The word “Dividend” has origin from the Latin word “Dividendum” Dividend refers to that portion of profit that is paid to the shareholders of the company. It is often paid in one financial year to the shareholders after the final accounts of profit are ready and the same has to be distributed. Section 2 of the Act defines that ‘includes any interim dividend’.
The rights of shareholders on profits as dividends only arise after the declaration of dividends by the company done generally on the approval of board of directors. The amount paid of the dividend is in proportion to the amount paid on the share by the shareholder as provided in section 51 of the Act.
There are two types of dividends: Interim dividends and Final dividends.
Interim dividend
The Act defines Dividend in terms of interim dividends which refer to the dividend declared by company’s board during any time of the year before official closing of financial year and calling of Annual General Meeting. According to the Act the company can declare interim dividend out of profits accumulated of current or previous financial years. The provisions of the Act which are generally for final dividend are applicable to interim dividends also.
Features of interim dividend
1) It is declared by board of directors in one financial year out of surplus generated in profit and loss accounts and out of profits in which interim dividend is bound to be declared. It has been held in Judgments that mere declaration by the directors in a general meeting does not obligate them to pay dividends as the decision can be rescinded.
2) If the company registers loss before the stipulated declaration of dividends, it has to be declared at an average rate calculated on the basis of dividends declared in previous 3 financial years.
3) It is deposited in a scheduled bank account within five days of the declaration.The same is irrespective of intervening holidays.
Final dividends
The dividends declared by the company after closing of the financial year and approval of Board of Directors in AGM. The term Dividend used except in the definition in Companies Act, 2013 refers to final dividends only. Majority of the provisions for both Interim and Final are same but there are some differentiated provisions for the Interim dividends in the Act. The liability on default arises only in case of declaration of Final Dividend and not Interim dividend.
Declaration of dividends
Section 123 of Companies Act 2013 lays down guidelines for the conditions when the companies are permitted to declare or pay dividends in a financial year:
Source of dividend: The dividends can be declared out of –
Transfer of reserves: The Company before declaring the dividends has to reserve the required amount of cash to run the affairs of the company. These are the appropriate reserves of the company to manage its affairs.
Declaration of dividends: If the company decides to declare dividend on the basis of profit accumulated in the previous years, such declaration has to be made on the basis of prescribed rules and the dividend paid has to be from free reserves only. The dividends can be declared only after approval of board of directors generally done in a ‘general meeting’. There cannot be any declaration of dividend unless the same is approved by Board and by General body of the company.
Separate account for dividends: The amount of dividends has to be kept in a separate bank account within 5 days from the date of declaration.
To be paid only in cash: The dividend has to be paid only in cash (includes payment by cash or other electronic means) and is payable only to the registered shareholder himself or to his banker. The objective of specifying payment in cash is to necessitate that some assets of the company have flown out to the shareholder.
Failure of section 73&74: If a company fails to adhere to provisions in section 73 and 74 which are related to borrowings from public and repayment of deposits, such company cannot
