stock-dividend

Dividend: Dividend means that portion of the profit received by a shareholder from the company’s net profit which is available for distribution among the members.

Definition of dividend as per Secretarial Standards -3 (SS-3) issued by Institute of Company Secretaries of India (ICSI):

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

Section 2(35) of the Companies Act, 2013 defines dividend as “dividend” includes any interim dividend”.

  1. Kinds of Dividend
  • Interim Dividend – means the Dividend declared by the Board of Directors;
  • Final Dividend – means the Dividend recommended by the Board of Directors and declared by the Members at an Annual General Meeting;
  • Preference share dividend – dividend that is declared for preference shareholders.

Note: Preference shareholder means a holder of such shares which carry a preferential right, in respect of payment of Dividend, of a fixed amount or an amount calculated at a fixed rate and in respect of capital, to repayment of capital.

  1. Source of payment of dividend

Section 123(1)(a) of the Companies Act, 2013 specifies that dividend can be paid out of:

  • Profit (profit after tax) of the current year after providing for depreciation;
  • Profit (profit of tax) of the previous financial year or years after providing for depreciation for each previous year;

Note: Depreciation shall be provided in accordance with the provisions of Schedule II to the Companies Act, 2013 (Section 123(2).

  • Out of the money provided by Central or State Government for payment of dividend in pursuance of guarantee given by the Central or State Government, if any.

In computing profits any amount representing:

  • unrealized gains;
  • notional gains or
  • revaluation of assets and any change in carrying an amount of an asset or of a liability on the measurement of the asset or the liability at fair value

shall be excluded [Proviso to Section 123(1)(a)].

  1. Important points
  • A company may pay dividend in proportion to the paid-up amount on each share, subject to authorization in Articles of Association (Section 51 of the Companies Act, 2013);
  • A company may pay the dividend only from free reserves, not from any other reserves (Third Proviso to Section 123(1));

Note: SS-3 recommends that dividend shall not be declared out of:

  • Securities Premium Account; or
  • Capital Redemption Reserve; or
  • Revaluation Reserve or Amalgamation Reserve; or
  • Profits on re-issue of forfeited shares or out of profits earned prior to incorporation of the company.
  • A company may not declare dividend unless losses for the previous financial years and depreciation which is not provided in the previous financial year(s) is set off against profit of the company for the current year (Fourth Proviso to Section 123(1));
  • Before the declaration of dividend, a company may transfer a portion from the profit to the reserves of the company. The company is free to decide the percentage for such transfer to the reserve [First Proviso to Section 123(1).
  • A company shall not declare dividend on its equity shares if it has defaulted in repayment of deposits or interest thereon. It can declare dividend if the default is made good.

Note: SS-3 recommends that a company shall not declare dividend if it has defaulted in:

  • Redemption of debentures or payment of interest thereon or creation of debenture redemption reserve;
  • Redemption of preference shares or creation of capital redemption reserve;
  • Payment of dividend declared in the current or previous financial year(s), or
  • Repayment of any term loan to a bank or financial institution or interest thereon, till such time the default is subsisting.
  • The dividend shall be paid to the shareholder or to his banker in cash not otherwise (Section 123(5));
  • Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder (First Proviso to Section 123(5)).
  1. Procedure for declaration of Dividend
  • Calling a board meeting and deciding the amount of dividend to be proposed in the general meeting;
  • Notice of general meeting;
  • Taking approval of members by passing an ordinary resolution;
  • If payment of dividend is approved in general meeting, then dividend shall be paid within 30 days from the date of resolution.