What is dividend? Discuss the law relating to payment of dividend by companies.

Question: What is dividend? Discuss the law relating to payment of dividend by companies.

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Answer

According to the generally accepted definition, “dividend” means the profit of a company, which is not retained in the business and is distributed among the shareholders in proportion to the amount paid up on the shares held by them.

The term ‘dividend’ has been defined under Section 2(35) of the Companies Act, 2013. The term “Dividend” includes any interim dividend. It is an inclusive and not an exhaustive definition. According to the generally accepted definition, “dividend” means the profit of a company, which is not retained in the business and is distributed among the shareholders in proportion to the amount paid up on the shares held by them.

Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits are available. A dividend for a financial year of the company (which is called ‘final dividend’) is payable only if it is declared by the company at its annual general meeting on the recommendation of the Board of directors.

Sometimes dividends are also paid by the Board of directors between two annual general meetings without declaring them at an annual general meeting (which is called an ‘interim dividend’).

The companies having licences under Section 8 of the Act are prohibited by their constitution from paying any dividend to their members. They apply the profits to promote the objectives of the company.

Law relating to payment of dividend by companies:

The Companies Act 2013 governs the payment of dividends by companies in India. The following are some of the key provisions of the Act:

Declaration of Dividend: Section 123 of the Companies Act 2013 provides that a company may declare and pay dividends out of its profits for a financial year, subject to the availability of profits and the approval of shareholders at a general meeting. However, a company can only declare and pay dividends if it has accumulated profits or current year profits after providing for depreciation are available for distribution.

Restrictions on Payment of Dividend: The Act imposes several restrictions on the payment of dividends. Firstly, a company cannot declare and pay dividends if it has not complied with the provisions of the Act, such as filing of annual returns, holding annual general meetings, etc. Secondly, a company cannot pay dividends if it has defaulted on the repayment of any loans or debentures. Thirdly, a company cannot pay dividends if it has not provided for depreciation in previous years.

Unpaid Dividend Account: In case the company is not able to pay the dividend to shareholders, then it has to transfer the unpaid amount to an unpaid dividend account within 30 days of the date of declaration of such dividend. The unpaid dividend account has to be maintained for a period of 7 years, and if the amount remains unclaimed for that period, it has to be transferred to the Investor Education and Protection Fund.

Declaration of Interim Dividend: Section 123(3) provides that a company may declare interim dividends during any financial year or at the end of the financial year before the finalization of accounts. The interim dividend can be paid out of the profits of the company for the relevant financial year.

Dividend to be paid in cash: The Act mandates that dividend must be paid in cash and not in any other form, except where a shareholder has given his consent to receive the dividend in a specific form, such as shares or warrants.

Prohibition on declaring dividends out of reserves: Section 123(5) provides that a company cannot declare dividends out of its reserves, except in the case of a bonus issue.

The Companies Act 2013 sets out various provisions for the payment of dividends by companies, and it is important for companies to comply with these provisions in order to avoid legal liabilities.

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