COMPANY LAW

UNIT 5 : Dividends, Audit and Winding Up

TOPIC- DIVIDENDS

Monika Arya, Associate Professor, Bharati College , Delhi

University
Dividends (Sec.123 to Sec.127)
The term 'dividend' refers to that part of the profits of the company which is distributed by the
company among its shareholders. As per Sec.2(35) , dividend includes interim dividend. The
shareholders can claim dividends only when-
dividend is recommended by BOD
dividend is declared by shareholders in the general meeting i.e. the shareholders approve the
rate of dividend recommended by the BOD in the AGM
Points to remember
• Unless the articles provide otherwise, the shareholders cannot compel the Board to increase the
recommended rate of dividend (Regulation 80 of Table F of Companies Act, 2013). But they
can reduce the amount\ rate of recommended dividend.
• Dividend is always declared for the working of one financial year and once it has been so
declared, neither the company nor its directors can declare a further dividend for the same
year at a subsequent general meeting
• Dividend should be declared only at an Annual General Meeting. However, dividend can be
declared at an EGM only if the company could not declare a dividend at an AGM and the
articles do not provide otherwise.
• A dividend once declared by the company in the general meeting becomes a debt payable
by the company to the shareholders .
Monika Arya, Associate Professor, Bharati College , Delhi
University
Legal provisions relating to Dividends as per Sec.123 and 127
• Dividends can be declared by a company for any financial year :
a) out of current years' profits or out of undistributed profits of any previous financial year \ years arrived at
after providing for depreciation as per Schedule II of the Companies Act or both;
b) out of accumulated profits lying in the free reserves but only in the case of inadequacy or absence of profits in
the financial year and only in accordance with Rule 3 of Companies ( Declaration and Payment of Dividend)
Rules,2014' which is as follows
 The rate of dividend declared shall not exceed the average rates of dividends declared in the immediately preceding 3 years
 Total amount drawn from accumulated profits \ reserves should not be more than 10% ( paid up share capital + free
reserves)
 Balance of reserves after the withdrawal shall not fall below 15% of paid up share capital
 Amount so withdrawn shall first be utilized to set off losses incurred in the year in which dividend is declared
 No dividend can be declared by the company from reserves other than free reserves
c) out of money provided by Central or State Government for the payment of dividends in pursuance of a
guarantee given by them
• Dividends cannot be declared out of capital otherwise it will amount to irregular reduction of capital. Also.
• Before declaration of dividend in any financial year, a company may transfer some percentage of its profits for
that financial year to the reserves of the company. However, it is totally optional for them and they can transfer
any amount they deem fit.
• Before declaration of dividend in any financial year, the previous years' losses and depreciation not provided in
earlier year\ years has to set off.

Monika Arya, Associate Professor, Bharati College , Delhi

University
Legal provisions relating to Dividends as per Sec.123 and 127
• Once declared, the amount of dividend shall be deposited in a separate bank
account within 5 days and shall be used for the payment of dividend.
• Dividend shall be paid only to registered shareholders or their orders or their bankers
• Dividend shall be paid only in cash i.e. paid by cheque\dividend warrant\electronic
means.
• Dividends shall be paid in proportion to the amounts paid up on each share.
• Dividends \ dividend warrants must be paid\ posted within 30 days from the date of
declaration otherwise the director \manager guilty of default shall be punishable with
imprisonment <=2 years + fine >= ₹1000 per day during which default continues.
Further , the company shall be liable to pay simple interest @18% [Link] the
period default continues. In the following cases however they are not liable
Where dividend cannot be paid due to operation of law e.g. dividends have been freezed
Where there is a dispute regarding the right to receive the dividend
Where dividend has been lawfully adjusted by the company against any amount due from a
shareholder.
Where any directions given by the shareholder to the company regarding the payment of dividend
cannot be complied with
Where, for any other reason, the failure occurred not due to any default on the part of the
company. Monika Arya, Associate Professor, Bharati College , Delhi
University
Interim Dividend
A dividend declared by the Board of Directors in between two AGMs of the company is
called interim dividend. Sec.2(35) defines dividend to include interim dividend.
• The Board of Directors declare interim dividend .
• The interim dividend may be declared during any financial year or during the period
from closure of financial year till the holding of AGM.
• Interim dividend may be declared out of surplus in the P&L Account or out of profits of
the concerned financial year or out of profits generated during the current financial
year upto the quarter preceding the date of declaration of interim dividend.
• Incase a company has incurred loss during the current financial year up to the quarter
preceding the date of declaration of interim dividend, then rate of interim dividend
shall not be higher than the average of dividends declared by the company during
immediately preceding three financial years.
• The amount of interim dividend shall be deposited in a separate bank account within 5
days of its declaration by Board. Similarly, all other provisions of Sec.123 and Sec.127
shall apply to interim dividend also.
Monika Arya, Associate Professor, Bharati College , Delhi
University
Difference between interim dividend and final dividend -
INTERIM DIVIDEND FINAL DIVIDEND
Board of Directors declare interim dividend Shareholders in AGM declare final dividend
It is declared before the preparation of final It is declared only after the preparation of final
accounts accounts and ascertainment of profits
Usually it relates to a part of year eg. for 6 Final dividend relates to a full year
months or 3 months
Board can declare interim dividend only when No need of any express provision in Articles for
the Articles permit declaring final dividend as it is an inherent right
of shareholders.

An interim dividend once declared does not A final dividend once declared becomes a debt
become a debt due from the company i .e. can due from the company i.e. cannot be revoked
be revoked with the consent of shareholders by shareholders
Monika Arya, Associate Professor, Bharati College , Delhi
University
Unpaid or Unclaimed Dividends (Sec.124)
• Where a dividend has been declared by a company but has not been paid or claimed, within
30 days from date of declaration , the company shall within 7 days from the expiry of 30 days,
transfer such dividends to a special account called " Unpaid Dividend Account" to be opened
by the company in any scheduled bank.
• If the company commits default in transferring such amount to the '' Unpaid Dividend
Account", within the prescribed time period, it will have to pay interest @ 12% p.a. on such
amount ,from the date of default.
• Any person claiming to be entitled to any money from such " Unpaid Dividend Account" shall
have to apply to the company for the payment .
• Within 90 days of transferring the amounts to the "Unpaid Dividends Account", the company
shall prepare a statement containing the names, last known addresses and the unpaid
dividend to be paid to each person and place it on the website of the company as well as any
other website approved by the Central Government.
• All the unclaimed dividends lying in the credit of " Unpaid Dividend Account" for a period of 7
years from the date of such transfer, must be transferred by the company, along with interest
earned, to the Investor Education and Protection Fund( IEPF). Further, all such shares in
respect of which dividend has not been paid \ claimed for seven consecutive years or more
shall also be transferred by the company to the IEPF along with a statement containing such
details as may be prescribed. Any claimant of shares transferred to IEPF, shall be able re-claim
such shares from IEPF on submission of prescribed documents and after following stipulated
Monika Arya, Associate Professor, Bharati College , Delhi
procedure . University
Investor Education and Protection Fund (Sec.125)- created
by the CG
Sources of Fund Utilization of Fund Management of Fund

 Grants given by CG for the Fund - Refund of unclaimed dividends, matured - CG has constituted an Authority for
 Donations given by CG\ State govts\ deposits\ debentures, redemption of administration of the Fund.
others for the Fund preference shares, application money due etc.
- The Authority consists of the Chairperson,
 Amounts lying in Unpaid Dividend
- Promotion of investors education, some members and CEO appointed by CG
Account u\s124
awareness and protection
 Amount lying in Investor Education and - The Authority administers the Fund and
Protection Fund of Companies Act, 1956 - Distribution of disgorged amount among maintains separate accounts and relevant
 Interest \ Income received out of eligible and identifiable persons who suffered records in relation to the Fund
investments made from Fund losses due to wrong actions of those guilty .
- The Authority is competent to spend money
 Amount received through disgorgement - Reimbursement of legal expenses incurred out of funds for carrying out the objects of
of securities of person convicted u\s 38 in pursuing class action suits filed by security the Fund.
for personation holders against the companies
 Application money due for refund but -The accounts of the Fund shall be audited by
remaining unclaimed for7 years or more - any other purpose incidental thereto the CAG of India.
 Matured amount of deposits\ debentures
remaining unclaimed for 7 years or more
 Redemption amount of preference shares
remaining unclaimed for 7 years or more
Monika Arya, Associate Professor, Bharati College , Delhi
 Interest accrued on above amounts University