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L E G A L A N D P R O C E D U R A L A S P E C T S O F PAY M E N T O F

D I V I D E N D

DIVIDEND It refers to that portion of profits of a company which is distributed by the company among its

shareholders.

It is the periodical payment made by the company to its shareholders out of divisible profits.

Divisible profits are those profits which are legally available for distribution of dividend to its

shareholders.

Legal provisions relating to declaration of dividend are laid down in Section 250, 250A,206

and 207 of the Companies Act.

IMPORTANT PROVISIONS IN PAYMENT OF DIVIDEND

Sources of Declaring Dividend.

Transfer to Reserve.

Declaration of Dividend out of Past Profits or Reserves.

Other Provisions and Aspects of Payment of Dividend.

SOURCES OF DECLARING DIVIDEND

Out of Current Profit.

Out of Past Profit.

Out of Money Provided by the Government.

TRANSFER TO RESERVE The Companies Rule 1975 require a company providing more than 10% dividend to

transfer a certain percentage of current year’s profit to reserve as specified below:

If dividend proposed exceeds 10% and does not exceeds 12.5%, the amount to be transferred to reserve should not be less than 2.5%.

If dividend proposed exceeds 12.5% and does not exceeds 15%, the amount to be transferred to reserve should not be less than 5%.

If dividend proposed exceeds 15% and does not exceeds 20%, the amount to be transferred to reserve should not be less than 7.5%.

If dividend proposed exceeds 20%, the amount to be transferred to reserve should not be less than 5%.

DECLARATION OF DIVIDEND OUT OF PAST PROFITS OR RESERVES

If a company wants to declare dividend out of accumulated profit or reserves, it has to comply with the following conditions:

The rate of dividend should not exceed the average of the rates at which dividend was declared by it in 5 years immediately preceding that year or 10% of its paid up capital, which ever is less.

The total amount to drawn for the declaration of dividend from the accumulated profit should not exceed an amount equal to one tenth of the sum of its paid up capital and free reserves and the amount so drawn should be utilised to set off the losses incurred in the financial year.

The balance of reserves after such drawl should not fall below 15% of its paid up capital.

OTHER PROVISIONS AND ASPECTS OF PAYMENT OF DIVIDEND

• The decision in regard to the payment of final dividend is taken at the annual general meeting of the shareholders only on the recommendation of the director. The shareholder themselves cannot declare dividend.

• Dividend on equity shares can be paid only after the declaration of dividend on preference shares.

• When dividend is declared by a company, it must be paid by the company within 30days of declaration.

• Any dividend payable in cash maybe paid by cheque or warrant sent through the post directed to the registered address of the shareholder.

• No dividend can be paid on calls in advance.

• In the absence of any specific provision in the articles of association of the company, dividend is paid on the paid up capital of the company. If there are calls in arrear, dividend is paid on the amount paid by the shareholders.

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