what is dividend
The Companies Act, 2013 has not defined the word 'dividend' but sub-section (85) of section 2 provides that the word dividend includes interim dividend.
As such, dividend means that part of the profits that are divisible or distributable which can be paid to the shareholders. After the annual accounts are prepared and audited, it is necessary to convene a meeting of the Board of Directors to discuss the question of dividend. The Board of Directors recommends dividend out of the profits of the company keeping in view the legal provisions regarding dividend.
what is interim dividend |
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As per section 2(35) of the Act, the word dividend also includes interim dividend. By the way, the term interim dividend refers to the dividend paid between the two annual general meetings of the company. The board of directors of the company has the power to declare interim dividend whereas the board of directors does not have the power to declare dividend, they can only recommend dividend. Whereas on the basis of that recommendation, the members of the company can declare dividend in the annual general meeting of the company. Since the word dividend includes interim dividend, the provisions applicable to dividend shall, with certain exceptions, also apply to interim dividend.
Rules regarding dividend (including interim dividend)
Section 123 of the Act lays down the rules regarding payment of dividend.
Dividend can be
declared by the company only by passing a resolution in the annual general meeting - the board of directors has absolute power to recommend dividend. They may or may not recommend dividends. If the directors recommend a dividend, the shareholders can declare that dividend in the annual general meeting. It should be remembered that neither the members can compel the directors to recommend dividend nor can they increase the rate of dividend declared by the directors. Yes, he can reduce the dividend rate if he wants.
(1) Dividend can be declared and paid only out of profit (Section 123(1))
Dividends can be declared and paid by a company for any financial year by any of the following
a) after making provision for depreciation of the profits of the company for that year in the manner specified in Schedule-II of the Companies Act; either
(i) after giving depreciation from the profits of the previous financial years of the company; either
(ii) of these two;
(b) out of the amount of a grant made by the Central Government or the State Government in accordance with the guarantee given.
Provided that before payment of dividend by the company a reasonable percentage (amount) of profit may be transferred to the accumulation account as its directors deem fit. The company may transfer some percentage of the profit to the accumulation account before paying the dividend.
Provided further that the dividend may be paid out of accumulated profits for non-availability or inadequacy of profits—The company proposes to declare dividend from the accumulated profits in any financial year on account of insufficient profits or non-availability of profits and such profit accumulation account, such declaration of dividend shall be made only in accordance with the rules specified in this behalf. Provided that no dividend shall be declared or paid by the company out of any reserves other than the free reserves.
Provided that no company shall declare a dividend unless the amount of brought forward losses of the previous year(s) and depreciation of the previous year(s) are adjusted in the profit of the current year.
Provided that no company shall declare dividend unless a company has written off the amount of previous loss and depreciation.
Provided also that in computing the profit, the change in the amount carried forward on account of unrealized profit (unrealized profit), nominal profit or fair value of assets or liabilities shall not be taken into account.
(2) For the purposes of this section, the depreciation shall be made in accordance with Schedule II of the provisions of this Act.
(3) Declaration of interim profit The Board of Directors of the company at any time during the financial year or from the end of the financial year to the holding of the Annual General Meeting shall be credited to the Profit and Loss Account or out of the profits of that financial year. for which interim dividend is to be declared or may declare interim dividend out of the profit earned in the financial year up to the date of declaration of interim profit.
Provided that if the company has incurred losses during the current year up to the end of the quarter immediately preceding the date of declaration of interim dividend, interim dividend cannot be declared at a rate higher than the rate of average dividend for the three immediately preceding financial years.
(3) Where the company has one or more subsidiaries or associate companies, in addition to the financial statements to be made under sub-section (2), a company shall have a consolidated financial statement of all the subsidiaries and associate companies in the same manner and in accordance with the prevailing accounting standards. which shall be presented to the general meeting of the company along with its financial statements to be presented under sub-section (2). Provided that the company shall attach to its financial statements a statement of the salient features of its subsidiary company and associate company. in such format as may be specified. Provided also that the Central Government may determine the manner of composition of the accounts of the company.
Provided that if the company has incurred loss till the end of the first quarter immediately following the date of declaration of interim dividend in the current financial year, such interim dividend shall not be declared by the company at a higher rate than the average dividends during the immediately preceding three financial years.
(4) Deposit of dividend and interim dividend in separate bank account [Section 123 (4)] - The amount of dividend and interim dividend declared by the company shall be deposited in a separate bank account within 5 days from the date of declaration of dividend.
(5) Dividend shall be paid to a registered shareholder [section 123(5)]—No dividend shall be paid in respect of shares except
(i) to or by order of the registered holder of such shareholder.
(ii) if a warrant has been issued, to the bearer of such warrant.
In both these cases the payment can be made to the shareholder's banker.
Provided that a company shall be at liberty to capitalize on its profits or accumulations, to issue fully paid-up bonus shares. A company may in certain cases pay interest out of capital in a manner and in accordance with the Act.
can pay interest out of capital.
Dividend shall be paid in cash or by check or warrant or by electronic means [Section 123 (5)] at the registered address of the holder or, in the case of joint holders, to one of the holders whose member is named in the register at his address or to such person and at such address as the holder or joint holder may direct in writing.
6. If the company fails to comply with sections 73 and 74, it cannot declare dividend on equity shares.
Dividend to be paid within 30 days of declaration – Dividend must be paid within 30 days of its declaration. After the dividend is declared, it becomes a legal liability or debt of the company and the shareholder can file a dispute against the company for its payment. [ Severan etc. Railway (1896). Ch. In the case of 559.
Unpaid Dividend Account [Section 124) - (1) Where a company has declared a dividend and has not paid it within 30 days of the declaration or a shareholder entitled to pay the dividend has not claimed the dividend, The amount of dividend or such unclaimed amount shall be transferred by the company in this behalf to a special account opened by the company in a scheduled bank in the name of Unpaid Dividend Account within the next 7 days on the expiry of the above 30 days period. will be called from
(2) Display of specified particulars on the website – The company shall, within 90 days from the date of transfer of the amount of unpaid dividend to the unpaid dividend account, prepare a statement with the name and address of each person to whom the unpaid dividend is to be paid and for this purpose shall be displayed on the website of the Company and on any other website approved by the Central Government for
(3) Penalty - If there is a mistake in transferring the total or part of the above unpaid dividend, it shall pay interest at the rate of 12 per cent per annum on the amount not transferred to the dividend account from the date of error and on such amount The interest earned will be given to the members in proportion to their unpaid amount.
(4) The claimant of the amount transferred to the unpaid dividend account may apply for recovery to the company for the payment thereof.
Any amount transferred to the unpaid dividend account under this section which has not been paid or claimed within 7 years from the date of transfer along with the interest accrued thereon, if any. shall be transferred to the fund established in section (25)(1) and the company shall send a statement of such transfer in the prescribed form to the authority governing the fund which shall give a receipt of receipt in evidence of such transfer.
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(6) All shares for which dividend has not been paid or claimed for 7 consecutive years or more shall also be transferred by the company to the Investor Education and Protection Fund with such particulars as may be specified. Provided that the claimant of the transferred shares shall be entitled to claim the transferred shares from the Investor Education and Safety and Security Fund in accordance with the procedure and forms specified above.
Explanation - For the removal of doubts, it is clarified that if dividend is paid or claimed for any year during the consecutive period of 7 years stated above, the share shall not be transferred to the Investor Education and Protection Fund. "
Investor Education and Protection Fund (Section 125)
The Central Government shall establish a fund to be called the Investor Education and Protection Fund (hereinafter referred to as the Fund).
Transfer of unpaid dividend to Investor Education and Protection Fund (Section 125](1) If the unpaid amount remains unpaid for 7 consecutive years, the amount shall be transferred by the company to the fund established under sub-section (1) of section 125. shall send a statement of such transfer in the prescribed form to the authority administering the fund and that authority shall give a receipt to the company of the amount received as evidence of such transfer.
The shares in which the unpaid dividend has been transferred in the above manner shall be transferred to the Investor Education and Protection Fund with a statement.
Provided that the claimant to transfer of shares is entitled to claim such amount from the Investor Education and Protection Fund on such shares in the prescribed manner and in the prescribed form.
Punishment - If a company fails to comply with any of the requirements of this section, the company shall be punished with fine which shall not be less than five lakh rupees but which may extend to twenty five lakh rupees and every guilty officer of the company shall be punished with fine. which shall not be less than one lakh rupees but which may extend to five lakh rupees.
type of dividend
Depending on the nature of distribution, dividends may have the following format:
1. Cash Dividend
In most of the cases, dividend is paid in the form of cash money only. This is the most popular and popular format. The need is that the liquidity position of the company should be capable of paying cash dividend and the liquidity should not be adversely affected by paying cash dividend.
2. Form Dividend
Dividend is paid out of the profit of the current year or out of the Consolidated Funds or both. Profit does not mean that the company has sufficient cash and dividends can be paid in cash. If the company does not have sufficient cash and the company wants to pay dividend, then the company can issue a promissory note for the amount of dividend which is payable after few months. If necessary, salvageable constituent non-letters may also be issued.
3. Dividend in the for m of debentures
A company can also issue debenture bonds to shareholders in exchange for dividends. These debentures are payable after a certain period and interest is payable on them. The purpose of paying dividend in the form of debenture is that the company wants to pay the present dividend in future. This is done only when the liquidity position of the company is critical.
Bonus Share or Stock Dividend The fund is capitalized by not paying cash dividend from the accumulated fund, that is, equity shares are issued to the shareholders in exchange for the accumulated fund. When the liquidity position of the company is not good and it is unable to pay cash dividend, shares are issued to the shareholders against the accumulated past profits. These shares are called bonus shares. Shareholders keep these bonus shares with themselves or get cash by selling them. In fact, bonus shares are not issued in lieu of dividends. Rather, along with paying normal dividends, bonus shares are issued by progressive companies from time to time only to convert assets into capital.
5. Wealth Dividend
This form of dividend is exceptional. This type of dividend can be in the form of stocks or securities. Sometimes a company buys shares and debentures of another company and puts it in the form of investment. If the company sells these then capital gains tax has to be paid. But when such investment is distributed among the shareholders in the form of dividend, then no tax liability arises on the company.
6. Joint Dividend
When some part of the dividend is paid in the form of cash and the rest in the form of other assets, then it is called joint dividend.
dividend policy
The main objective of financial management is to maximize the market value (money) of the organization. The market value of the firm's equity shares is influenced by the policy of how the net profit/excess is allocated between dividends and re-appropriation. Weston and Brigham say that managers do not have a choice whether to share or share dividends. Yes, the question must be that how much dividend should be distributed? The answer comes from the dividend policy. Dividend policy refers to the principles and plan of distributing dividends. Weston and Brigham have written, “The dividend policy determines the division of earnings into retained earnings and paid
The policy formulated by the management regarding the distribution of earnings in the form of dividend among the shareholders is called dividend policy. It is concerned not only with the dividend payable in a particular year but also with the steps to be followed for several years. The following questions should be answered before formulating a dividend policy:
(i) Whether dividend is to be paid from the initial years of operation (ie regular dividend).
(ii) whether the same amount or a fixed percentage of the dividend is to be paid every year, irrespective of the quantum of profit
Whether a fixed percentage of profit should be paid as dividend, which would mean variable dividend per share (ie fixed pay-out ratio).
(iv) Whether the dividend is to be paid in cash or in other forms.
From another point of view, the policies adopted by the managers can be of three types:
(a) Conservative or rigid dividend policy
(b) Liberal Dividend Policy
(c) sound or stable dividend policy
Conservatism or Rigid Dividend Policy
Conservative dividend policy is called when the management distributes a small portion as dividend even if there is huge profit. Under this policy, most of the profit is re-appropriated in the business itself and minimum dividend is paid to the shareholders. Thus, on adopting this policy, the management keeps the financial soundness and business condition of the company paramount and keeps the present expectations of the shareholders at a secondary place. The payout ratio in this policy is very low or sometimes zero. This type of policy is considered good and wise in the case of a company which is developing and which needs more additional capital for improvement and expansion programmes. The shareholders of such a company get benefits in the long run from this policy. But while following such a policy, care should be taken that the patience of the shareholders does not exceed the limit.
liberal dividend policy
When the management distributes most of the profit to the shareholders in the form of dividend, it is called liberal dividend policy. As much of the profit is retained as is absolutely necessary. In this policy the payout ratio is very high and the retain ratio is very low. In this policy, more importance is given to the present interest than the long-term interests of the shareholders. It is clear that compliance with this policy can lead to shortage of funds for the company's development, expansion and replacement programs and also increases the speculative value of shares, which makes it difficult for the company to raise new equity capital.
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