Dividend : Regulatory Framework

29 April 2021 • Mukul Manral & Shawant Verma


Dividend : Regulatory Framework

29 April 2021 • Mukul Manral & Shawant Verma

Dividend represents a participation in the profit, based on the amount of share held by the shareholder. A Company works in a way through which an investor can flow their money to the industry and result into nation building. It is thus a matter of more than a private interest but a national interest. The article summarizes the regulatoy framework on declaration of dividend.

The Supreme Court of India has observed in case CIT v Girdhardas& Co., (Private) Limited., AIR 1967 SC 795, the expression Dividend:

In case of a Company which is a going concern, it ordinarily means the portion of the profits of the Company which is allocated to the holders of shares in the Company.

It is a return on the investment made in the share capital of a Company, as distinct from the return on borrowed capital

Interim and Final Dividend

The term “Dividend” is not specifically defined under the Companies Act, 2013 (“the Act”) but it includes Interim Dividend, it is therefore extensive definition. The Act has not made any distinction between the Interim and Final Dividend.

The Companies Act, 2013 read with Secretarial Standards 3 distinguishes as follows:

Interim Dividend

Final Dividend

It is declared by the Board of Directors in their meeting.

It is recommended by the Board of Directors and declared by the shareholders at an Annual General Meeting.

It can be declared during the financial year or at any time during the period from closure of financial year.

It is declared at the Annual General Meeting of the Company.

Cannot be declared out of free reserves.

It can be declared out of Free Reserves subject to certain conditions.

Compiled some common queries on subject and tried answering them which have come quite easy way to familiarise on the subject:

1. The shareholders of the company are demanding dividend but the directors don’t agree. Can shareholders suo moto declare it?

The shareholders can only declare those dividends which are recommended by the Board and cannot declare it on their own.

2. Can a company revoke the final dividend after it has been declared by the shareholder intheir meeting?

Once the dividend is declared by the shareholders in their meeting it becomes the obligation on the company to pay it. However, the shareholders can revoke it by passing a subsequent resolution in their meeting. This subsequent resolution, of course, has to be passed before it is paid or credited to the shareholders account.

3. Is it required to keep the amount so declared as an Interim or Final Dividend in a separate Bank Account?

Yes, the amount so declared shall be deposited in a scheduled bank in a separate Bank Account within five days from the date of its declaration.

4. Our Company has not earned any profit during the year. Can we still declare final dividend? What are the sources available for its payment?

It can be declared out of the following sources:

    • Out of the current year profit after providing for depreciation; or
    • Out of the profit of the Company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed, or out of both;

Provided that in computing profits any amount representing unrealised gains or notional gains shall be excluded.

5. Is there any limit up to which final dividend can be declared in case the Company has insufficient profits?

In case of inadequacy or absence of profit, a company can propose to declare it out of the accumulated profit earned by the Company in previous years and free reserves. However, such proposed payment shall be subject to the following conditions:

    • 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 condition shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.

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

6. What are the sources out of which dividend cannot be declared?

Following are the sources out of which it cannot be declared:

    • It shall not be declared or paid by a Company from its reserves other than free reserves.
    • Nocompany shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.

7. Our company has defaulted in repayment of a term loan to a bank previously. Can we pay dividend to our shareholders this year?

The Board cannot propose or recommend dividend if the company has defaulted in the following situations until such defaults continues:

    • Redemption of deposits or payment of interest thereon;
    • Redemption of debentures or payment of interest thereon;
    • Redemption of preference shares;
    • Payment of Dividend declared in the current or previous financial year(s), or
    • Repayment of any term loan to a bank or financial institution or interest thereon,

8. What if the declared dividend cannot be paid or claimed within 30 days from the date of declaration?

The Company shall within seven days from the date of expiry of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company with a scheduled bank to be called as an Unpaid Dividend Account”.

If the amount so transferred to Unpaid Dividend Account remains unpaid or unclaimed for a period of seven years from the date of such transfer, it shall be transferred along with the interest accrued, if any, to the Investor Education and Protection Fund (IEPF).

Taxation Aspects

9. Whether the Company is required to pay Dividend Distribution tax (DDT) on the dividend declared by it to the shareholders?

The requirement to pay Dividend Distribution Tax (DDT) has been done over w.e.f. 1stApril, 2020. Now, it will be taxed in the hands of the shareholders under the head ‘Income from other sources’

10. Whether TDS is required to be deducted on payment of Dividend, if so at what rate?

An Indian Company before declaration or payment of dividend, including a Deemed Dividend by any mode to a resident shareholder, shall be required to deduct TDS from the amount of such amount, at the rate of ten percent.

11. What are the conditions where TDS is not required to be deducted in case of individual shareholders?

Following are the conditions where TDS is not required to be deducted in case of individual shareholders, when:

    • the company pays  it by any mode other than cash; and
    • the aggregate of the amounts of dividend distributed or paid during the financial year, does not exceed five thousand rupees.

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