THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER VIII

Declaration and Payment of Dividend

Sections 123–127

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

Sources of Dividend • Interim • Unpaid Dividend • IEPF

— Enriched with landmark judgments and illustrative case law —

Chapter VIII — Declaration and Payment of Dividend

A dividend is the portion of profit that a company returns to its shareholders as a reward for the risk capital they have supplied. The word itself is derived from the Latin 'dividendum' — that which is to be divided. Chapter VIII of the Companies Act, 2013 (Sections 123 to 127) contains a compact but exam-heavy code that regulates the sources, timing, and manner of payment of dividend, the mandatory transfer to reserves, and the punishment for failure to pay declared dividend.

Dividend is defined in Section 2(35) of the Act to include any 'interim dividend'. It is paid in proportion to the amount paid up on the shares held by each shareholder.

Section 123 — Declaration of Dividend

(1) Out of What Profits can Dividend be Paid?

No dividend shall be declared or paid by a company for any financial year except:

1. Out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2);Out of the profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed; orOut of both (a) and (b) above; orOut of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government.

A company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company. (The previous mandatory transfer under the 1956 Act has now been made voluntary.)

In case of inadequacy or absence of profits in any year, a company may declare dividend out of the free reserves accumulated in previous years — subject to compliance with the conditions prescribed by Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.

Rule 3 — Conditions for Declaration out of Free Reserves

• The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year.
• The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
• The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared, before any dividend in respect of equity shares is declared.
• The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid-up share capital as appearing in the latest audited financial statement.

(2) Depreciation

Depreciation shall be provided in accordance with the provisions of Schedule II. A company shall not declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.

(3) Interim Dividend

The Board of Directors of a company may declare interim dividend during any financial year or any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account and out of profits of the financial year for which such interim dividend is sought to be declared. In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

(4) Deposit of Dividend Amount — Separate Bank Account

The amount of dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

(5) Payment in Cash or Electronic Mode Only

No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash. The expression 'in cash' includes payment by cheque or warrant or in any electronic mode. Nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company.

(6) No Default in Repayment

A company which fails to comply with the provisions of Sections 73 (deposits from members) and 74 (repayment of deposits accepted before commencement of the Act) shall not, so long as such failure continues, declare any dividend on its equity shares.

Section 124 — Unpaid Dividend Account

Where a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank, to be called the Unpaid Dividend Account.

• The company shall, within a period of ninety days of making any transfer of an amount to the Unpaid Dividend Account, prepare a statement containing the names, their last known addresses, and the unpaid dividend to be paid to each person, and place it on the company's website and also on any other website approved by the Central Government.
• If any default is made in transferring the amount, the company shall pay interest at 12% per annum from the date of such default.
• Any money transferred to the Unpaid Dividend Account which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along with interest accrued, to the Investor Education and Protection Fund established under Section 125.
• All shares in respect of which dividend has not been paid or claimed for seven consecutive years or more shall also be transferred by the company in the name of Investor Education and Protection Fund.

Section 125 — Investor Education and Protection Fund (IEPF)

The Central Government has established a Fund called the Investor Education and Protection Fund. The following amounts are credited to the Fund:

• The amount given by the Central Government by way of grants;
• Donations given to the Fund;
• The amount in the Unpaid Dividend Account transferred under Section 124;
• The amount in the general revenue account of the Central Government which had been transferred to that account under sub-section (5) of section 205A of the 1956 Act;
• Amount lying in the IEPF under Section 205C of the 1956 Act;
• The interest or other income received out of investments made from the Fund;
• The amount received under sub-section (4) of section 38 — disgorgement of profits from personation;
• Application money received by companies for allotment of any securities and due for refund;
• Matured deposits and debentures with companies other than banking companies;
• Interest accrued on the amounts referred to above;
• Sale proceeds of fractional shares arising out of issuance of bonus shares, merger, and amalgamation for seven or more years.

The Fund shall be utilised for the refund of unclaimed dividends, matured deposits, matured debentures, and the application money due for refund, along with interest thereon; promotion of investors' education, awareness, and protection; distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, etc.

Section 126 — Right to Dividend, Rights Shares and Bonus Shares to be held in Abeyance Pending Registration of Transfer of Shares

Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company, it shall (notwithstanding anything contained in any other provision of this Act):

• Transfer the dividend in relation to such shares to the Unpaid Dividend Account unless the company is authorised by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer; and
• Keep in abeyance in relation to such shares, any offer of rights shares under clause (a) of sub-section (1) of section 62 and any issue of fully paid-up bonus shares in pursuance of first proviso to sub-section (5) of section 123.

Section 127 — Punishment for Failure to Distribute Dividend

Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend:

• Every director of the company, if he is knowingly a party to the default, shall be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues;
• The company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.

No offence is committed in the following circumstances (proviso to Section 127):

1. Where the dividend could not be paid by reason of the operation of any law;Where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;Where there is a dispute regarding the right to receive the dividend;Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; orWhere, for any other reason, 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.