Meaning of Dividend as per Companies Act, 2013

Section 2(35) of the Companies Act, 2013 defines Dividend as the Profit of a company, which is no retained in the business and is distributed among the shareholders in proportion to the amount paid upon the shares held by them. It is to be noted that this definition is inclusive and not exclusive. Once the final accounts are ready and the amount of distributable profit is available, Dividend as per Companies Act is declared for the financial year and becomes payable.

‘Final dividend’ i.e. the Dividend for the final year of a company is payable only if it is declared by the Company at its Annual General Meeting on the recommendation of the Board of Directors. Whereas ‘Interim Dividend’ is paid by the Board of Directors between two Annual General Meetings without declaring them in the Annual General Meeting.

Provisions for Declaring Dividend as per Companies Act, 2013

The following provisions are laid down for Declaration of Dividend as per Companies Act, 2013:

  • Payment of Dividend on pro-rata basis

Section 51 provides for the payment of Dividends in proportion to the amount paid-up on each share. This takes place when all shares are not uniformly paid-up, i.e. pro-rata, which means in proportion or proportionately. Further, it is noteworthy that the provision of this article is conditional upon the Article of Association of the Company.

  • Section 102(2)

Generally, the Dividend is declared at an Annual General Meeting at a rate nor more than the recommendation of the Directors and by the Article of Association of a Company.

  • Section 134(3)(k)

This Section provides that the Board of Directors must state in the Directors’ Report the amount of dividend, if any, which it recommends being paid. The dividend thus recommended must be declared in the Annual General Meeting.

  • Section 123

This section provides that dividends shall be declared or paid by a Company for any fiscal year only out of the profits of the company for that year, which is arrived at after providing for depreciation by section 123(2) of the Act. Further, Section 123(1) section provides that dividends shall be declared or paid by a Company out of profits of the Company for any previous financial year/years arrived at after providing for depreciation by the provisions of the above subsection and remaining undistributed or out of both.

  • Companies (Declaration and Payment of Dividend) Rules, 2014.

If a Company proposes to declare dividend out of the accumulated profits earned by it in any previous financial years and transferred to reserves, owing to the inadequacy of funds, such declaration should be in accordance to the Companies (Declaration and Payment of Dividend) Rules, 2014.

Note- 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.

  • Section 123(4) provides that the amount of dividend shall be deposited in a separate bank account within 5 days from the date of declaration, which is to be paid within 30 days from the date of declaration.
  • Where a dividend has not been paid by the Company within 30 days from the date of declaration, every Director, knowingly participating shall be punishable with a term of imprisonment which may extend to 2 years.  He shall also be liable to a fine of rupees 1000 for every day during which default continues. Moreover, Company shall be liable to pay simple interest @ 18% per annum during the period for which such default continues. [Section 127]
  • If the Company delays the transfer of the unpaid/unclaimed dividend amount to the unpaid dividend account, it shall pay interest @ 12% p.a. till it transfers the same and the interest accruing on such amount shall ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them. [Section 124(3)]
  • Dividend payable in cash may be paid by cheque or warrant through post directed to the registered address of the shareholder who is entitled to the payment of the dividend or his order or in any electronic mode sent to his banker. [Section 123(5)].

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