Gols study 22_dividends

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Executive Short Notes – Corporate Accountability ‐ IIICSI eLearning Coaching Program

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STUDY XXII CORPORATE ACCOUNTABILITY - II

DIVISIBLE PROFITS AND DIVIDENDS

DEFINITION AND MEANING OF DIVIDEND

-Dividend is the return on the share capital subscribed for and paid to a company by its shareholders.

-“Dividend” has been defined under Section 2(14A) as “dividend” includes any interim dividend.

Difference between Dividend and Interest

-1)Dividend is paid on preference and equity shares and interest is paid on debentures and long term and short term loans/borrowings including fixed deposits.

2)Interest is a debt while dividend becomes a debt only after it has been declared by the company.

3)Interest is a charge on profits while dividend is an appropriation of profits.

Types of Dividend

1)Final Dividend

-Final dividend is recommended by the Board of directors and declared by the shareholders at the annual general meeting.

-Though the shareholders cannot increase the rate or amount of dividend, they can declare a lesser rate than the one recommended by the directors in their report.

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-Unless the Board recommends, the shareholders cannot on their own declare the dividend

2)Interim Dividend

-The Board of directors may declare interim dividend. It is paid between two AGMs of the company.

-A company normally estimates its profits for the current financial year on a fairly reasonable basis and after allocating to the reserves the prescribed percentage of profits on the basis of its estimated profits and after providing for depreciation in full, the Board may decide to pay interim dividend

-Interim dividend stands on the same footing as that of the final dividend. Both interim and final dividend when declared (by Board and company respectively) become debt and are payable within 30 days of declaration.

Dividend on Preference Shares

-A Preference share carries a fixed and preferential right to dividend in accordance with the term of issue and the articles of association, subject to the availability of distributable profits and declaration of dividend on preference shares – It may be cumulative or non cumulativethe other class.

Dividend on Equity Shares

-Dividend on equity shares are paid as per the rights of the respective classes of shares and after all dividends on preference shares have been paid to date – The rate of dividend may be even higher than the rate of preference

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shares

-Balance in Securities Premium Account cannot be used to distribute dividend

RESTRICTIONS ON DECLARATION OF DIVIDEND AND PURPOSE BEHIND IT

-They must be paid only out of profits and after providing for depreciation and setting off previous years losses, if any

-However, in exceptional circumstances, the Central Government may permit a company to declare dividend before providing for depreciation – for such approval, the Board should pass a resolution authorizing MD or company secretary to make an application to CG

-If a company has failed to comply with the provisions of Section 80A regarding of redemption of irredeemable preference shares, it shall not declare any dividend on its equity shares so long as such failure continues.

ASCERTAINMENT OF DIVISIBLE PROFITS AND DIVIDENDS

-‘Divisible profits’ means the profits which the law allows the company to distribute to the shareholders by way of dividend. ‘Profits available for dividend’ on the other hand means the profits which the directors consider should be distributed after making provision for depreciation or past losses, for reserves or for other purposes.

-Under Section 205(1), dividend can be paid by a company:

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(a) out of current year’s profits after providing for depreciation under Section 205(2); and/or

(b) out of past years’ profits after providing for depreciation under Section 205(2) and remaining undistributed; or

(c) out of moneys provided by the Central or State Government for the payment of dividend pursuant to a guarantee given by the Government.

-Profit and loss account for this purpose should be prepared in accordance with Part II of Schedule VI.

Depreciation

Under Section 205(2) depreciation should be provided :

(a) to the extent specified in Section 350; or

(b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset; or

(c) on any other basis as approved by the Central Government which has the effect similar to that of (b) above

(d) if no rate of depreciation has been provided in this Act or any rules made thereunder, on such basis as is approved by the Central Government.

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Manner of providing depreciation

-The provisions of Section 349 and Section 350 shall be complied with.

-The rates of depreciation are specified in Schedule XIV, classifying the assets into (I) Buildings; (ii) Plant and Machinery; (iii) Furniture and fittings; and (iv) ships.

Loss of previous year(s) to be set off against profits of current year or previous years.

-If a company has incurred any loss in any previous financial year(s), the lower of the following two amounts, namely:

(a) the amount of the loss, or

(b) the amount of depreciation provided for that year or those years,

should be set off against the profits of the current year for which the dividend is proposed to be declared

Transfer of Profits to Reserves

-Before declaring dividend in any year, a specified % of profits must be transferred to reserves as follows:

1)If the proposed dividend exceeds 10% but does not exceed 12.5% of paid up capital – Minimum 2.5% of current profits should be transferred

2)If the proposed dividend exceeds 12.5% but does not exceed 15% of paid up capital – Minimum 5% of current profits should be transferred

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3) If the proposed dividend exceeds 15% but does not exceed 20% of paid up capital – Minimum 7.5% of current profits should be transferred

(4)If the proposed dividend exceeds 20% of paid up capital – Minimum 10% of current profits should be transferred

-However, a company may transfer more than 10% of profits to reserves in a year, it can do so after complying with the provisions of Rule 3 of Companies (Transfer of Profits to Reserves) Rules, 1975

-A newly incorporated company is prohibited from transferring more than ten per cent of its profits to its reserves.

Dividend in Case of Absence or Inadequacy of Profits

-In case of absence or inadequacy of profits, dividend can be declared out of the accumulated profits earned by the company in the previous years and transferred by it to reserves. If it does not conform to the rules prescribed in this regard by the Government, the declaration should be approved by CG first

-Under these rules dividend can be declared from amounts drawn from free reserves in case of absence or or inadequacy of profits subject to the following conditions:

(a) the rate of dividend declared shall not exceed the average of the rates of dividend declared by it during the immediately preceding last five years or 10% of the paid-up capital, whichever is less;

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(b) the amount to be drawn shall not exceed 10% of its paid-up capital and free reserves and the amount so drawn should be first utilised to set off the losses incurred in the financial years before any dividend in respect of preference as equity shares is declared; and

(c) the balance of reserves after such drawal shall not fall below 15% of the paid-up share capital

DECLARATION OF DIVIDEND

-Members shall declare the final dividend in AGM

-Once declared it becomes a debt and a shareholder is entitled to sue for recovery of the same after expiry of the period of 30 days prescribed under Section 207

-If a dividend is so declared at the general meeting, the company cannot declare a further dividend for the same year

-There can be no declaration of dividend for past years

-Interim dividend is declared by the Board of directors

Revocation of Declared Dividend

-A dividend once declared becomes a debt and cannot be revoked, except with the consent of the shareholders.

-However, if a dividend has been illegally declared, the directors can revoke the declared dividend. If an illegally declared dividend is paid then the directors shall be responsible, liable and accountable to the company personally.

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Payment of Dividend in Cash or in Kind

-Dividend can be paid only in cash, not in kind.

Liability of Directors, Shareholders and Auditors for Improper Dividend

-The directors are personally liable to account for improper payment of dividend like payment out of capital, to the extent to which it has caused loss to the company. – However, if a member received dividend knowing that it is paid out of capital he is liable to make good the loss of the company and the directors can recover the amount so paid.

-An auditor who is knowingly a party to the payment of improper dividend is liable to be proceeded against and the amount which is improperly paid may be recovered from him.

TO WHOM PAID

-Under Section 206, it has to be paid to the registered shareholder of the share or to his order or to his bankers. –

-For this purpose, usually companies close the register of members under Section 154 of the Act or fix a record date, of which 7 days notice should be given by publication of advertisement in two newspapers—one in English and the other in the language of the region in which the registered office of the company is situate.

-Section 206A provides that in case instrument of transfer of shares is pending registration with the company, the

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dividends in relation to such shares should be transferred to the special bank account opened by the company under Section 205A unless the company is authorised by the registered shareholders in writing to pay such dividend to the transferee specified in the instrument of transfer.

WHEN PAYABLE

-Under Section 207, dividend has to be distributed within 30 days of the declaration - Posting of dividend warrants within 30 days will be deemed to be payment irrespective of the fact whether the warrant has been encashed or not. - In the case of joint holders the warrant has to be sent to the registered address of the first named joint holder or to such person and to such address as the joint holders may in writing direct.

-However, in the following circumstances dividend need not be paid within 30 days:

(i) Where dividend could not be paid by reason of the operation of any law

(ii) Where a shareholder has given directions to the company regarding the payment of dividend and these directions cannot be complied with;

(iii) Where there is a dispute regarding the right to receive dividend;

(iv) Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or

(v) Where for any other reason, failure to pay the

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dividend or to post the warrant was not due to any default on the part of the company.

-Under Section 205A, if a dividend declared by a company has not been paid or claimed within 30 days of the declaration, the same shall within 7 days after the expiry of 30 days from the date of declaration, 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…………….Company Limited/Company (Private) Limited”. Subsequently dividend claims will be met from this account.

-According to Section 205A(5), if any amount remains unpaid or unclaimed in that account for a period of seven years from the date of such transfer, the amount so remaining unpaid/unclaimed together with any interest credited thereto should be transferred to the ‘Investor Education and Protection Fund’.

-The above provisions shall also apply to payment of interim dividend.

ESTABLISHMENT OF INVESTOR EDUCATION AND PROTECTION FUND

-The provisions of Section 205C are as follows:

-The Central Government shall establish the above fund

-The fund will be credited with:

(a) amounts in the unpaid dividend accounts of companies;

(b) the application moneys received by companies for

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allotment of any securities and due for refund;

(c) matured deposits with companies;

(d) matured debentures with companies;

(e) the interest accrued on the account referred to in clauses (a) to (d);

(f) grants and donations given to the Fund by the Central Government, State Government, companies or any other institutions for the purposes of the Fund; and

(g) the interest or other income received out of the investments made from the Fund.

-Provided that no such amounts referred to in clauses (a) to (d) shall form part of the fund unless such amounts have remained unclaimed and unpaid for a period of seven years from the date they became due for payment.

-Once the fund is credited with the above, no claims shall lie against the Fund or the company in respect of individual unclaimed or unpaid amounts so far

-The Fund shall be utilised for promotion of investor awareness and protection of the interests of investors in accordance with such rules as may be prescribed.

DIVIDEND WARRANTS

-Dividend is paid by cheque or warrant

-“Dividend warrant” is an order by the company to its banker to pay the amount specified therein to the shareholder whose name is written therein.

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-Dividend may be distributed through ECS facility to avoid dividend warrants falling into wrong hands leading to disputes later on

Can Dividends be Paid out of Capital

-Dividend cannot be paid out of capital, even if the articles of association authorise such payment.

-However, interest may be paid out of capital, on the shares of the company by following the provisions of Section 208.

PAYMENT OF INTEREST OUT OF CAPITAL

-If shares are issued to raise money to defray the cost of works or building or of plant or project which cannot be made profitable for a long period, the company may pay interest on capital raised and may charge the same to capital as part of the cost of works, buildings or project or plant provided the following conditions are satisfied:

(a) Authority and Sanction of the Central Government—The payment should be authorised by the articles or a special resolution should be passed AND prior sanction of the Central Government is obtained.

(b) Time Period—The payment of interest shall be made only up to the close of the half-year next after the half-year during which the work or building has been actually completed or the plant provided or any shorter period decided by CG

(c) Rate of Interest—The rate of interest shall, in no case, exceed four per cent per annum or such other

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rate as the Central Government may notify in the Official Gazette.

(d) Charge to Capital—The payment of interest shall not operate as a reduction of the amount paid up on the shares in respect of which it is paid.

-It may be noted that that the Institute has published Secretarial Standard on Dividend (SS-3) and a Guidance Note on Dividend.

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