1.

MEANING OF DIVIDEND
Definition Section 2(35) of the Companies Act, 2013, while defining the term dividend simply states
that “dividend” includes any interim dividend.

This definition, instead of explaining the term merely enlarges its scope by including ‘interim
dividend’ in its fold. Dividend is the shareholders return on their investment / capital in the company.

Dividend is part of the distributable profits which has been paid out to them. In simple words, it is a
distribution of profits i.e. a portion of profits earned and allocated as payable to the shareholders
whenever declared.

The company in general meeting may declare dividends, but no dividend shall exceed the amount
recommended by the Board. (Clause 80 of Table F in Schedule I)

CA Indresh Gandhi
Dividend is recommended by Board of Directors in the Board’s Report 1 and approved by
Shareholders at the Annual General Meeting. Dividend is not a liability unless it is declared by the
shareholders at a validly constituted general meeting by passing an ordinary resolution2 at the rates
recommended by the Board or such lower rates as they may decide.

Declaration of dividend by the company at a rate higher than the rate recommended by the Board is
not permitted.

Dividend is Declared as a proportion of Nominal or Face Value of a share.

Example 1: AB Ltd. has issued equity shares having face value of ` 10 per share. The shares are
currently quoting on the NSE at ` 250/- per share. The Company at its AGM held on 27.7.20 has
declared a dividend of 20%. Mr. Shekar owns 1000 shares which he purchased at ` 300/- per share.
What is the amount of dividend he will receive?

The dividend is to be calculated on Face Value i.e. ` 10/-. So dividend per share is 20% of ` 10/- = `
2/- per share. So Mr. Shekar will receive ` 2 * 1000 shares = ` 2000/-.

Example 2: The shareholders at an annual general meeting unanimously passed a resolution for
payment of dividend at a rate higher than that recommended by the directors. Discuss the
validity of the resolution.

CA Indresh Gandhi
 2. TYPES OF DIVIDEND
I. Classification based on time i.e. when declared

Interim Dividend

Section 123 (3) and also section 123 (4) contain provisions regarding interim dividend. Following
points are noteworthy:

♦ Interim dividend may be declared by the Board of Directors at any time during the period from
closure of financial year till holding of the annual general meeting.

The declaration of interim dividend is done out of profits before the final adoption of
the accounts by the shareholders and therefore, interim dividend is said to be declared
and paid between two AGMs.

♦ The sources for declaring interim dividend include:

CA Indresh Gandhi
• Surplus in the profit and loss account; or

• Profits of the financial year in which such dividend is sought to be declared; or

• Profits generated in the financial year till the quarter preceding the date of declaration of the
interim dividend.

♦ Declaration of interim dividend shall be ratified at the ensuing AGM by the members.

♦ If the company has incurred loss during the current financial year up to the end of 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 (rate of) dividend declared by the company during the
immediately preceding three financial years.

Example 3: If a company declared dividend at the rate of 16% during the immediately preceding
three financial years, then in case the company incurs loss in the current financial year, it is
permitted to declare interim dividend at a rate which is not higher than 16%.

♦ The amount of the dividend, including interim dividend, shall be deposited in a separate
account maintained with a scheduled bank within five days from the date of declaration.

CA Indresh Gandhi
♦ All provisions which are applicable to the payment of dividend shall also apply in case of interim
dividend.

Final Dividend

♦ When the dividend is declared at the Annual General Meeting of the company, it is known as ‘final
dividend’.

♦ The rate of dividend recommended by the Board cannot be increased by the members.

The table given below provides a quick summary of the above concepts of Interim Dividend and Final
Dividend.

CA Indresh Gandhi
II. Classification based on Nature of Shares does not require any specific provision in the
articles.

CA Indresh Gandhi
Shares can be classified into two categories i.e. preference shares and equity shares. The manner
of payment of dividend is dependent upon the nature of shares.

(i) Preference Shares: According to Section 43 of the Companies Act, 2013, shareholders holding
preference shares are assured of a preferential dividend at a fixed rate during the life of the
company.

Preference dividend unless otherwise agreed is Non-cumulative in nature and need not be paid in
any year where there is deficiency of profits.

Classification of preference shares on the basis of payment of dividend is as follows:

(a) Cumulative Preference Shares: A cumulative preference share is one in respect of which
dividend gets accumulated and any arrears of such dividend arising due to insufficiency of
profits during the current year is payable from the profits earned in the later years. Until and
unless dividend on cumulative preference shares is paid in full, including arrears, if any, no
dividend is payable on equity shares.

(b) Non-cumulative Preference Shares: A non-cumulative preference share is one

where the dividend is payable only in a year of profit. There is no accumulation of
profit as in the case of cumulative preference shares. In case no dividend is declared
in a year due to any reason, the right to receive such dividend for that year expires and
the holder of such a share is not entitled to be paid arrears of dividend out of future years .
CA Indresh Gandhi
(ii) Equity Shares: Equity shares are those shares, which are not preference shares. It means that
they do not enjoy any preferential rights in the matter of payment of dividend or repayment of
capital. The rate of dividend on equity shares is recommended by the Board of Directors and may
vary from year to year. Rate of dividend depends upon the dividend policy and the availability of
profits after satisfying the rights of preference shareholders.

3. PROVISIONS REGARDING DECLARATION AND PAYMENT OF

DIVIDEND
A. Sources for Declaration of Dividend

According to Section 123 (1), the dividend for any financial year shall be declared or paid from the
following sources:

(a) Profits of the current financial year- Profits arrived at after providing for depreciation in
accordance with Schedule II3 .

(b) Profits of any previous financial year or years- Profits of any previous financial year(s)
arrived at after providing for depreciation in accordance with Schedule II and remaining
undistributed i.e. credit balance in profit and loss account and free reserves. It is to be
noted that only free reserves4 and no other reserves are to be used for declaration
or payment of dividend5 .

CA Indresh Gandhi
(c) Both (a) and (b).

(d) Provision of money by the Government- Money provided by the Central Government or a State
Government for the payment of dividend by the company in pursuance of a guarantee given by that
Government.

Note 1: Before declaration of any dividend, carried over previous losses and depreciation not
provided in previous year or years are required to be set off against profit of the company for the
current year6 .

Note 2: In computing profits any amount representing unrealised gains, notional gains or revaluation
of assets and any change in carrying amount of an asset or of a liability on measurement of the asset
or the liability at fair value shall be excluded7 .

Note 3: Capital profits are not same as distributable profits because they are not earned in the
normal course of business; and therefore, normally not available for distribution as dividend.

Need for providing for depreciation out of profits before declaring dividend

Dividend is an apportionment from revenue profits. Therefore, dividend should never

be declared out of capital. This is also the reason for prohibition on issue of shares
at a discount which you studied in the topic Share Capital and Debentures.

CA Indresh Gandhi
"Depreciation" is a notional estimate of the reduction in the value of an asset due to

i. wear and tear,

ii. efflux of time,

iii. improvements in technology etc.

If depreciation is not provided for there will be two consequences:

i. The value of the asset will be overstated in Balance Sheet

ii. The profits of the current year will be overstated.

Let us take a hypothetical case where a company declares all the profits earned during any year as
dividend.

At the time of winding up of the company the value of assets appearing in the
Balance-sheet would appear to be sufficient to repay the capital of the shareholders
but the actual realizable value thereof will be a paltry sum which may not be
sufficient even to meet the expenses of winding up.

CA Indresh Gandhi
This is because the company has failed to retain the amount of wear and tear in the value of the
asset by way of provision for depreciation. In a way the company would have declared dividend out of
capital, which is prohibited.

Hence the law mandates provision for depreciation out of profits before declaration of dividend.

Example 4: Shreyas Mechanics Limited owns a plot of land which was purchased long before. As the
property rates are going up, it is decided to revalue the plot at fair value which is moderately ten
times the original price, thus resulting in a revaluation profit of ` 20,00,000. The Board of Directors
is keen to utilize this ` 20,00,000 along with free reserves of ` 24,00,000 for declaration of
dividend at the forthcoming Annual General Meeting (AGM) to be held on 28th September, 2019. But
according to Proviso to Section 123 (1) (a), the amount of ` 20,00,000 cannot be considered as it
does not form part of Free Reserves as the same cannot be utilized towards declaration of dividend.

B. Transfer to Reserves

Transfer of profits to reserves for any financial year has been left to the discretion of the
company. Therefore, a company is free to transfer any portion of its profit to reserves as it may
deem fit. It may also decide not to transfer any amount to reserves.

Example 5: For the current year, Alma Watches Limited proposes to transfer
more than 10% of its profits to the reserves before declaration of dividend at the
rate of 12%. Can the company do so?

CA Indresh Gandhi
Answer: The amount to be transferred to reserves out of profits for any financial year before the
declaration of dividend has been left to the discretion of the company. Therefore, Alma Watches
Limited is free to transfer any part of its profits to reserves as it may deem fit.

Example 6: Brix Shipyards Limited has earned a profit of ` 1,000 crores for the financial year
2018-19. It has proposed a dividend @ 8.75%. However, it does not intend to transfer any amount to
the reserves out of the profits earned. Can the company do so?

Answer: The amount to be transferred to reserves out of profits for any financial year has been
left to the discretion of the company. The company is free to transfer any part of its profits to
reserves as it may deem fit or it may even not transfer any profits to reserve if it is deemed
appropriate before the declarationof dividend. Thus, Brix Shipyards Limited is justified in its action
if it does not transfer any amount of profits to the reserves.

C. Declaration of Dividend when there is inadequacy or Absence of Profits (Second Proviso to

Sec. 123)

Where in any year there are no adequate profits for declaring dividend, the
company may declare dividend out of the profits of any previous year transferred by it to the
free reserves only in accordance with the procedure laid down in Rule 3 of the Companies
(Declaration and Payment of Dividend) Rules, 2014.

CA Indresh Gandhi
Free Reserves 8 means such reserves which, as per the latest audited balance sheet of a company,
are available for distribution as dividend:

The following shall not be treated as free reserves;

Any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as
a reserve or otherwise, or

Any change in carrying amount of an asset or of a liability recognized in equity, including surplus in
profit and loss account on measurement of the asset or the liability at fair value.

Under Rule 3 such declaration shall be subject to the following conditions:

CONDITION I

The rate of dividend declared shall not exceed the average of the rates at which dividend was
declared by the company in the immediately preceding three years.

CA Indresh Gandhi
However, this condition shall not apply if the company has not declared any dividend in each of the
three preceding financial year.

CONDITION II

The total amount to be drawn from such accumulated profits shall not exceed 10% of its paid-up
share capital and free reserves as appearing in the latest audited financial statement. In other
words:

DECLARATION AND PAYMENT OF DIVIDEND

The amount so drawn shall first be utilised to set off the losses incurred in the financial year in
which dividend is declared and only thereafter, any dividend in respect of equity shares shall be
declared.

CONDITION III

The balance of reserves after such withdrawal shall not fall below 15% of its paid
up share capital as appearing in the latest audited financial statement.

CA Indresh Gandhi
It may be noted that all the above three conditions have to be satisfied.

The conditions prescribed by Rule 3 are not applicable to a Government company in which the entire
paid up share capital is held by the Central Government, or by any Stale Government or Governments
or by the Central Government and one or more State Governments (vide Notification No. 463 (E),
dated 05-06-2015).

Example 7: Capricorn Industries Limited has a paid-up capital of ` 200 lakhs and accumulated
Reserves of ` 240 lakhs. Loss for the year ending 31st March 2020 is ` 30 Lakhs. Dividend was
declared at the following rates during the three years immediately preceding.

Year 1 9%

Year 2 10%

Year 3 12%

What is the maximum rate at which the company can declare dividend for the current year?

Answer: In the given case, Capricorn Industries Limited has not made adequate profits during
CA Indresh Gandhi
the current year ending on 31st March, 2020, but it still wants to declare dividend. Let us apply the
conditions:
Condition I:

CA Indresh Gandhi
Example 8: Shipra Sugar Mills Limited has been regularly declaring dividend at the rate of 20% on
its equity shares for the past 3 years. However, the company has not made adequate profits during
the current year ending on 31st March, 2020, but it has got adequate free reserves which can be
utilized for maintaining the rate of dividend at 20%.

Advise the company as to how it should proceed in the matter if it wants to declare dividend at the
rate of 20% for the year 2019-20, as per the provisions of the Companies Act, 2013.

Answer: The company can declare a dividend out of its Accumulated Free Reserves subject to
satisfaction of the following conditions:

• The total amount to be drawn from free reserves shall not exceed 10% of its paid-up share capital
and free reserves as per the latest audited financial statement.

• The amount so drawn shall first be utilised to set off the losses incurred in the current financial
year and only thereafter, dividend at 20% shall be declared.

• After such withdrawal from free reserves, the residual reserves shall not fall below
15% of its paid-up share capital as per the latest audited financial statement.

The company is advised to get the desired dividend recommended by the Board of Directors
and propose the same for the approval of the members at the ensuing Annual General

CA Indresh Gandhi
Meeting as the authority to declare dividend lies with the members of the company.

D. Depositing of Amount of Dividend

In terms of section 123(4), the amount of the dividend (including interim dividend), shall be
deposited in a separate account maintained with a scheduled bank. This is to be done within 5 days
from the date of declaration of dividend9 .

Example 9: The authorised and paid-up share capital of Avantika Ayurvedic Products Limited is `
50.00 lacs divided into 5,00,000 equity shares of ` 10 each. At its Annual General Meeting (AGM)
held on 24th September, 2019, the company declared a dividend of ` 2 per share by passing an
ordinary resolution. The amount of dividend must be deposited in a scheduled bank in a separate
account latest by 29th September, 2019.

E. Payment of Dividend

Section 123(5) contains provisions regarding payment of dividend. These are stated as under:

(a) Dividend shall be payable only to the registered shareholder or to his order or to his
banker.

In case a shareholder informs the company to pay dividend to a particular

banker and if the payment is so made by the company, then it shall be deemed to be made to

CA Indresh Gandhi
the shareholder himself.

A purchaser of shares whose name is not entered in the Register of Members cannot claim payment
of dividend to him though he might have

made full payment to the seller of shares. In this regard we will, later in this chapter, see Section
126 which provides for keeping of dividend etc., in abeyance pending registration of transfer of
shares, unless the registered holder has authorized the company to pay the dividend to the
purchaser.

Example 10:

The Directors of East West Limited proposed dividend at 15% on equity shares for the financial
year 2017-2018. The company announced 28th September 2018 as the record date for payment of
dividend. The dividend was approved in the Annual General Meeting held on 30th September 2018.

Mr. Binoy was the holder of 2000 equity of shares on 31st March, 2018, but he transferred the
shares to Mr. Mohan, whose name has been entered in the register of members on 18th June, 2018.
Who will be entitled to the above dividend?

Answer: According to section 123, dividend shall be paid by a company only to the registered
shareholder of such share.

CA Indresh Gandhi
Record date is the date announced by the company for determining entitlement to dividend. All those
persons whose name is included in the register of members on that date shall be entitled to dividend.

In the instant case, on the date announced by the company as the record date, Mr. Mohan’s name is
present in the register of members (i.e. Mr. Binoy’s name is NOT present therein). Therefore, the
dividend should be paid to Mr. Mohan who is the registered shareholder on the record date.

Example 11: The Board of Directors of Som Mechanical Toys Limited proposed a dividend at 12%
on equity shares for the financial year 2019-20. The same was approved at the Annual General
Meeting of the company held on 25th June, 2020.

Mr. Nitin Jha was holding 1,000 equity shares as on 31st March, 2020, but the same were
transferred by him to Mr. Raj, whose name was registered on 20th April, 2020 in the Register of
Members. State as to who will be entitled to the dividend declared by the company.

Answer: According to section 123(5), dividend shall be payable only to the registered shareholder
of the shares or to his order or to his banker. Facts in the given case state that Mr. Nitin Jha,
the holder of equity shares transferred his shares to Mr. Raj whose name was registered
on 20th April,2020. Since, Mr. Raj became the registered shareholder before the declaration
of the dividend in the Annual General Meeting of the company held on 25th June, 2020, he will
be entitled to the dividend.

CA Indresh Gandhi
Note: In terms of Section 51, a company may, if so authorised by its articles, pay dividend in
proportion to the amount paid-up on each share. Suppose, some of the shareholders have paid only `
5 (face value ` 10) on each share held by them. In case of declaration of dividend at the rate of ` 5
per share, the company, if authorised by its articles, shall be justified in paying dividend of ` 2.50
per share in respect of such partly paid shares.

(b) Dividends are payable in cash and not in kind. Dividends that are payable to the
shareholders in cash may also be paid by cheque or dividend warrant or through any electronic
mode.

Section 127 requires that the declared dividend must be paid to the entitled shareholders within
the prescribed time limit of thirty days from the date of declaration of dividend. In case dividend is
paid by issuing dividend warrants, such warrants must be posted at the registered addresses within
the prescribed time. Once posted, it is immaterial whether the same are received within thirty days
by the shareholders or not.

Note: Dividends shall be paid only in cash. The exception to this is the capitalization of profits
or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any
amount for the time being unpaid on any shares held by the members of the company10.

But you may note that while Declaration of dividend does not affect the company’s power
to issue fully paid up bonus shares, such shares cannot be issued in lieu of dividend.

CA Indresh Gandhi
(c) Applicability of Section 123 (5) to Nidhis: In terms of Notification No. GSR 465 (E), dated
05-06-2015, this sub-section shall apply to the Nidhis, subject to the modification that any dividend
payable in cash may be paid by crediting the same to the account of the member, if the dividend is
not claimed within 30 days from the date of declaration of the dividend.

F. Prohibition on Declaration of Dividend

In the following cases declaration and payment of dividend is prohibited.

(i) Prohibition in case of any Defaulting Company:11 A company which fails to comply with
the provisions of section 73 (Prohibition on acceptance of deposits from public) and section
74(Repayment of deposits, etc., accepted before the commencement of this Act of 2013)
shall not, so long as such failure continues, declare any dividend on its equity shares.
CA Indresh Gandhi
(ii) Prohibition in case of Section 8 Companies: According to section 8 (1), a company having licence
under Section 8 (Formation of companies with charitable objects, etc.) is prohibited from paying any
dividend to its members. Its profits are intended to be applied only in promoting the objects for
which it is formed.

4. UNPAID DIVIDEND ACCOUNT (UDA)

Section 124 of the Act contains the provisions relating to Unpaid Dividend Account (UDA). These are
as follows:

(i) Unpaid or Unclaimed Dividend to be transferred to the Unpaid Dividend Account- Where a
dividend has been declared by a company but has not been paid or claimed within thirty (30) days
from the date of declaration, thecompany shall, within seven (7) days from the
expiry of the said period of 30 days, transfer the total amount of unpaid or unclaimed
dividend to a special account called the Unpaid Dividend Account (UDA). The UDA shall be
opened by the company in any scheduled bank.

CA Indresh Gandhi
(ii) Preparing of Statement of the Unpaid Dividend- Within 90 days of transferring any amount to
the Unpaid Dividend Account, the company shall prepare a statement containing the names, last
known addresses and the amount of unpaid dividend to be paid to each person and place such
statement on its web-site, if any, and also on any other web-site approved by the Central
Government for this purpose.

(iii) Payment of Interest if default is made in transferring the Amount- If any default is made
in transferring the total unpaid dividend amount or any part thereof to the Unpaid Dividend Account,
the company shall pay, from the date of such default, interest at the rate of twelve per cent per
annum on the amount not so transferred to the said account. The interest accruing on such amount
shall ensure i.e. be available to the benefit of the members of the company in proportion to the
amount remaining unpaid to them.

(iv) Claimant to apply for payment of Claimed Amount- Any person claiming to be entitled to any
money transferred to the Unpaid Dividend Account may apply to the company concerned for payment
of the money so claimed.

(v) Transfer of Unclaimed Amount to Investor Education and Protection Fund (IEPF)- Any
money transferred to the Unpaid Dividend Account which remains unpaid or unclaimed for
seven (7) years from the date of such transfer shall be transferred by the company along
with interest accrued thereon to the Investor Education and Protection Fund.

CA Indresh Gandhi
Further, the company shall send a prescribed statement containing the details of such transfer to
the IEPF Authority and in turn, the Authority shall issue a receipt to the company as evidence of
such transfer.

(vi) Transfer of Shares to IEPF- All shares in respect of which dividend has not been paid or
claimed for 7 consecutive years or more shall be transferred by the company in the name of
Investor Education and Protection Fund along with a statement containing the prescribed details.

By way of Explanation, it is clarified that in case any dividend is paid or claimed for any year during
the said period of seven consecutive years, the share shall not be transferred to Investor Education
and Protection Fund.

(vii) Right of Owner of ‘transferred shares’ to Reclaim- Any claimant of shares so transferred to
IEPF shall be entitled to reclaim the ‘transferred shares’ from Investor Education and Protection
Fund in accordance with the prescribed procedure and on submission of prescribed documents.

(viii) Punishment for Contravention- If a company fails to comply with any of the
requirements of this section, such company shall be liable to a penalty of one lakh
rupees and in case of continuing failure, with a further penalty of five hundred rupees
for each day after the first during which such failure continues, subject to a maximum
of ten lakh rupees and every officer of the company who is in default shall be
liable to a penalty of twenty-five thousand rupees and in case of continuing failure,

CA Indresh Gandhi
with a further penalty of one hundred rupees for each day after the first during which such
failure continues, subject to a maximum of two lakh rupees.

CA Indresh Gandhi
5. INVESTOR EDUCATION AND PROTECTION FUND (IEPF)

Section 125 of the Act along with various Rules framed from time to time including 12Investor
Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 deal
with the Investor Education and Protection Fund (IEPF). This fund, being established by the Central
Government, shall be credited with specified amounts and utilized for refund of unclaimed and
unpaid amounts, promotion of investors’ awareness and protection of the interests of investors, etc.

The relevant provisions are discussed below:

1. Credit of Specified Amounts to the Fund: Following specified amounts shall be credited to the
Fund:

(a) Amount given by the Central Government- The amount given by the Central Government by
way of grants after due appropriation made by Parliament;

(b) Donations by the Central Government- Donations given by the Central Government, State
Governments, companies or any other institution for the purposes of the Fund;

(c) Amount lying in the Unpaid Dividend Account- The amount lying in the Unpaid Dividend
Account (UDA) of companies which is transferred by them to the Fund under section 124(5);
CA Indresh Gandhi
(d) Amount in the General Revenue Account of the Central Government-The amount in the
General Revenue Account of the Central Government which had been transferred to that account
under section 205A(5) of the Companies Act, 1956 as it stood immediately before the
commencement of the Companies (Amendment) Act, 1999 and remaining unpaid or unclaimed on the
commencement of the Act of 2013;

(e) Amount in IEPF- The amount lying in the Investor Education and Protection Fund under section
205C of the Companies Act, 1956;

(f) Income from Investments- The interest or other income received out of investments made
from the Fund;

(g) Amount received through disgorgement or disposal of Securities- The amount received under
section 38(4) i.e. amount received through disgorgement 13or disposal of securities seized from a
person who has been convicted for personation for acquisition of securities as provided in section
38(3);

(h) Application Money- The application money received by companies for allotment
of any securities and due for refund (only if such amount has remained unclaimed
and unpaid fora period of seven years from the date it became due for payment);

(i) Matured Deposits- Matured deposits with companies other than banking companies

CA Indresh Gandhi
(only if such amount has remained unclaimed and unpaid for a period of seven years from the date it
became due for payment);

(j) Matured Debentures- Matured debentures with companies (only if such amount has remained
unclaimed and unpaid for a period of seven years from the date it became due for payment);

(k) Interest- Interest accrued on the amounts referred to in clauses (h) to (j);

(l) Amount received from Sale Proceeds- Amount received from sale proceeds of fractional
shares arising out of issuance of bonus shares, merger and amalgamation for seven or more years;

(m) Redemption Amount- Redemption amount of preference shares remaining unpaid or unclaimed
for seven or more years; and

(n) Other Amounts- Such other amounts as prescribed in Rule 3 of the Investor Education and
Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016. They are as under:

(a) all amounts payable as mentioned in clause (a) to (n) of section 125 (2) of the Act
[as stated above];

(b) all shares in accordance with section 124 (6) i.e. all those shares in whose case
dividends have not been claimed or paid for seven consecutive years or more;

CA Indresh Gandhi
(c) all the resultant benefits arising out of shares held by the Authority under clause (b) above;

(d) all grants, fees and charges received by the Authority under these rules;

(e) all sums received by the Authority from such other sources as may be decided upon by the
Central Government;

(f) all income earned by the Authority in any year;

(g) all amounts payable as mentioned in sub-section (3) of section 10B of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970, section 10B of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1980 sub-section (3) of section 38A of the State
Bank of India Act, 1955 and section 40A of the State Bank of India (Subsidiary Bank) Act, 1959;
and; and

(h) all other sums of money collected by the Authority as envisaged in the Act.

Further, according to Rule 3 (3), in case of term deposits and debentures of companies,
due unpaid or unclaimed interest shall be transferred to the Fund along with the transfer
of the matured amount of such term deposits and debentures.

2. Utilization of the Fund: According to section 125 (3) the Fund shall be utilized for:

CA Indresh Gandhi
(a) refund of unclaimed dividends, matured deposits, matured debentures, the application money due
for refund and interest thereon;

(b) promotion of investors’ education, awareness and protection;

(c) distribution of any disgorged amount among eligible and identifiable applicants for shares or
debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong
actions by any person, in accordance with the orders made by the Court which had ordered
disgorgement;

(d) reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and
245 by members, debenture-holders or depositors as may be sanctioned by the Tribunal; and

(e) any other purpose incidental thereto in accordance with the rules framed under the Investor
Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016.

Refund of Amount- A person amounts referred to in clauses (a) to (d) of sub-section

(2) of section 205C were transferred to IEPF, after the expiry of 7 years as per provisions
of the Companies Act, 1956, shall be entitled to get refund out of the fund in respect of such
claims in accordance with rules made under this section.

3. Application to the Authority for payment: According to section 125 (4), any person

CA Indresh Gandhi
claiming to be entitled to the amount referred in section 125 (2) may apply to the Authority
constituted under section 125 (5) for the payment of the money claimed.

4. Other Provisions governing the IEPF

(i) Constitution of the Authority for Administration of Fund- In terms of Notification dated
13.01.201614, the Ministry of Corporate Affairs has notified sub-section (5), sub-section (6)
(except with respect to the manner of administration of the Fund) and sub-section (7) of section
125 of the Act w.e.f. 13.01.2016. With this Notification, an Authority is being constituted for
the administration and maintenance of accounts as well as other relevant records of the Fund.

Further, with the notification of IEPF Authority (Appointment of Chairperson and Members, holding
of Meetings and provision for Offices and Officers) Rules, 2016 on 13.01.2016, the Secretary,
Ministry of Corporate Affairs shall be the ex-officio Chairperson of the Authority. In addition,
there shall be six members (maximum limit seven) and a Chief Executive Officer who shall be the
convenor of the Authority.

(ii) Provision of required Resources by the Central Government for Administration of the
Fund- The Central Government may provide to the Authority such offices, officers, employees
and other resources in accordance with the IEPF Authority (Appointment of Chairperson and
Members, holding of Meetings and provision for Offices and Officers) Rules, 2016.

CA Indresh Gandhi
(iii) Authority to work in consultation with CAG of India- The Authority shall administer the Fund
and maintain separate accounts and other relevant records in relation to the Fund in such form as
may beprescribed after consultation with the Comptroller and AuditorGeneral of India.

(iv) Spending of Money- The Authority shall be competent to spend money out of the Fund for
carrying out the objects specified in section 125 (3) i.e. purposes for which the fund shall be
utilized.

(v) Audit of the Fund- The accounts of the Fund shall be audited by the Comptroller and Auditor-
General of India at such intervals as may be specified by him. Such audited accounts together with
the audit report thereon shall be forwarded annually by the Authority to the Central Government.

(vi) Preparation of Annual Report by the Authority- For each financial year, the Authority shall
prepare in the prescribed form and at prescribed time its annual report giving full account of its
activities during the financial year and forward a copy thereof to the Central Government. In turn,
the Central Government shall cause the annual report and the audit report given by the Comptroller
and AuditorGeneral of India to be laid before each House of Parliament.

6. RIGHT OF DIVIDEND, RIGHTS SHARES AND BONUS

SHARES TO BE HELD IN ABEYANCE PENDING REGISTRATION
OF TRANSFER OF SHARES
CA Indresh Gandhi
According to Section 126, in case any instrument of transfer of shares has been delivered by a
shareholder for registration and the transfer of such shares has not been registered by the
company, such company shall take the following steps:

(a) Transfer the dividend in relation to such shares to the Unpaid Dividend Account unless it is
authorised by the registered holder of such share in writing to pay such dividend to the transferee
specified in the instrument of transfer; and

(b) Keep in abeyance in relation to such shares any offer of rights shares under section 62 (1) (a) and
any issue of fully paid-up bonus shares in pursuance of first proviso to section 123 (5).

7. PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS

WITHIN 30 DAYS
Section 127 of the Act contains time limit for distribution of dividends and punishment
for failure to distribute dividend on time. Certain exemptions from punishments are
also provided. These provisions are stated as under:

A. Time Limit for Distribution of Dividends

CA Indresh Gandhi
Where a company declares dividend, it must be paid or the dividend warrant thereof must be posted
within 30 days from the date of declaration of dividend to the shareholders entitled to the same.
Posting of dividend warrants within 30 days absolves the company from any punishment irrespective
of whether it is received by the shareholder concerned within this time or not. The offence is
committed only when the company fails to post dividend warrants to the registered address of the
members within 30 days of declaration. Non-receipt of dividend warrants by the shareholders within
the prescribed time does not attract any punishment.

B. Punishment for Failure

In case a company fails to pay declared dividends or fails to post dividend warrants within 30 days
of declaration, following punishments are applicable:

(i) Every director of the company shall be punishable with imprisonment of up to two years, if he is
knowingly a party to the default. And, he shall also be liable to pay minimum fine of ` 1,000 for
every day during which such default continues.

(ii) The company shall be liable to pay simple interest at the rate of 18% p.a. during
the period for which such default continues.

C. Exemption from Punishment

CA Indresh Gandhi
Under the following cases, where the company has failed to pay declared dividend within 30 days of
declaration, no offence shall be deemed to have been committed and therefore, no punishment is
attracted:

(a) where the dividend could not be paid by reason of the operation of any law;

(b) 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;

(c) where there is a dispute regarding the right to receive the dividend;

(d) where the dividend has been lawfully adjusted by the company against any sum due to it from the
shareholder;

(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the
prescribed period of 30 days was not due to any default on the part of the company.

CA Indresh Gandhi
Example 12: Mr. Alok, holding equity shares of face value of ` 10 lakhs, has not paid ` 80,000
towards call money due on shares. Can the dividend amount payable to him be adjusted against such
dues? Give reasons for your answer.

Answer: Yes. As per clause (d) of Proviso to Section 127, where the dividend is declared
by a company and there remains calls in arrears or any other sum due from a member,
then the dividend can be lawfully adjusted by the company against any such dues.

Thus, the action of the company adjusting dividend payable to Mr. Alok towards call money
due on shares amounting to ` 80,000 is justified and therefore, no punishment is attracted.

CA Indresh Gandhi
D. Applicability of Section 127 to Nidhis

In terms of Notification No. GSR 465 (E), dated 05-06-2015, Section 127 dealing with punishment
shall apply to the Nidhis, subject to the following modification:

In case the dividend payable to a member is ` 100 or less, it shall be sufficient compliance of the
provisions of the section 127, if the declaration of the dividend is announced in the local language in
one local newspaper of wide circulation and announcement of the said declaration is also displayed on
the notice board of the Nidhis for at least 3 months.

CA Indresh Gandhi
CA Indresh Gandhi