ACKNOWLEDGEMENT

I wish to extend my heartfelt gratitude to those who have contributed to the

successful completion of this assignment. My sincere thanks go to (Dr. Baseerat
Fatima Ma’am), whose insightful feedback and guidance were instrumental
throughout this project. Their expertise and encouragement significantly enhanced
my understanding and execution of the assignment.

I would also like to acknowledge my classmates and friends for their support and
valuable discussions that helped refine my ideas. Their diverse perspectives and
constructive critiques were crucial in shaping my approach.

Additionally, I am deeply grateful to my family for their unwavering support and

patience during this period. Their encouragement provided the motivation and
strength needed to meet deadlines and overcome challenges.

This assignment is the result of collective efforts, and I am appreciative of

everyone who played a role in its completion.

Thank you.
(Mehvish Junaid)
 Introduction

WHAT IS A DIVIDEND?
Companies rely on funds to manage their business affairs successfully. Shareholders in
a company play a vital role in raising funds, and in that process, they become its
stakeholders. They exercise control over the share of profits in proportion to the
money they invest. The dividend is known as the share of profit by shareholders.
Shareholders are also considered the company's owners; therefore, they are entitled
to a dividend. There is not an exact definition of the dividend in the Companies Act,
2013. Under section 2(35), it merely mentions dividends as “any interim dividend.” To
distribute the profit among the company's shareholders, the Declaration and
Payment of Dividends under the Companies Act were enacted. In this article, we shall
cover various provisions related to the Declaration and payment of dividend under the
Companies Act, 2013.

WHO CAN DECLARE DIVIDEND?

As per the provisions contained in the Companies Act, 2013, all companies can declare
dividends except for those who are registered under section 8.

PROVISION RELATING TO DECLARATION OF

DIVIDEND
Section 123 of the Companies Act, 2013 provides that dividend should be declared by
the company on such rate at its annual general meeting as recommended by the
board. The amount of dividend approved by the board cannot be exceeded by the
company. Once the dividend is declared, it shall be debt that must be paid by the
company to its shareholders. The shareholders may sue the company in case the
dividend is not paid.

A company must primarily adopt its books of accounts, and then only shall it be
entitled to declare the dividend. A company without passing a resolution for the
adoption of accounts cannot pass a resolution for the Declaration and Payment of
dividend.

WHAT ARE THE SOURCES OF DIVIDEND?

The principle governing the declaration and payment of dividend is that dividend shall
be paid out of the profits only, but as per the Companies Act, dividend may be declared
out of:

• Profit of the company of the current year

• Undistributed or accumulated profits of the company for any previous years

• Money provided by the Central Government or State Government for paying

dividend by the company in pursuance of a guarantee given by the government.

CONDITIONS PRECEDENT TO DECLARATION OF

DIVIDEND

• Depreciation- A Company will provide depreciation to all its depreciable assets

before declaration of dividend according to the rates or useful life depending
on the case as provided in Schedule II, Companies Act, 2013.

• Transfer to Reserves- A Company before declaring dividend in any financial

year may transfer such a percentage of its profit for that financial year in
accordance with the reserves of the company.

• Free reserves- A Company other than free reserves will not declare or pay
dividends out of its reserves.
Conditions Precedent to Declaration of Dividend out of
Surplus reserves under the Companies (Declaration and
Payment of Dividend) Rules, 2014

The following conditions must be met in order to declare dividend out of surplus
reserves:

• The rate of declared dividend should not be beyond the average of the rates at
which the dividend was declared by it in three years preceding that year.

An essential thing to be noted is that the above-mentioned condition shall not apply
to the company that has not declared any dividend in any of the three financial years.

• The total amount to be withdrawn from the accumulated profits must not be
more than one-tenth of the paid-up share capital and free reserves, as shown
in the latest audited financial statement.

• The withdrawn amount shall be utilized. Firstly it shall be used to set off the
losses sustained in the financial year in which declaration of dividend is made
prior to any dividend relating to equity shares is declared.

• It must be affirmed that the balance amount of reserves is maintained that

means that the balance of reserves must not go below 15% of its paid-up share
capital after such withdrawal, as shown in the latest audited financial
statement under the rules of Declaration and Payment of Dividend.

• Setoff of previous year losses and depreciation- A company cannot make a

declaration of dividend unless the carries over losses and depreciation not
provided in previous years are set off against the profit of the company for the
current year.
It may be observed that in case any company intends to declare dividend out of the
accumulated profits that were earned by the company in previous years and were
transferred by it to the reserves due to inadequacy or absence of profits in any
financial year, such declaration of dividend cannot be made except in consistency with
the Companies (Declaration and Payment of Dividend) Rules, 2014.

PROVISIONS RELATING TO PAYMENT OF DIVIDEND

The provisions under the Companies Act, 2013 provides that no dividend shall be
paid except through cash and where the dividend is payable in cash, it can be paid by
way of cheque, warrant or by any electronic mode to the shareholder who is eligible
to receive the dividend. However, it may be kept in mind that a company, who has
defaulted in compliance with respect to the provisions of section 73 and section 74
comprising of prohibition of acceptance of deposits from public and repayment of
deposits, shall be barred to declare dividend.

The amount of the dividend (Including the interim dividend) must be deposited in
the bank in a separate account in five days from the date such declaration of
dividend is made. The dividend shall be payable to the eligible shareholder by way of
cash.

INTERIM DIVIDEND
Under the provisions of Section 123 (3), the Board of directors in a company may
declare interim dividend during any financial year, arising from profits made by the
company during the financial year or out of undistributed profits of the previous year
in accordance with the Companies (Declaration and Payment of Dividend) Rules, 2014.

The phrase “Dividend includes interim dividends” under section 2(35) shows that the
provisions of the Companies Act applicable on the final dividend to the possible extent
will be applicable also on interim dividends.
PENALTIES FOR FAILURE IN DISTRIBUTING
DIVIDENDS
As per the provisions contained in section 127 of the Companies Act, if a company
declares a dividend but it does not pay the dividend within 30 days from the date of
its declaration to the shareholder entitled to such payment of dividend, every director
of such company will be penalised with imprisonment of up to two years term and
along with fine that shall not be less than 1000 Rs. for each day during the continuation
of default. Moreover, the company shall be required to pay simple interest at 18 % per
annum during the continuation of default.

EXCEPTIONS:-

No offence would have deemed to be committed in the following situations:

• Dividend not paid due to the reason of operation of any law.

• Wherein a shareholder has directed the company for the payment of dividend,
but those directions can’t be complied with, and it has been communicated to
him.

• In case of a dispute regarding the right to receive dividend.

• In case of dividend adjusted lawfully by the company against any amount due
to it from the shareholder.

In case the failure to pay the dividend or post the warrant within the time prescribed
under this section was not owing to the default from the company.

CONCLUSION
When any company is lent money by the shareholders, it ultimately shares its profits
out of business. Such profit or share of profit is known as a Dividend, but it must be
critical to understand that a dividend is not a part of the rights of the shareholders,
but when the company declares the dividends, the right to claim for dividends arise.

BIBLIOGRAPHY

1. Bharat Vasani & Miloni Mau , Decleration of dividend: Interplay of law and
business dynamics, Cyril Amarchand Mangaldas (28th Sep 2024,5:00 PM)
https://corporate.cyrilamarchandblogs.com/2024/01/declaration-of-dividend-
interplay-of-law-and-business-dynamics/

2. Anish Roy, Understanding Dividend Under Companies Act,2013: Legal

provisions, case laws, Tax Guru, (28th Sep 2024,6:00 PM)
https://taxguru.in/company-law/understanding-dividends-companies-act-
2013.html

3. Sneha Mahawar, Section 123 of Companies Act,2013, ipleaders blog(28th Sep

2024, 6:48 PM), https://blog.ipleaders.in/section-123-of-companies-act-2013/

4. H.D. Pithawalla, Company Law, 74 , C. Jamnadas & Co. (2018)

5. Dr. N.V. Paranjape, The New Company Law, 88 Central Law Agency (2021)