Declaration of Dividend

Meaning Dividend is the return on the investment made in the shares (equity or preference) and is paid out of the profits of the company. The shareholders being the owners of the company are entitled to get their share of profit in the form of dividend. While the rate of dividend in case of preference shares is fixed, the dividend on equity shares varies from year to year depending upon the profit for the year and the requirement to plough back profits. Dividend rate is used for valuation of share and is an indicator of performance of the company. Legal Regime Section 205 of the Act regulates the declaration of dividend and payment thereof. All the companies which have share capital other than section 25 companies and make profit are bound by law to declare and distribute dividends. As per Section 205 of the Companies Act, 1956, a dividend (including interim dividend) can be paid out of current profits or profits accumulated of earlier years. However, depreciation for the entire year has to be provided before a dividend is declared or paid. For this purpose, the Board needs to approve the provisional financial results (unaudited) and a working of the profits available for distribution as dividend, post providing for depreciation for the full year and amount required to be transferred to reserves as per the Companies.[1] Sections 205 A, B and C deal with some other aspects of distribution of dividend such as establishment of Investor Education and Protection Fund, Payment of unpaid and unclaimed dividend etc. Separate bank account needs to be opened and the amount of dividend will have to be transferred to that account. Dividend will have to be remitted within 30 days of declaration. The other procedure of record date/book closure, payment of tax on dividend within 7 days of declaration, etc. will have to be complied with. Dividend is also payable out of divisible profits or out of moneys provided by the Central or any State Government for the payment of dividend in pursuance of a guarantee given by that Government. Mode Of Declaration Dividend can be declared out of four sources namely: Firstly, it can be declared out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of the Act or Secondly, out of the profit of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or Thirdly, out of both or Lastly, out of the money provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government.   Process involved in declaration and distribution of dividend 1)      Computation of depreciation for dividend purpose Depreciation shall be provided either at the rate specified in Schedule XIV or any other basis approved by the Central Government. 2)      Transfer of Profits to Reserve Before declaring the dividend, some part of the profit has to be compulsorily transferred to the Reserves of the Company. This amount is based on the proposed rate of dividend. However voluntary transfer of higher percentage to reserves is permitted subject to the conditions stipulated in the Act. 3)      Board Resolution Board resolution is the most important step for declaration of dividends. Until and unless the Board recommends the payment of dividend, the same cannot be declared at an Annual General Meeting. 4)      Annual General Meeting The item pertaining to declaration of dividend should be included in the agenda of the notice for AGM which should be sent to members as well as the creditors. An ordinary resolution is required for declaration of dividend. However shareholders cannot increase the amount of dividend recommended by the Board. 5)      Time Limit for payment of Dividend The dividend account should be opened with the company’s bankers and the dividend amount payable should be transferred to that account. Within 30 days of the AGM the dividend should be sent to the shareholders. 6)      Transfer to unpaid dividend account Within 7 days from the date of expiry of 30 days from the date of dividend declaration, the amount remaining unpaid or unclaimed should be transferred to the ‘unpaid dividend account’ to be opened in a scheduled Bank. Dividend which remains unpaid or unclaimed for a period of 7 years shall be transferred to the Investor Education and Protection Fund within a period of 30 days of its becoming due for the transfer. Dividend not to be paid a. Where it could not be paid because of operation of any law; b. Where a shareholder has given direction to the company regarding payment of dividend and those directions could not be complied with; c. Where there is a dispute regarding the right to receive the dividend; d. Where the dividend has been lawfully adjusted by the company against any sum due from the shareholders; and e. Where the dividend could not be paid not due to any default on part of the company. Tax Limit In addition to the income tax chargeable in respect of the total income of a company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) and also whether paid out of current or accumulated profits is charged with additional tax at the rate of 15 %. The liability of payment of tax is on the principle officer of the company. The tax has to be paid within 14 days of declaration, distribution or payment of any dividend whichever is the earliest. The tax on distributed profit paid by the Company would be treated as the final payment of tax in respect of dividend. Special Provisions relating to Listed Company In addition to the steps mentioned above the listed companies also have to advance intimation regarding the venue of the Board Meeting to the stock exchange where the securities are listed. Within 15 minutes of the closure of the Board meeting, intimation is also to be sent to the stock exchange containing the particulars of dividend. Details regarding the general meeting for the declaration of dividend are also to be given to the Stock Exchange.

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