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DIVIDEND
SECTION (123 - 127)
WHAT IS DIVIDEND?
INTRODUCTION
It is a distribution of a portion of profits earned and allocated as payable to the shareholders
2(35) Dividend includes any interim dividend.
MEANING 2(35)
PROCEDURE
FINAL DIVIDEND-
Firstly, dividend is recommended by the BOD (in Board’s Report)
Secondly, it is declared by members in AGM by passing ‘OR’ (dividend=ordinary business)
The members may reduce the rate or amount recommended by the Board, but they cannot increase it (Regulation 80 of Table F)
Example 2: The shareholders at an AGM unanimously passed a resolution for payment of dividend at a rate higher than that recommended by the directors. Discuss the validity of the resolution.
AOA companies usually contain provisions with regard to declaration of dividend on the pattern of regulations 80 to 85 of Table F to Schedule I of the Companies Act, 2013. Under regulation 80, the power to declare a dividend vests with the GM, But not even all the shareholders have the power to declare a dividend exceeding the amount recommended by the BOD.
REVOCATION
It is not possible for a company to revoke dividend once it is declared, it becomes a debt payable by the company and therefore cannot be revoked. Revocation of dividend is not a ground for non-payment.
However the following are the exceptions:
1) Where the declared dividend is ultra vires. If the dividend which was illegal has already been paid, the directors shall be personally liable to indemnify the company.
2) Where the company ceases to be a going concern after declaration.
TYPES
TYPES
INTERIM
FINAL
(dividend declared at AGM)
(dividend declared between
two AGMs)
PROPORTION
Dividend to be paid shall be in proportion to the amount paid up on shares.
Dividend shall not be paid on calls in advance (sec 51).
Example 1: AB Ltd. has issued equity shares having face value of ` 10 per share. The shares are currently quoting on the NSE at ` 250/- per share. The Company at its AGM held on 27.7.20 has declared a dividend of 20%. Mr. Shekar owns 1000 shares which he purchased at ` 300/- per share. What is the amount of dividend he will receive?
The dividend is to be calculated on Face Value i.e. Rs. 10/-. So dividend per share is 20% of` 10/-=Rs. 2/-per share. So Mr. Shekar will receive` 2 x 1000 shares = Rs. 2000/-.
DECLARATION OF DIVIDEND
SECTION 123
DECLARATION OF DIVIDEND
The fundamental rule is that dividend should be declared or paid only out of profits.
The sources are as follows –
• Profits of the company for that FY
• Profits of the company for any previous FY (undistributed)
• Money provided by CG or SG in pursuance of any guarantee given by them.
Note: The above profits shall be after providing depreciation as per SCH 2
Particulars for calculating dividend-
Profits
(-) Depreciation for that year
(-) Unabsorbed dep. for any PY
Profits available for appropriation
(-) Transfer to reserves
= Profits available for distribution of Dividend
SOURCE
In computing the profits, any amount representing unrealized gains ,notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded.
WHAT NOT
Example
Shreyas Mechanics Limited owns a plot of land which was purchased long before. As the property rates are going up, it is decided to revalue the plot at fair value which is moderately 10 times the original price, thus resulting in a revaluation profit of ` 20,00,000. The Board of Directors is keen to utilize this ` 20,00,000 along with free reserves of ` 24,00,000 for declaration of dividend at the forthcoming Annual General Meeting (AGM) to be held on 28th September, 2019. But according to Proviso to Section 123 (1) (a), the amount of ` 20,00,000 cannot be considered as it does not form part of Free Reserves as the same cannot be utilized towards declaration of dividend.
A company may transfer such percent of profit to reserve as it may deem fit (discretion, not mandatory).
RESERVE
Brix Shipyards Limited has earned a profit of ` 1,000 crores for the financial year 2018-19. It has proposed a dividend @ 8.75%. However, it does not intend to transfer any amount to the reserves out of the profits earned. Can the company do so?
Answer: The amount to be transferred to reserves out of profits for any financial year has been left to the discretion of the company. The company is free to transfer any part of its profits to reserves as it may deem fit or it may even not transfer any profits to reserve if it is deemed appropriate before the declaration of dividend. Thus, Brix Shipyards Limited is justified in its action if it does not
transfer any amount of profits to the reserves.
Question
Declaration out of reserves
RULE 3
If profits do not exist or they are inadequate, then dividend can be paid out of free reserves. Subject to condition of rule 3 has been fulfilled (Exception: 100% Government company)
RULE 3
Conditions to pay dividend out of accumulated profits:-
Q. Q. X Ltd. has a PUC of 200 lakhs & reserves of 240 lakhs. Loss for year ending 31st March 2020 is 30 lakhs. Dividend in preceding 3 FYs is-
Year 1- 8%
Year 2- 10%
Year 3- 12%
What is the maximum rate at which the company can declare dividend for CY.
(RD1+RD2+RD3)/3
CONDITION 1
Rate of dividend shall not exceed the average rates at which dividend was declared by it in the 3 years immediately preceding that year. However this condition is not applicable to a company which has not declared any dividend in each of the immediately preceding 3 FYs.
=< 1/10(PUSC+FR)
CONDITION 2
Amount paid shall not exceed 1/10th of the sum of its paid up capital and free reserves.
Amount drawn shall be first utilized to set off the losses incurred in the financial year in which dividend is declared.
BAL OF RESERVES >= 15% OF PUSC
CONDITION 3
Balance of the reserves shall not fall below 15% of its paid up capital.
ANSWER
Condition I:
8+10+12 Average rate = 10%
Therefore, the rate of dividend shall not exceed 10%.
10% of PUC i.e. 200 lakhs = 20 lakhs
Condition II:
PUC+ Free reserves (Assuming all reserves are free) = (200+240) Lakhs = 440 Lakhs
10% of (PUC+FR) = 0.1 * 440 = 44 Lakhs
Less: loss for the year = 30 Lakhs
Amount available = 44-30 = 14 Lakhs
Hence the quantum of dividend is further restricted to 14 lakhs.
Condition III:
Accumulated Reserves = 240 Lakhs
Proposed withdrawal declaration of dividend = 14 Lakhs
Balance of Reserves = 226 Lakhs
This is more than 15% of paid-up capital (i.e 15% of ` 200 Lakhs) i.e. ` 30 lakhs.
Thus, the company can declare a dividend of ` 14 lakhs i.e. at a rate of 7% on its
paid-up capital of ` 200 lakhs.
PROHIBITION OF DIVIDEND
PROHIBITION
- Failure to comply with Sec 73 and 74 will render the company with the inability to declare dividend (acceptance of deposits are prohibited as per these sections)
- SECTION 8 company cannot pay dividend
TO WHOM AND HOW
The Board of Directors of Som Mechanical Toys Limited proposed a dividend at 12% on equity shares for the financial year 2019-20. The same was approved at the Annual General Meeting of the company held on 25th June, 2020.
Mr. Nitin Jha was holding 1,000 equity shares as on 31st March, 2020, but the same were transferred by him to Mr. Raj, whose name was registered on 20th April, 2020 in the Register of Members. State as to who will be entitled to the dividend declared by the company.
Question
Answer: According to section 123(5), dividend shall be payable only to the registered shareholder of the shares or to his order or to his banker. Facts in the given case state that Mr. Nitin Jha, the holder of equity shares transferred his shares to Mr. Raj whose name was registered on 20th April, 2020. Since, Mr. Raj became the registered shareholder before the declaration of the dividend in the Annual General Meeting of the company held on 25th June, 2020, he will be entitled to the dividend.
SEPARATE A/C
The amount declared as dividend shall be deposited in a separate A/C in a scheduled bank within 5 days of declaration of dividend and after transfer it cannot be used for any other purpose (Exception: 100% Government company)
Example: The authorised and paid-up share capital of Avantika Ayurvedic Products Limited is Rs. 50.00 lacs divided into 5,00,000 equity shares of Rs. 10 each. At its Annual General Meeting (AGM) held on 24th September, 2019, the company declared a dividend of Rs. 2 per share by passing an ordinary resolution. The amount of dividend must be deposited in a scheduled bank in a separate account latest by 29th September, 2019.
SEPARATE A/C
INTERIM DIVIDEND
- declared by the Board
- during FY or at any time during the period from closure of FY till holding of the AGM
- The declaration is done out of profits before the final passing of the accounts so effectively, it is declared and paid between two AGMs.
- regularized at the ensuing AGM by members.
- Sources
- surplus in P/L
- Profits of FY in which such interim dividend is sought to be declared.
- - Profits generated in the FY till the quarter preceding the date of declaration of the interim dividend.
- in case the company has incurred loss during the current FY 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 immediately preceding three FYs
-(RD1+RD2+RD3)/3
UNPAID DIVIDEND A/C
SECTION 124
UNPAID/UNCLAIMED DIVIDEND A/C
• The company shall transfer all such shares in respect of which dividend has not been claimed for 7 years. However, if it claimed even in any one of the year out of the 7 years, then shares cannot be transferred.
• Such transferred shares can be claimed back by filing an application to the company.
WHAT ABOUT THE SHARES?
yeh shares mujhe dede !!!
SECTION 125
IEPF
ESTABLISHMENT OF FUND BY CG
1
SOURCES OF FUND
- Amount in IEPF u/s 205(c) of 1956
- unpaid dividend a/c of sec 124.
- application money received and deposits matured and debenture matured and redemption of preference shares remaining unpaid for a period of 7 years .
- grants and donations by CG, SG and local bodies.
- income received on the investments made from the fund.
2
UTILIZATION OF FUND
- promoting awareness among investors
- educating the investors
- protecting the interests of investors
- refunds in respect of unclaimed dividend, matured deposits, debentures, application money
- distribution among persons who have suffered losses.
3
APPLICATION TO THE AUTHORITY FOR PAYMENT
any person claiming to be entitled to the amount may apply to the authority for payment of money claimed
4
CONSTITUTION OF AUTHORITY
5
CG shall constitute an authority by notification for administration of fund-
- Chairperson
- other members,not exceeding 7; and
- CEO.
AUTHORITY TO WORK IN CONSULTATION WITH CAG OF INDIA
6
authority to maintain separate accounts & relevant records in relation to funds after consultation with CAG
RIGHT TO SPEND THE MONEY
7
authority is competent to spend money out of fund for carrying out the objects i.e. utilization of fund.
AUDIT OF FUND
accounts shall be audited by CAG at intervals.
audited accounts + audit report to be forwarded annually by authority to CG.
8
PREPARATION OF ANNUAL REPORT
9
- Authority shall prepare in each FY giving full account of activities and forward it to CG.
- CG shall lay down the annual report + audit report before each House of Parliament.
PENALTY
COMPANY - 5 LAKH TO 25 LAKH
OFFICER IN DEFAULT - 1 LAKH TO 5 LAKH
10
RIGHT TO DIVIDEND, RIGHTS SHARES AND BONUS SHARES TO BE HELD IN ABEYANCE
SECTION 126
- in case any instrument of transfer of shares has been delivered by a shareholder for registration and the transfer has not been registered, such company shall take the following steps:
- If any bonus shares (sec 63), right issues (sec 62) shares and dividend has been paid during such period, it shall be t/f to unpaid dividend A/c & shall be kept in abeyance.
- However, if the registered shareholder has authorized the company in writing to transfer the dividend in the name of transferee, then it shall not be kept in abeyance and paid to transferee.
RIGHT HELD IN ABEYANCE
SECTION 127
PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDEND
TIME LIMIT FOR PAYMENT OF DIVIDEND
Time Limit Dividend shall be paid within 30 days from date of declaration (Even if dividend warrants have been issued, it would be sufficient compliance)
• When there is no default of the company.
Punishment • Company to pay simple interest @18% per annum to that shareholder.
• Officer who is in default imprisonment up to 2 years and fine of 1000 per day.