Does your Company Propose to Declare and Pay Dividend?

1. Beginning of a new Calendar year is normally witnessed by abundance of corporate activities in the form of announcement of third quarter results as also consideration and declaration of interim dividend. Though this was not the phenomenon a score of years back, yet this has come to stay. Trend of performance in the first three quarters of the current financial year enables a company to take a pragmatic view as to its ability to declare and pay dividend. Based on the performance of the company in the last quarter of the financial year, the Board of Directors of a company (Board) decides whether final dividend should be proposed for consideration of its equity shareholders. As per the definition of the term dividend contained in section 2 (35) of the Companies Act, 2013 (2013 Act), dividend includes interim dividend.

Sources of funds for payment of dividend

2. A company is permitted by 2013 Act to declare and pay dividend out of: -
   1. profits of the company for the financial year arrived at after providing for depreciation in accordance with Schedule II to 2013 Act; or
   2. profits of the company for any previous financial year or years after providing for depreciation and remaining undistributed; or
   3. both [i.e. (a) and (b)]; or
   4. money provided by the Central Government or State Government for payment of dividend by the company in pursuance of guarantee given by that Government.

Manner of declaration of dividend

3. Neither 2013 Act nor the rules made thereunder specify the procedure for declaration of dividend by a company. However, section 123 (3) of 2013 Act mentions that interim dividend may be declared by the Board of Directors (Board) during any financial year out of: - (a) the surplus in the profit and loss account; and (b) profits of the financial year in which such interim dividend is sought to be declared.
4. As far as the dividend declaration other than interim dividend is concerned, one can gather from section 102 (2) of 2013 Act that the business relating to the declaration of any dividend is an ordinary business at the annual general meeting. It implies that the dividend recommended by the Board shall have to be approved by the shareholders at the annual general meeting of the company. By virtue of the provisions contained in the articles of association of the company and/or practice and procedure evolved over the years, the Board only recommends the dividend to the shareholders or passes on the dividend and it is for the shareholders to approve it. In this regard it is apposite to refer to article 80 of Table F of Schedule I annexed to 2013 Act, which states: - “The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the Board”.

Matters to be kept in view before declaring interim dividend / recommending dividend

5. (a) A company intending to consider declaration of interim dividend or recommending dividend to its equity shareholders has to provide for depreciation in accordance with Schedule II annexed to 2013 Act; and (b) transfer such percentage of profits for that financial year to the reserves.
6. It shall be ensured that no dividend is declared or paid by a company from its reserves other than free reserves.
7. In case the company has incurred loss during the current financial year up to 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 the immediately preceding three financial years.
8. A company which has defaulted in servicing the deposits accepted by it in terms of sections 73 and 74 of 2013 Act shall not, so long as the failure continues, declare any dividend on its equity shares. There is lack of clarity as to whether payment of dividend on preference shares is permissible when the company defaults in servicing the deposits accepted since section 123 (6) only restricts payment of dividend on equity shares. The deletion of the word “equity” would have prohibited even payment of dividend on preference shares also so long as the company fails to service the deposits accepted by it. Such prohibition is desirable as in the event of winding up of a company its preference shareholders are paid only after payment of the dues to the secured creditors, as under the 2013 Act, the company shall have to secure the deposits accepted by it.

Whether Transfer to reserves is compulsory?

9. The first proviso to section 123 (1) specifies as under: - “Provided that 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”. The usage of the word “may” whether to be read as “shall” or taken permissive needs to be considered. Under the Companies Act, 1956 (1956 Act), it was compulsory to transfer a specified percentage of the profits not exceeding ten per cent, as may be prescribed, to the reserves before declaration of dividend. The Central Government also framed the Companies (Transfer of Profits to Reserve) Rules, 1975. 2013 Act neither specifies the percentage of profits to be transferred to the reserves of the company nor empowers the Central Government to prescribe that percentage. On the contrary, it is left to the discretion to transfer such percentage of profits to the reserves.
10. It is pertinent to refer to article 82 of Table F of Schedule I annexed to 2013 Act. It provides:-
    1. The Board may, before recommending any dividend, set aside out of the profits of the company such sums as it thinks fit as a reserve or reserves which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the company may be properly applied, including provision for meeting contingencies or for equalising dividends; and pending such application, may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the Board may, from time to time, thinks fit.
    2. The Board may also carry forward any profits which it may consider necessary not to divide, without setting them aside as a reserve”.
    It is, therefore, in order for the Board to recommend any dividend without the necessity of crediting a percentage of the current year’s profits to its reserves. Nonetheless, it is advisable to transfer a portion of the profits to the reserves so that the company can maintain the track record of dividends even in adverse years.

Declaration of dividend out of reserves

11. Second proviso to section 123 (1) of 2013 Act envisages a situation where a company may propose to declare a dividend in spite of inadequacy or absence of profits in any financial year. In such circumstances, any company may propose to declare out of the accumulated profits earned by it in the previous years and transferred by the company to the reserves. However, such declaration of dividend shall be in accordance with the Companies (Declaration and Payment of Dividend) Rules, 2014 (Dividend Rules). (Discussed below).

Conditions to be met for declaration of dividend out of reserves


12. Rule 3 of Dividend Rules requires the fulfilment of the following conditions before a company declares a dividend out of reserves, namely: -
    1. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. This condition does not apply to a company, which has not declared any dividend in each of the three preceding financial year. If a company has declared dividend in any of the three years, the exception mentioned hereinabove will not apply;
    2. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of the paid up share capital and free reserves as appearing in the latest audited financial statement;
    3. The amount drawn shall be first utilised to set off the losses incurred in the financial year in which the dividend is declared before any dividend in respect of equity shares is declared. This condition has been rendered otiose in view of the condition (v) infra;
    4. The balance reserves after such withdrawal shall not fall below fifteen per cent of the paid up share capital appearing in the latest audited financial statement;
    5. A company shall not declare dividend unless carried over previous losses and depreciation not provided in the previous year or years are set off against profit of the company of the current year. This condition was amended by the Companies (Declaration and Payment of Dividend) Amendment Rules, 2014 with effect from 02.06.2014. Even after amendment of this condition is not happily worded. Rule 3 begins with the words “In the event of inadequacy or absence of profits in any year”. A situation of profit in the current year may be remote. If there is adequate to provide for carried over losses and depreciation not provided for in the previous year or years, this Rule will be inapplicable. A purposeful understanding of this condition is that the carried over previous losses and depreciation not provided for in the previous year or years should be set off against the current year’s profits and the funds transferred from the reserves and only surplus shall be considered for declaration of dividend.

Payment of dividend

13. Condition precedent: -
    The amount of dividend including interim dividend shall be deposited in a scheduled bank in a separate account within 5 days from the date of declaration of such dividend.
14. Unpaid Dividend Account: -
    1. Amount of dividend declared by a company but has not been paid to, or claimed by, any shareholder entitled to its payment within 30 days from the date of declaration, the company shall transfer the total amount of dividend which remains unpaid or unclaimed to a special account opened by the company in a scheduled bank to be called Unpaid Dividend Account (UDA) within 7 days from the date of expiry of the said period of 30 days. In the event of default in transferring the total amount of dividend which remains unpaid or unclaimed or any part thereof, the company shall pay interest on such amount not so transferred at the rate of 12% per annum and the interest accruing on such amount shall enure to the benefit of the members in proportion to the amount remaining unpaid.
    2. The company shall prepare within 90 days of making any transfer to UDA a statement containing the names, their last known address and the unpaid dividend to be paid to each person and place it on the website of the company, if any and also on any other website approved by the Central Government for this purpose in such form, manner and other particulars as may be prescribed. Dividend Rules, however, do not contain any details of the website approved by the Central Government for this purpose.
    3. The member entitled to the money transferred to UDA can make an application to the company for its payment.
    4. Any amount lying in UDA for a period of 7 years from the date of its transfer shall be transferred by the company along with interest accrued, if any, thereon to Investor Education and Protection Fund (IEPF). Upon transfer of the amount to IEPF, the company shall send a statement in Form DIV 5 prescribed under the Dividend Rules. The company is entitled to a receipt as evidence of such transfer from the authority which administers IEPF.
15. Payment of dividend: -
    1. The amount of dividend shall be paid in cash. It may also be paid by cheque or warrant or in any electronic mode or to the banker by crediting the designated account of the registered shareholder entitled to dividend. Payment of dividend to a joint holder shall be made in accordance with the articles of association of the company.
    2. Amount paid or credited as paid on a share in advance of calls shall not be treated as paid on share.
    3. The Board is entitled to deduct from any dividend payable to any member all sums of money presently payable by him to the company on account of calls or otherwise in relation to the shares of the company.
    4. The dividend amount shall not carry interest against the company.
16. Transfer of shares to IEPF: - One of the directions contained in 2013 Act is that all shares in respect of which the unpaid or unclaimed dividend to IEPF shall also be transferred by the company in the name of IEPF along with a statement containing such details as may be prescribed. The claimant of the shares so transferred in the name of IEPF is entitled to claim the transfer of shares from IEPF by following the prescribed procedure and submission of prescribed documents. In view of the amendment suggested in the Companies (Amendment) Bill, 2014 (discussed infra), the companies may take a considered view regarding the transfer of shares to IEPF.
17. Payment of dividend where registration of transfer of shares is pending: - Where a request for registration of transfer of shares is pending with the company, it may: - (a) pay the dividend to the transferee, if authorised in writing by the registered holder of such shares; or (b) transfer the dividend in relation to such shares to the UDA.

The Companies (Amendment) Bill, 2014

18. A Bill to amend the Companies Act, 2013 (Bill No. 185 of 2014) was passed by the Lok Sabha. The Bill was introduced to supply certain omissions, remove certain difficulties in complying with some of the requirements of the 2013 Act etc., with the objective of further facilitating the ease of doing business. As regards dividend, the amendment Bill provides for two significant changes. A new proviso has been suggested for inclusion requiring setting off past losses and depreciation not provided for in the previous year or years before declaring dividend out of profits of the company. This amendment is to plug the inadvertent omission in 2013 Act.
19. The second amendment is relating to doing away with the requirement of transfer of shares to IEPF in cases where the subsequent dividend has been claimed by the shareholder. The explanation inserted in section 124 (6) clarifies that in case any dividend is paid or claimed for any year during the said period of 7 consecutive years subsequent to the relevant year, the share shall not be transferred to IEPF. Thus the requirement of transfer of shares in case of unpaid or unclaimed dividend will arise only if during the 7 consecutive years the concerned shareholder has not claimed the dividend from the company.
20. As on date, as the Bill has not become an Act of the Parliament, the two changes suggested to 2013 Act by the amendment Bill have no application. But it is prudent to have regard to these changes as they are in furtherance of the objectives of the 2013 Act and do not impede the declaration and payment of dividend to a significant extent.

Instances when offence is not deemed to have been committed regarding declaration and payment of dividend

21. Non payment of dividend within 30 days of from the declaration to any shareholder is a punishable offence. Every director of a company who knowingly is a party to the default is also punishable for such non payment. However, in the following circumstances the offence will not be deemed to have been committed, namely: -
    1. Where the dividend could not be paid by reason of the operation of any law;
    2. Where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;
    3. Where there is a dispute regarding the right to receive the dividend;
    4. Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
    5. Where, for any other reason, the failure to pay the dividend or to post the warrant within the period was not due to any default on the part of the company.  

Date of declaration of dividend

22. This expression “date of declaration of dividend” is used in several places in Chapter VIII of 2013 Act but, we do not find the meaning of it either in 2013 Act or in the Deposit Rules. As interim dividend is declared by the Board of a company, the date of declaration of dividend in respect of the interim dividend is the date on which the Board takes a decision to announce the dividend. In the case of dividend, other than interim dividend, the Board only makes a recommendation and the shareholders accord their approval at the general meeting. Taking a cue from article 80 of Table F of Schedule I annexed to 2013 Act, “the company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the Board”, the date of declaration of dividend other than the interim dividend shall be the date on which the shareholders approve the recommendation of the Board to pay the dividend.

Compliance with Listing Agreement

23. In addition to the matters stated above, companies whose equity shares are listed in any recognised stock exchanges shall also comply with the covenants contained in the listing agreement like giving intimation of the date of Board meeting for consideration of dividend, announcement of the decision taken by the Board, fixing book closure or record date for payment of dividend etc. The listing agreement also stipulates that the company shall declare and disclose the dividend on per share basis only.

Conclusion

24. The provisions contained in Chapter VIII of the 2013 (dealing with declaration and payment of dividend) except for certain changes, are in line with the 1956 Act. The penal consequences have been made deterrent. It is in the interests of the corporates to comply with the provisions relating to declaration and payment of dividend so as to avoid penalty which is both imprisonment and fine.

    *****

    Disclaimer: The views expressed in this article are solely the opinion of the author.