The Dividend is paid as per provisions of companies act 2013 and companies (declaration and payment of dividend) rules, 2014. It is paid to shareholder for their investment in shares of company. It can be paid annually once or during the year. The rate of dividend is not fixed it depends on the profitability of the company. While paying dividend, a company need to check various provisions and rules of companies act 2013 and in addition to that correct accounting must be done for dividend. In this article I have presented how to pay dividend under companies act 2013.
What is the meaning of Dividend?
Dividend is defined u/s 2(35) of the companies act 2013. It means the profit of a company which is not retained by the business and is distributed among the shareholders (owners of business) in proportion to the amount paid-up on the shares held by them.
When dividend is paid?
Dividend may be paid when books of account get final and company have distributable profit. In this way dividend is paid annually for a financial year. Later it is approved by shareholders in annual general meeting on recommendation of board of directors. Dividend can also be paid during the year which is called interim dividend.
Can non-profit company pay dividend?
Non-profit companies are licensed u/s 8 of the act. These companies are prohibited by their constitution from paying any dividend to its members. These companies can only apply the profits in promoting the objects of the company. NGO & charitable institutions comes under this category.
How dividend is paid under the companies act 2013?
Section 51 provides that board of directors of a company can pay dividends proportionately i.e. in proportion to the amount of capital paid by the shareholders i.e. pro rata. Pro rata means in proportion or proportionately according to a certain rate. But this clause should be mentioned in articles of association. However in the case of preference shares dividend is always paid at a fixed rate.
How many types of dividend declared by the company?
A company can declare two types of dividend –
- Final dividend: It is declared by the members of the company at AGM of the company on the rate which is recommended by the directors in accordance with the articles of association of the company.
- Interim dividend: It is declared by the directors at any time before the closure of the financial year.
Is dividend recommended need to be mentioned in board report?
Section 134(3)(k) provides that board of directors must state in the board report the amount of dividend which it recommends to be paid.
The dividend so mentioned must be declared at the annual general meeting of the company. This is an item of ordinary business to be transacted at every annual general meeting. However this does not apply to interim dividend.
Can a company declare dividend from last year profits?
Yes a company can declare dividend from profit of any financial year after providing for depreciation in accordance with section 123(2) of the Act.
Should a company need to transfer profits to reserve?
A company may before the declaration of any dividend in any financial year transfer such percentage of its profits as it may find appropriate to the reserves of the company.
But if a company has inadequate or absence of profits in any year and the company wants to declare dividend out of the any profits earned by it in any previous financial years, then such declaration of dividend shall be made in accordance with the companies (declaration and payment of dividend) rules, 2014.
Which companies are probihibited from declare of dividend ?
A company which fails to comply with section 73 and 74 of the companies act shall not declare any dividend on its equity shares till such default continues.
- Section 73 provides of prohibition on acceptance of deposits from public.
- Section 74 provides of repayment of deposits etc. accepted before commencement of the act.
What are the timeline for payment of dividend?
The amount of dividend, final as well as interim shall be deposited in a separate bank account within five days from the date of dividend declaration.
Dividend has to be paid within 30 days from the date of declaration.
If dividend has not been paid or claimed within 30 days from the date of its declaration then the company is required to transfer, within 7 days, the unpaid or unclaimed to a special account which is to be opened by the company in a scheduled bank to be called unpaid dividend account.
If any money remains in unpaid dividend account of a company unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred to the investor education and protection fund. The company shall file a form DIV-5 to the authority constituted under the act to administer the fund and such authority shall issue a receipt to the company as evidence of such transfer.
What is the interest rate for late payment of dividend?
Where a dividend has not been paid by the company within 30 days from the date of declaration every director shall if he is knowingly involve in the default be punishable with imprisonment for a term which may extend to 2 years and shall also be liable to fine of Rs.1000 for every day during which default continues and the company shall be liable to pay interest @18% per annum during the period for which such default continues.
If the company delays the transfer of the unpaid/unclaimed dividend amount to the unpaid dividend account it shall pay interest @ 12% p.a.
Can dividend be paid in cash?
Yes dividend can be paid by any mode. If it is paid by cheque or warrant, then it needs to send to registered address of the shareholder who is entitled to the payment of the dividend or to his order or in any electronic mode sent to his banker.
What is the procedure for declaration and payment of final dividend?
Notice for board meeting – Issue notice for holding a meeting of the board of directors of the company to consider the matter in accordance with section 173 of the Act. It must state time, date and venue of the meeting and details of the business to be transacted thereat and be sent to all the directors for the time being in India and to other directors at their normal address in India by hand delivery, or by post or by electronic means.
In case of listed companies, they need to notify stock exchange in which company’s securities are listed for two working days at least, in advance of the meeting date of its board of directors at which the recommendation of final dividend is to be considered and after the meeting will intimate to the stock exchanges where the company is listed about the declaration of dividend within 15 minutes of the closure of the board meeting.
Hold board meeting– In the board meeting following resolutions should be passed:
- Approving the annual accounts (balance sheet and profit and loss account of the company for the year ended).
- Recommending the quantum of final dividend to be declared at the next AGM and the source of funds for the payment thereof and amount to be transferred from the current profits to reserve as the board may deem appropriate.
Notice for annual general meeting – Fixing time, date and venue for holding the next annual general meeting of the company for declaration of dividend recommended by the board.
Closure of the register of members – Determining the date of closure of the register of members and the share transfer register of company in accordance to companies act 2013 (section 91) and the signed listing agreements are listed which is signed by company . In the case of listed companies, commencement of closure of the transfer books date should not be occurred after a holiday. It is advisable before fixing the dates consult with the regional stock exchange in advance and after that fix closure of books dates, so that date should not be clashed with clearance programme in stock exchange.
Transfer of profits to reserve – Ensure that the required percentage of profits as decided by the board is transferred to company’s reserves.
In case of listed company publish notice of books closure in a newspaper circulating in the district in which the registered office of the company is situated at least 7 days before the date of commencement of book closure. Further:
To give notice of books closure to the stock exchange at least 7 working days as the stock exchange may prescribe before the closure of transfer books or record date, stating the dates of closure of its transfer books/record date.
To send the copies of notice stating the date of closure of the register of transfers or record date, and mentioning the purpose for which the register is closed or the record date is fixed to other recognized stock exchanges.
Time gap between two book closures and record date would be at least 30 days.
To declare and disclose the dividend on per share basis only.
Close the register of members and the share transfer register of the company.
Mention in director report – The amount of dividend as recommended by the board of directors shall be shown in the director’s report.
Board meeting for transfer – A board meeting to be conducted for approving registration of transfer of the shares of the company which have been lodged with the company prior to the commencement of book closure.
Hold the annual general meeting – Hold the annual general meeting and pass an ordinary resolution declaring the payment of dividend to the shareholders of the company as per recommendation of the board. The final dividend cannot be higher than the one recommended by the board. However, they may declare the final dividend at a rate lower tfcahan the one recommended by the board. The following should be followed in this regard:
- A company can declare a dividend for a financial year at an annual general meeting once, It is beyond the powers of the company to declare further dividend for the same FY at an extraordinary general meeting although the companies act does not prohibit the declaration of a dividend at a general meeting other than an annual general meeting.
- The profits of a company is divided in proportion to the number of shares each shareholder holds
Dividend statement – Prepare a statement of dividend in respect of each shareholder.
Tax on dividend – Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
Separate bank account – A separate bank account is opened for dividend payment and transfer the total amount of dividend payable in this account within 5 days of declaration of dividend.
Issue and share transfer agent – For dividend payment, a listed company should use mandatorily either directly or through its registrars to an issue and share transfer agents, any RBI approved electronic mode of payment such as ECS, NEFT etc.
Dividend warrants – Make arrangements with the bank and in collaboration with other banks if required for dividend warrants payment at par. The bank should send Instructions to all its specified branches that dividend should be paid at par.
RBI approval not required – RBI approval is not required for dividend payment to shareholders abroad in case of investment made on repatriation basis.
Unpaid dividend account – Where transfer instrument has been received by company before book closure but registration of transfer of such shares has not been done when the dividend warrants were posted then the keep the amount of dividend in special a/c called unpaid dividend account opened u/s 124 unless the registered holder of these shares authorizes company in writing to pay dividend to the transferee specified in the said instrument of transfer. Arrange for transfer of unpaid or unclaimed dividend to unpaid dividend account (a special account) within seven days after expiry of the period of 30 days of declaration of final dividend. Identify the unclaimed amounts as referred to in section 124(1) of the act and separately furnish a prescribed form and upload on company’s own website or other website, specified by the government in this regard, in 90 days of making any transfer to unpaid dividend account.
Dividend warrant dispatch – Dispatch dividend warrants within 30 days of the declaration of dividend. Dividend warrant is dispatched to the first named shareholder if any joint shareholders.
Investor education and protection fund – Transfer unpaid dividend amount to investor education and protection fund after the expiry of 7 years from the date of transfer to unpaid dividend a/c. While transferring to the fund should separately furnish a form DIV-5 with the authority constituted to administer the fund of companies (declaration and payment of dividend) rules, 2014 and get a receipt as a proof of such transfer from the authority.
Company shall also transfer all the shares in the name of investor education and protection fund on which unpaid or unclaimed dividend has been already transferred to IEPF and any lawful claimant of those shares/dividend from IEPF as per rules as mentioned by the central government.
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Hello Sir
I want to learn how to calculate depreciation as per companies act.
Hi, check this link https://www.investsaver.com/depreciation-calculation-as-per-companies-act-2013/
Hope it will help.
Nice Article !
Dear Sir,
Is it mandatory to pay dividend to shareholders ?
Another scenario wherein, company makes profit but cash flow is not viable to pay out dividend, can the company forego the dividend ?
Whether accumulated losses needs to be set-off with current profit to determine the dividend payment ?