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Dividend Process Creation and Calculation

Date Added: February 20, 2010 09:14:30 PM
Author: Administrator
Category: Lawyers: US Attorneys: Nevada



Dividend Process Creation and Calculation



Author: Abhilash Chandran


 

 

DIVIDEND PROCESS CREATION AND CALCULATION

 

 

 

 

 

 

 

Introduction:

 

 

 

The provisions concerning declaration and payment of dividend by an Indian company are provided in the Companies Act, 1956 of India (“Act”) and the rules made there under including Companies (Transfer of Profits to Reserves) Rules, 1975, Companies (Declaration of Dividend out of Reserves) Rules, 1975. Further, the provisions of Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001 become applicable and need to be complied with in case of issue of shares with differential rights as to dividend.

 

 

 

In usual circumstances dividend is declared at the annual general meeting of the shareholders on the recommendation by the board on the rate of dividend.

 

However interim dividend can be declared by the board of directors of a company between two annual general meetings.

 

 

 

 

 

Objective:

 

 

 

This article aims to bring forth the various provisions for payment of dividend to shareholders with emphasis on calculation and procedure for payment of the same.

 

 

 

 

 

Main Text:

 

 

 

Determination of dividend

 

 

 





  1. Source of dividend





 

 

S. 205 of the Act states that that dividends can be declared or paid only out of the profits of a company. In other words, a company cannot pay dividends out of its capital, and can declare dividends only when it has earned or accumulated sufficient profits for the said purpose.

 

It is to be noted that dividend can be paid only by following the prescribed procedure for the calculation of distributable profits. Any declaration not in accordance with this procedure would result in an unauthorized reduction in capital.

 

 

 





  1. Calculation of Profit





 

 

(a) While determining the distributable profits for any financial year, it is mandatory under the Act for the company to provide for depreciation in accordance with prescribed procedure. Moreover if the company has not provided for depreciation for any previous financial year or years it shall, before declaring or paying dividend for any financial year (but after providing for depreciation for such financial year), provide for such depreciation out of the profits of that financial year.

 

(b) Further, where there has been a loss in any previous year, the amount of such loss or an amount equal to the amount of the depreciation provided for that year, whichever is less, shall be set off against the profits of the company.

 

(c) However, it may be noted that the Central Government may, if it thinks necessary to do so in public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or previous years without providing for depreciation.

 

 

 





  1. Entitlement





 

 

Dividend can be paid only to the shareholders of the company whose,

 

(a) name appears on the register of members maintained by the company (in case the shares are held in physical form); or

 

(b) on the register of beneficial owners maintained by a depository (in case sharers are held in dematerialized form).

 

 

 





  1. Whenever shares delivered to a company for registration have not been registered by the company then any dividend to be paid on those shares will have to be transferred to the unpaid dividend account.





 

 





  1. Preference Shareholders





 

 

(a) Preference shares carry a preferential right as to dividend in accordance with the terms of the issue and the Articles, and hence preference shareholders are paid dividend before the dividend is paid to the equity shareholders of the company.

 

(b) Preference share may be cumulative or non-cumulative. Dividend in arrears on cumulative preference shares can be paid in the subsequent years where there are profits sufficient for such payment. In case of non-cumulative preference shares, if no dividend is paid in a year, there in no right to receive it in future years.

 

(c) In case participating preference shares are issued, the holders thereof also have the right to participate in such residual profit, which otherwise is the sole entitlement of the equity shareholders.

 

 

 





  1. Basis of Dividend





 

 





  1. out of the profits of the company for that year; or





 

 





  1. out of the profits of the company for any previous financial year or years which remain undistributed; or





 

 





  1. out of both (a) or (b); or





 

 

(d) out of the moneys provided by the Central or State Government for the payment of dividend in pursuance of a guarantee given by that Government.

 

 

 





  1. Dividends cannot be declared out of the securities premium account or the capital redemption reserve account or revaluation reserve or amalgamation reserve or out of the profit on re-issue of forfeited shares or out of profit earned prior to the incorporation of the company.





 

 





  1. A company may declare dividend out of the accumulated profits earned in previous years and transferred by it to the reserves. Such declaration will be subject to the Companies (Declaration of Dividend out of Reserves) Rules, 1975.





 

 





  1. Compulsory Reserve





 

 

(a) A company before declaring and paying profits is required to transfer a specified percentage of its distributable profits up to an extent of 10% to the free reserves of the company. The company may, however, voluntarily transfer a higher percentage of its profits to the reserve.

 

(b) The Companies (Transfer of Profits to Reserves) Rules, 1975 have been prescribed by the Central Government in this behalf.

 

 

 





  1. Mode of Dividend





 

 

A company may, in lieu of cash payments as dividends, issue bonus shares to its shareholders or pay any unpaid amount on any shares of its shareholders.

 

 

 

 

 

Procedure for declaration and payment of dividends

 

 

 





  1. Recommendation by the Board





 

 

Dividend can be declared only on the recommendation of the board of directors (“Board”) of the company. The members cannot on their own declare any dividend. The Board, after consideration and approval of the financial statements of the company, determines the rate of dividend to be declared and recommends the same to the shareholders.

 

 

 





  1. Resolution at the annual general meeting





 

 

Dividend is declared by a company by a resolution passed at its AGM after sanctioning the rate of dividend recommended by the Board. The members may declare a lower rate of dividend than what is recommended by the Board but they have no power to increase the amount or rate so recommended by the Board.

 

 

 





  1. Payment from profits of the Company





 

 

It has to be ensured that dividend is paid out of the profits of the company after providing for depreciation and if no depreciation is provided, ensure that approval was obtained from the Central Government before declaring the dividend.

 

 

 





  1. Payment within 42 days of declaration





 

 

(a) The amount of dividend including interim dividend shall be deposited in a separate bank account within 5 days from the date of declaration of such dividend.

 

 

 

(b) Dividend should be paid out of such bank account within 42 days of declaration of such dividend.

 

 

 

(c) Failure to comply with this requirement subjects the company to penalty under the Act unless such failure is because of the reason excepted under the Act.

 

 

 





  1. Unpaid dividend





 

 

(a) Unpaid Dividend Account

 

 

 

The amount of dividend which remains unpaid or unclaimed after 30 days from the date of declaration should be transferred to a special dividend account, to be called ‘Unpaid Dividend Account’ of the company within 7 days from the expiry of the 30 days period provided for payment of dividend.

 

 

 

The company in default of this provision shall pay, from the date of such default, 12% interest on the amount not transferred to the said account, which interest shall ensure to the benefit of the members, in proportion to the amount remaining unpaid to them.

 

 

 

(b) Investor Education and Protection Fund

 

 

 

Any amount in the Unpaid Dividend Account of the company which remains unclaimed and unpaid for a period of 7 years from the date of transfer of such amount to the Unpaid Dividend Account should be transferred to the Investor Education and Protection Fund, within 30 days of the expiry of 7 years from the date of transfer to the Unpaid Dividend Account. But prior to such transfer the company must have given individual intimation to the concerned members of the amount of dividend remaining unclaimed which is liable to be transferred to such fund at least 6 months before the due date of such transfer.

 

 

 





  1. Permission of RBI





 

 

The permission of RBI is required in case of payment of dividend to non- resident shareholders.

 

 

 

 

 





  1. Declaration of Interim Dividend





 

 

(a) Interim dividend can be declared by the Board without requiring the approval of the members of the company. However interim dividend can be paid only if authorized by the articles of association of the company.

 

(b) A mere resolution declaring interim dividend does not create any liability and may be rescinded at any time before actual payment. (distinction between interim and final dividend)

 

 

 

 

 

Dividend Distribution Tax (DDT)

 

 

 

The DDT is liable to be paid by the company at the rate of 15.0% (plus a surcharge of 10% and education cess at the rate of 3% on dividend distribution tax and surcharge) on the total amount distributed as a dividend. Thus the effective rate of dividend distribution tax is 16.995%.

 

In addition it is pertinent to note that dividends are not taxable in India in the hands of the shareholders.

 

 

 

 

 

Conclusion:

 

 

 

Dividend payment is a mechanism through which the investment by shareholders in a company is rewarded. In addition a company with a good dividend payment history offers a good investment option for investors as dividend can be paid only out of profits and this in turn demonstrates the sound profit making policies and their implementation by the company.

 

 




1 Section 86, 93, 205, 205A, 205B, 205C, 206, 206A, 207, 350 of the Act.




 



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