(12.12.9) Dividends

All the profits of a company are not available for distribution amongst the shareholders. Only the divisible profits which are determined in accordance with legal provisions are available for distribution. Some of the more important provisions regarding dividends are:

  (1)  No dividend shall be declared or paid for any financial year except out of profit of the current year or of the previous years.

  (2)  The company must provide for depreciation (including arrears of depreciation- as per Department of Company Affairs clarification)before declaring dividends.

  (3)  Dividends can be paid in cash only. (Payment of dividend by cheque or dividend warrant amounts to payment of dividend in cash). However, capitalization of profits or reserves for the purpose of issuing fully paid-up bonus shares is allowed.

  (4)  Capital profits can also be distributed by way of dividend but only if (i) the capital profits are realised; (ii) the capital profits remain after the revaluation of all the assets; and (iii) the distribution of a dividend of such profits is permitted by the company's articles.

  (5)  The company must transfer from the profits to its reserves the following minimum amount; before declaring dividends, at the rates mentioned below:

Per cent Rate of dividend             proposed.	Minimum percentage of profits             to be transferred to reserves
10 per cent to 12.5 per cent,             12.5 per cent to 15 per cent.             15 per cent to 20 per cent.                         20 per’ cent and above.	2.5 per cent.             5 per cent.             7.5 per cent.             10 per cent.

A company may transfer a higher percentage of profits (i.e., more than 10 per cent) voluntarily to the reserves in accordance with the Rules framed by the Central Government (s.205). However, no transfer to reserves shall be required if the dividend proposed is less than 10 per cent (as per clarification).

  (6)  In case of inadequacy or absence of profits in any yea1, the company may declare dividends out of previous year's accumulated profits and reserves in accordance with Rules framed by the Central Government.

The Rules framed by the Central Government in this regard, called Companies (Declaration of Dividends out of Reserves) Rules, 1975,inter alia, provide as follows:

  (i)  The rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the five years immediately preceding that year or 10 per cent of its paid-up capital, whichever is less.

  (ii)  The total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to 1/10 ^th of the sum of its paid-up capital and free reserves

  (iii)  The amount so drawn from general reserves shall first be utilised to set-off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared.

  (iv)  The balance of reserves after such drawal shall not below 15 per cent of its paid-up share capital.

  (7)  The rate of dividend is recommended by the Board of Directors and is declared by the shareholders in the AGM. The shareholders cannot insist on either declaration of dividend or on increasing the rate recommended by the Board of Directors.

  (8)  The dividends must be paid or the warrants in respect thereof posted to the shareholders, within 30 days from the date of declaration (s.207).

The total amount of dividends unpaid or unclaimed should, within seven days from the date of the expiry of the said period of 42 days, be kept in a separate special account with any scheduled bank which would be called the Unpaid Dividend Account of company Limited/Private Limited. The payment of dividends should then be made out of this Account [s.205 A(1)].

All the unclaimed dividends lying to the credit of the said Dividend Account for a period of more than three years will have to be transferred to a "General Revenue Account of the Central Government". The shareholders will have to prefer their claims for arrears of dividends for more than three years to the Central Government [s.205-4(5)].

  (9)  section 206, provides for payment of dividend and allotment of bonus and right shares to the transferee on a mandate in this regard from the transferor. But in the absence of such a mandate, it is obligatory on the part of the company to transfer the dividends accruing on such shares to the Unpaid Dividend Account and to keep in abeyance offer to rights or bonus shares till the title to the shares is decided.

  (10)  The articles may also empower the directors to declare interim dividends. An interim dividend is that dividend which is declared by the Board of Directors At any time in between two AGMs. The directors should seek the opinion of auditors Before declaring any interim dividend, as it must be paid out of the profits of the company, otherwise it may amount to payment of dividend out of capita l which is not allowed.

(11) section 205 lays down the general rule that dividends can be paid out of profits only and not out of capital. An exception to this rule is, however, constituted by s.208. It provides that where shares are issued to raise money to defray the cost of works of building or plant which cannot be made profitable for a long period, the company may (i) pay interest @4 per cent on the amount of capital paid-up in respect of such shares, if the articles of the company allow and previous sanction of the Central Government is obtained; and (ii) charge such interest to capital as part of the cost of works,  building, or plant.

  (12)  Section 205 delinks the depreciation from that under the Income-tax Act. The companies must provide for depreciation at rates as given in Schedule XIV to the

 Companies Act. Depreciation at rates higher than Schedule XIV may, however, be provided. Department of Company Affairs has clarified that Schedule XIV rates represent the minimum rates at which the companies should provide depreciation.

  (13)  The companies (Amendment) Act,2000 has introduced certain changes in s. 205, 205 A and 207 . Also for the first time companies (Amendment) Act, 2000 has defined the term 'dividend'. It includes any interm dividend. [s.2 (14)]

The board of directors may declare interim dividend and the amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend (s. 205). The dividend is required to be paid (within 30 days from the date of declaration) in cash, by cheque or warrant or bank draft (s. 2054). For such non-Payment within the prescribed period, every director of the company shall, if he is knowingly a party to the default, be punishable with simple imprisonment upto 3 years and also five of Rs 1000 for every day during which the default continues. Also the company shall be liable to pay simple interest at the rate of 18 per cent per annum during the period the default continues (s.207).

All the provisions of sections 205,205A, 20,206a and 207 shall be applicable to interim dividend as well (s.205).