DESSERTATION: DIVIDEND

DIVIDEND

Meaning- The profit which falls to share of each individual member of Company.

S. 14 A : Dividend includes any interim dividend.

The SC in CIT v/s Girdhar Das and Company.

Thus, dividend is the payment made by a company to its shareholders out of its distributable profits. It is calculated as a percentage of the nominal value of their shares, which is fixed for holders of preference shares and fluctuating for holders of equity or ordinary shares. Distributable profits are the profits of a company that are legally available for distribution as dividends.

Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is available. Dividend for a financial year of the company (which is called 'final dividend') are payable only if they are declared by the company at its annual general meeting on the recommendation of the directors. But sometimes dividends are also paid by the directors themselves between two annual general meetings without declaring them at an annual general meeting (which is called 'interim dividend').

The size of the dividend payment is determined by the Board of directors of a company, who decide how much to pay out to shareholders and how much profit to retain in the business; these amounts may vary from year to year. This is called 'recommendation of dividend'. There is no specific provision in the Act to this effect. However, this is implied from the provision in section 217(1)(c), according to which the Board of directors must state in the Directors' Report the amount, if any, which it recommends should be paid by way of dividend.

The dividend recommended by the Board of directors in the Board's Report must be 'declared' at the annual general meeting of the company. This constitutes an item of ordinary business to be transacted at every annual general meeting. This does not apply to interim dividend.

The power regarding appropriation of profits is given to the Board of directors,. However, they are governed by the provisions of Act. The directors are to follow table. A or the provisions of Articles and the provisions of the Companies Act 1950 in the regard. The following are the rules regarding declaration and payment of dividend:-

(1) Dividend on Paid up Capital. A company may, if so authorized by its Articles, pay dividend on the paid up value of shares under section 93 of the companies Act.

(2) Provisions of Articles of Association. Rules 85 to 94 of Table A provide that-

(i) A company may declare dividend its general meeting provided it does not exceed the a mount recommenced by the board of directors.

(ii) the board of directors may from the time pay to members such interim dividends, as appears to it to be justified by the profits of the company.

(iii) Notice of any dividend should be given to those who are entitled to receive it.

(iv) The directors my transfer an amount they think p[roper to the reserve fund which may be utilised for any contingencies.

(v) When a dividend has been declared, it becomes a liability of the company to the shareholders from the date of its declaration but no interest can be claimed on it.

3. Dividends only of Profits.

(a) Dividends can only be declared or paid out of (i) the current profits of the co., (ii) the past accumulated profits and (iii) moneys provided by the government for the payment of dividends in pursuance of a guarantee given by that government. No dividend can be paid out of capital. (Sec. 205 (i)). Director who is responsible for payment of dividend out of capital shall be personally liable to take good such amount to the co.

(b) Cos. r not entitled to pay any dividend unless present or arrears of depreciation have been provided for out of the profits and an amount of 10 % or reports has been transferred to reserve. However, central govt. may allow any company to declare or pay dividends out of profits before providing for any depreciation.

(c) Capital Profits may also be utilised for the declarations of dividend provided (i) there is nothing in the Article prohibiting the distribution of dividend out of capital profits; (ii) they have been reallied in cash: and (iii) they ave been realised in cash and (iii) they remain as profits after revaluation of all assets and liabilities.

(d) Dividend cannot be paid out of accumulated profits unless current losses are made good.

(4) Payment of dividend only in Cash [Sec. 205 (iii)]. Dividends are to be paid in cash only except in the following circumstances-

(a) by capitalizing the profits by issue of fully paid bonus shares, if Articles so permit, provided all legal formalities have been satisfied in respect of issue of bonus shares.

(b) by paying up any unpaid amount on partly paid up shares.

(5) Payment of Dividend to Specified Persons (Sec. 206). Dividend shall be paid only to those whose names appear on the Register of member’s son the date of declaration of dividend or to the holders of dividend warrant, if issued by the company.

(6) Payment of Dividend within 42 days (Sec. 207) Dividend must be paid within 42 days of its declarations except in the following circumstance:-

(i) by operation of law of insolvency;

(ii) in compliance of the directions of the shareholders;

(iii) where right to receive dividend is pending decision;

(iv) where it is not due to the default of the company.

(v) if company lawfully adjusts the amount against any debt due form the shareholder.

(7) Transfer of Unpaid dividend to a Special Bank Account (Sec. 205 A) According to section 205 A, newly inserted by the Companies (Amendment) Act 1974, where a company has declared a dividend but has not posted the dividend warrant in respect therefor within 42 days to the shareholders entitled to it, such unpaid dividends shall be transferred to a special account to be opened by the company in that behalf in any Scheduled Bank to be called Unpaid Dividend Account of ......Co. Ltd/Co. (Pvt) Ltd.' If the unpaid dividend are not so transferred, the company shall pay an interest at 12 % p.a. Any unpaid amount of dividend declared before the commencement of this Amendment Act shall also be transferred to such special account within 6 months from the date of commencement of the Act.

8. Transfer Unclaimed Dividend to Central Government. Any amount transferred to the unpaid dividend account remains unpaid or unclaimed for 3 years from the date of such transfer shall be transferred to the 'General Revenue Account' by the company along with a statement giving full particulars in respect of the sums so transferred and the last known addresses of the persons entitled to receive it and such other particulars as may be prescribed. The company is entitled so a receipt for such transfer from the Reserve Bank of India.

If a co. fails to comply the above said provisions (given in para 8 and 9 above), the company and every officer of the company who is in default shall be punishable with a fine which may extend to Rs. 500 for every day during which default continues.

Interim Dividend

Dividend that is paid on shares before the time of declaring the final dividend is called interim dividend. It is a dividend paid by the directors any time between two annual general meetings of the company. The word ‘interim’ is not used as meaning temporary or provisional, but as meaning (happening) in the meantime, meanwhile, or intervening time, since interim dividend is paid between two annual general meetings at which final dividend is declared. It is a dividend paid on the basis of less than a full year's results. The Act does not contain any provision with regard to interim dividend. The Act vests the power of recommendation of a final dividend in the Board of Directors and the power of declaration in the shareholders. However, the articles of association usually empower the directors to pay an interim dividend.

Regulation 86 of Table-A provides that the Board may from time to time pay to the members such interim dividends as appear to it to be justified by the profits of the company. The power given by such an article is vested in the directors and cannot be exercised by the shareholders of the company and a resolution by the company in general meeting requiring the directors to declare an interim dividend is inoperative, unless a concurrent power to declare such a dividend is expressly conferred on the company in general meeting by the articles.

Before declaring an interim dividend, directors must satisfy themselves that there are profits available for distribution by way of dividends. The declaration of interim dividends depends much more upon estimates and opinions than the declaration of a final dividend, which is made upon the information contained in a formal balance sheet

The directors' paramount duty is not to pay dividends out of capital, and accordingly, after declaring an interim dividend and before payment the directors can reconsider the matter and properly refuse to pay it for they may discover that it will, if paid, have to be paid out of capital

An important difference between final and interim dividends is that once a final dividend has been declared, it is a debt payable to the shareholders and cannot be revoked or reduced by any subsequent action of the company; but where directors have power to pay interim dividends, their decision to do so is not a declaration of a dividend, and so can be rescinded or varied at any time before the dividend is paid

Procedure for payment of interim dividend

1.	It should be verified that Articles of Association that they authorize the directors to declare interim dividend, if not, then alter the Articles of Association.
2.	Board Meeting be convened after giving notice to all the directors [Section 286] to discuss besides others the following matters. · To declared interim dividend. · To decide the record date. [Agenda]
3.	Stock Exchange be informed with which shares of the company are listed about the date of this meeting prior to the board meeting.
4.	In case the shares of the company are listed on a Stock Exchange, the following must be done:- · Inform the said Stock Exchange within 15 minutes of the board Meeting, by letter or fax of all dividends declared; · Give intimation to the Stock Exchange about the period of record date at least 21 days in advance. · Issue simultaneously the dividend warrants which shall be encashable at par at all the branches of your company’s bankers. · The dividend warrants should reach the shareholders on or before the date fixed for payment of dividend.
5.	In case of joint holders, send the dividend warrant to the joint shareholders who is first named on the register of Members of your company or to such person and to such address as the shareholder or shareholders may in writing direct.
6.	A separate bank account be opened and credit the amount of dividend within 5 days from the date of declaration.
7.	Make the payment or issue dividend warrants within thirty days from the date of declaration.
8.	If the company fails to pay the dividend declared or fails to post the warrant in respect thereof within thirty days from the date of declaration, every director of the company if he is knowingly a party to the default will be punishable with simple imprisonment of 3 years and will also be liable to a fine of Rs. 1,000/- for every day during which the default continues and the company will be liable to pay simple interest@18% per annum during the period for which such default continues. [Section 207]
9.	The amount of dividend must be rounded off to the nearest rupee.
10.	Where instruments of transfer have been received by the company and the transfer of such shares has not been registered when the dividend warrants were posted, the amount of dividend must be kept in the special account called “Unpaid Dividend Account” unless the company is authorised by the registered holders of those shares in writing to pay the dividend to the transferees specified in the said instruments of transfer. [Section 206A]
11.	Arrange to transfer the total amount of dividend, which remains unpaid or unclaimed within seventy days from the date of expiry of thirty days from the date of its declaration to a special account to be opened by your company in this behalf in any scheduled bank to be called “Unpaid Dividend Account of Company Ltd.”. [Section 205A(1)]

12.

Further note that no offence as aforesaid will be deemed to have been committed by your company’s directors in the following cases:-

· Where the dividend could not be paid by reason of the operation of any law;

· Where a shareholder has given direction to the company regarding the payment of the dividend and those directions cannot be compiled with;

· Where there is a dispute regarding the right to receive the dividend;

· Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; Where for any other reason the failure to pay the dividend or to post the warrant within the period of thirty days from the date of declaration was not due to any default on the part of the company. [Section 207 Proviso]

Final Dividend : Procedure for payment

1.	Convene Board Meeting after giving notice to all the directors [Section 286] to discuss besides others the following matters.  To recommend the rate of dividend.  To decide the dates of Book closure.  To fix the date, time and place for convening the Annual General Meeting of shareholders.  Issue and despatch notices in writing at least 21 clear days before the date of the General Meeting [Section 171(1)] [Agenda]
2.	Inform the Stock Exchange with which shares of the company are listed about the date of this meeting prior to the board meeting. [Clause 19 of the Standard Listing Agreement]
3.	Ensure that the required percentage of profits is transferred to our company’s reserves. [Rule 2 of the companies [Transfer of profits to reserves] Rules, 1975.
4.	Company may transfer to reserves more than ten per cent of the current profits if the conditions contained in Rule 3 of the said Rules are compiled with.
5.	If case the shares of the company are listed on a Stock Exchange, the following must be done:-  Inform the said Stock Exchange within 15 minutes of the board Meeting, by letter or fax of all dividends recommended;  The total turnover, gross profit or loss, provision for depreciation, tax provision and net profit for the year (with comparison with the previous year) and the amount appropriated from reserves, capital profits, accumulated profits of past years or other special source to provide partly or wholly for the dividend even if this calls for qualification that such information is provisional or subject to audit. [Clause 20 of the Standard Listing Agreement]  Give intimation to the Stock Exchange about the period of book closure atleast 21 days in advance. [Clause 15 & 16 of the Standard Listing Agreement]  Issue simultaneously the dividend warrants which shall be encashable at par at all the branches of your company’s bankers.  The dividend warrants should reach the shareholders on or before the date fixed for payment of dividend. [Clause 20 and 21 of the Standard Listing Agreement]
6.	In case of joint holders, dividend warrant must be sent to the joint shareholders who is first named on the register of Members of the company or to such person and to such address as the shareholder or shareholders specify in writing. [Section 205(5)(b)]
7.	Hold and convene the General Meeting and pass an Ordinary Resolution declaring dividend out of your company’s reserves.
8.	Forward 3 copies of the notice and copy of the minutes of the general Meeting to Stock Exchange with which the shares of the company are listed. [Clause 31 (c) and (d) of the Standard Listing Agreement]
9.	Open a separate bank account and credit the amount of dividend within 5 days from the date of declaration.
10.	Make the payment or issue dividend warrants within thirty days from the date of declaration.
11.	If the company fails to pay the dividend declared or fails to post the warrant in respect thereof within thirty days from the date of declaration, every director of the company if he is knowingly a party to the default will be punishable with simple imprisonment of 3 years and will also be liable to a fine of Rs. 1,000/- for every day during which the default continues and the company will be liable to pay simple interest@18% per annum during the period for which such default continues. [Section 207]
12.	The amount of dividend must be rounded off to the nearest rupee.
13.	Where instruments of transfer have been received by the company and the transfer of such shares has not been registered when the dividend warrants were posted, the amount of dividend must be kept in the special account called “Unpaid Dividend Account” unless the company is authorised by the registered holders of those shares in writing to pay the dividend to the transferees specified in the said instruments of transfer. [Section 206A]
14.	Arrange to transfer the total amount of dividend, which remains unpaid or unclaimed within seventy days from the date of expiry of thirty days from the date of its declaration to a special account to be opened by your company in this behalf in any scheduled bank to be called “Unpaid Dividend Account of Company Ltd.”. [Section 205A(1)]
15.	Further note that no offence as aforesaid will be deemed to have been committed by your company’s directors in the following cases:-  Where the dividend could not be paid by reason of the operation of any law;  Where a shareholder has given direction to the company regarding the payment of the dividend and those directions cannot be compiled with;  Where there is a dispute regarding the right to receive the dividend;  Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; Where for any other reason the failure to pay the dividend or to post the warrant within the period of thirty days from the date of declaration was not due to any default on the part of the company. [Section 207 Proviso]