Process for Declaration of Dividend: An In-Depth Guide (2024)

Navigating the complexities of corporate dividends can be challenging. This guide sheds light on the comprehensive nuances underpinning the Companies Act, 2013, focusing on the pivotal Section 123 and the intertwined Companies (Declaration and Payment of Dividend) Rules, 2014.

Applicable Statute and Rule:: Section 123 of Companies Act, 2013 Read with Companies (Declaration and Payment of Dividend) Rules, 2014.

Adherence to Secretarial Standards: Navigate the nuances of dividend declarations using the insights from Secretarial Standard 3.

Decoding Dividends:

  • What is a dividend? Discover its scope as we explain how the term “dividend” comprehensively includes interim dividends. In simpler terms, explore how dividends symbolize the financial distributions made to company members from accrued profits, or when permissible, from designated free reserves.

Types of Dividends – Interim and Final:

  • Interim Dividend: Understand the prerogative of the Board of Directors in declaring dividends.
  • Final Dividend: Learn about the dual-step process involving a proposal by the Board of Directors, followed by ratification during an Annual General Meeting (AGM).

Criteria and Source for Dividend Declaration:

1. For Companies with Sufficient Profits:

  • The company can declare such rate and quantum of dividend as it considers appropriate out of profit after providing for depreciation.
  • The company can declare dividend such rate and quantum of dividend as it considers appropriate out of free reserve after providing for depreciation.
  • By both.
  • out of money provided by the Central Government or a State Government

2. For Companies with Insufficient Profits in a Financial Year:

  • Out of accumulated profit of the previous year, and the amount of dividend shall be determined after considering following rules:

In the event of inadequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the fulfilment of the following conditions, namely: –

(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year:

Provided that this sub-rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.

(2) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

(3) The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.

(4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid-up share capital as appearing in the latest audited financial statement.

Companies Not Eligible:

The company who fails to company with the provision of Section 73 and 74 of the Companies Act 2013.

Steps to Declare a Final Dividend by a Private Limited Company:

1. Conduct Board meeting and approve agenda “Declaration of Dividend” and consider following points:

  • Recommending the rate and quantum of dividend.
  • Select as schedule bank and open an dividend account in the name of company
  • decide a record date and determine eligible shareholders.

2. Open a Special bank account with Schedule Bank

3. Convey a Annual general meeting as per SS-2 and take approval of shareholders by passing a Ordinary resolution.

4. Deposit the dividend amount into the bank within 5 days of declaration.

5. Company should maintain and update register of dividend and shall preserved the same for a period of eight years.

6. Disclosure of dividend declared in board report of the company.

Notes:

1. In computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded

2. The company may transfer such percentage of profit out of profit as it consider appropriate in reserve account.

3. Dividend payable in cash will be paid by or warrant or Cheque or through any other electronic mode to the shareholder.

4. Unclaimed dividend after one month from date of declaration shall be transferred to unclaimed dividend account.

Frequently Asked Questions (FAQs):

1. Can a declared dividend be revoked?

    • No.

2. In an inadequate profit scenario, can a company announce an interim dividend from accumulated profit?

    • No, only a final dividend can be declared in such cases.

3. Can members declare dividends directly during an AGM?

    • No, members can only sanction and approve dividends if the Board of Directors recommends them.

4. Can companies distribute bonus shares instead of dividends?

    • No.

5. For shares pending transfer, can dividends be provided to the transferee?

    • Yes, but only with the transferor’s consent.

Conclusion:

Navigating the multifaceted landscape of dividend declarations is paramount for companies operating under the Companies Act, 2013. This guide offers clarity, especially in distinguishing between interim and final dividends, the criteria for dividend declarations based on a company’s financial health, and the stringent regulations that ineligible companies face. For private limited companies, adhering to the outlined steps is crucial to maintain transparency and uphold shareholders’ trust. As these financial distributions symbolize a company’s performance and shareholders’ returns, it is indispensable for corporate entities to be well-versed with these guidelines, ensuring both compliance and strategic financial planning.

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Disclaimer: The above-mentioned article is prepared for information purpose only on the basis of best knowledge of the author and under no circ*mstances, the author is liable for any direct or indirect loss due to this information.

Process for Declaration of Dividend: An In-Depth Guide (2024)

FAQs

Process for Declaration of Dividend: An In-Depth Guide? ›

(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends. (2) A dividend must not be declared unless the directors have made a recommendation as to its amount.

What is the procedure for declaration of dividends? ›

(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends. (2) A dividend must not be declared unless the directors have made a recommendation as to its amount.

What is the process of issuing dividends? ›

Step 1: The company in a Board Meeting decides on the amount of dividend that would be declared and paid. Step 2: Company issues notice of general meeting with intent to declare dividends. Step 3: General meeting is conducted and the resolution for declaring dividend is passed along with record date.

What are the rules for declaring dividends? ›

Final dividends require shareholder approval; interim dividends do not. The company has sufficient funds to pay the dividends. Before paying dividends, the company must have enough cash or liquid assets to cover the payments, and the directors must judge that the payment will not cause cash flow problems.

What is the timeline for dividend declaration? ›

In case of interim dividend, the payout to the shareholders has to happen within 30 days from the date of the announcement of the dividend. However, in case of final dividend, the actual payment of dividend only has to be made within 30 days of the Annual General Meeting (AGM).

What is the rule 3 of declaration of dividends? ›

Rule 3 specifies that in the event of inadequacy or absence of profits in any year, a company may declare dividend out of free reserves.

What is the procedure for dividend declaration under Companies Act 2013? ›

Procedure of Declaration and Payment of Dividend
  • Approving the annual accounts (balance sheet and profit and loss account of the company for the year ended);
  • Recommending the final amount of dividend;
  • Determining the date of book closure;
  • Fixing the Day, Date, Time and Venue of AGM;
  • Approving the notice of AGM;
Apr 25, 2023

What are the four steps in dividend payments? ›

There are four key dates to keep in mind when holding a dividend-paying stock:
  • Declaration Date. The declaration date is the date on which the board of directors announces and approves the payment of a dividend. ...
  • Ex-Dividend Date. ...
  • Record Date. ...
  • Payment Date.

What are the three important dates for dividends? ›

When it comes to investing for dividends, there are three key dates that everyone should memorize. The three dates are the date of declaration, date of record, and date of payment.

What is a good dividend yield? ›

What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.

Who Cannot declare dividend? ›

2. Compliance with Sections 73 and 74: Any company that has failed to comply with the provisions of Section 73 and Section 74 of the Companies Act, which pertain to the prohibition and repayment of deposits accepted from the public, is prohibited from declaring any dividend on its equity shares.

Can you declare dividends but not pay? ›

The accrued dividend refers to a balance sheet liability. In the statement, the common stock of dividends will be maintained. This is a record in which dividends are declared but not paid yet. These are often hailed as the current liability within the company.

Can a dividend be declared and paid later? ›

Dividends can be paid following the end of a company's financial year, once its year-end financial statements have been approved (a “final dividend”), or at any time during the financial year, before the company's annual profits have been determined (an “interim dividend”).

Can you backdate a dividend declaration? ›

The short answer is no! You cannot backdate the dividends of a limited liability company to its owners.

Do I have to report dividends less than $1500? ›

If your interest and dividend income are less than $1,500 for the tax year, you can typically report the income directly on Form 1040, lines 2 and 3, without using Schedule B. However, there are some circ*mstances where you must file Schedule B, regardless of the total amounts.

Do I have to report dividends less than $20? ›

All dividends are taxable and this income must be reported on an income tax return, including dividends reinvested to purchase stock.

Do I need to report dividends under $200? ›

All dividends are taxed as ordinary income.

Do I need to report less than $10 in dividends? ›

The IRS does not require 1099 Forms in cases where the interest, dividends or short-term capital gain distributions are under $10. However, the IRS does require individuals to report these amounts under $10 on their tax returns.

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