the day or date on which the AGM was held.
While Listed Companies are required to inform the Stock Exchanges on which their shares are listed, the progress of closing of its Register of Members for the payment of the dividend declared during the annual general meeting for the determination of names of shareholders entitled to the dividend.
- Now the dividends shall be paid to the shareholders on the basis of the resolution passed with regard to the same.
- Separate bank account should be opened by the company, and such amount of dividend which is payable as per the declared amount shall be credited to the said account within 5 days of such declaration. And such arrangements must be made with this bank along with such other banks as required, for dispatching the dividend warrants at par.
- Dispatch the dividend warrants within a period of 30 days from the date of such declaration of dividend. In case of any shares held jointly, the payment of the same should be done in the name of the first shareholder.
- If any dividend is remaining as unpaid or unclaimed, the company is required to transfer the same to a special account named, “Unpaid dividend Account” within 7 days after expiry of the period of 30 days of declaration of the final dividend.
- The unpaid dividend amount should be transferred to the Investor Education and Protection Fund (IEPE) after the expiry of seven years from the date of transfer of the unpaid dividend account maintained by the company.
Unpaid Dividend Account
Where the company declares dividend and such dividend stands unpaid or unclaimed by the shareholders for a period of 30 days from the date of such declaration, then such amount shall be transferred to Unpaid Dividend Account within 7 days from the date of expiry of the pre-stipulated 30 days.
And then, within a period of 90 days, a statement containing,
– address and
– amount of unpaid dividend
is required to be prepared and to be placed on the website of the company, if any, and any other website as approved by the Central Government.
In case the company has committed any default in transferring the amount, to the Unpaid Dividend Account, then the company shall be held liable to pay interest at rate of 12% p.a. from the date of commitment of such default. And if such unpaid or unclaimed amount lies as such for 7 consecutive years or more then the company shall transfer the same to the Investor Education and Protection Fund.
Penalty for Non-Payment of Declared Dividend
If a dividend declared by a company has not been paid within 30 days from the date of declaration, to any shareholder, then;
- The Directors of the company are punishable with imprisonment which may widen to 2 years and with a fine which will not be less than INR 1,000 for every day during which such default continues.
- The company will be liable to pay simple interest at the rate of 18 % per annum during the period for which such delay in dividend payment continues.
There are certain exceptions to this case and this shall not be deemed to have been committed:
– The dividend could not be paid due to the enforcing of any law;
– A shareholder of the company has given special and particular directions to the company regarding the payment of the dividend. And these directions cannot be complied with by the company, which has been duly communicated to him;
– There is a dispute existing regarding the right to receive the dividend;
– The dividend has been lawfully adjusted by the company against any sum which the shareholder holds as due to it;
– Such other reason, which caused the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.