Dividend Declaration Process: A Step-by-Step Guide

Introduction

A dividend is a reward given by a company to its shareholders in return for their investment. It represents a portion of the company’s profits and can be distributed in the form of cash or stock. Section 2(35) of the Companies Act, 2013 (“Companies Act”) defines “dividend,” stating that it includes any “interim dividend.” Dividends are given in proportion to the amount paid for each share held by the shareholders, as authorized by the Articles of Association (Section 51, Companies Act). All companies, except Non-Profit Organizations registered under Section 8, can declare a dividend.

Sections 123 to 127, Chapter VIII, of the Companies Act deal with the declaration and payment of dividends. The company may pay a dividend in the manner prescribed under Section 123:

1. From the profits of the current year of the company.
2. From the accumulated and undistributed profits of previous years.
3. From the amount provided by the Central or State Governments under a guarantee.

The company may declare dividends only when the following conditions are fulfilled:

1. Depreciation: Depreciation is provided on all depreciable assets according to the rates and useful life given under Schedule II of the Companies Act.
2. Transfer to reserves: A certain proportion of profit must be transferred to reserves.
3. Settling of losses of previous years: Losses of previous years and depreciation are set off from the current year’s profit.
4. Free reserves: Dividends must be declared only from free reserves.

In cases where the company has no or inadequate profits, it can declare dividends from the unutilized profits of previous years, subject to certain conditions under Section 123 (1).

Step 1: Ascertain Profit Availability

Before declaring any dividend, the board of directors must ensure sufficient profits. Dividends can be paid out of:

• Current financial year’s profits.
• Profits from previous financial years after providing for depreciation.
• Money provided by the government for dividend payment in government companies.

Ensure that adequate provisions are made for all unpaid dues, depreciation, and contingencies.

Step 2: Hold Board Meeting

A meeting of the Board of Directors should be convened as per Section 173 of the Act. In this meeting, the board should:

• Consider the profit and loss accounts.
• Decide the quantum of dividends.
• Fix the date for the Annual General Meeting (AGM).

Record the minutes of the meeting as per Section 118 of the Act.

Step 3: Declare Dividend at AGM

The shareholders must approve the dividend at the AGM:

• The board’s recommended dividend is presented to the members at the AGM.
• The declaration is subject to the approval of shareholders.
• The dividend declared should not exceed the amount recommended by the Board.

Step 4: Deposit Dividend Amount

Within 5 days of the declaration, the company must deposit the total dividend amount in a separate bank account as per Section 123 of the Act.

Step 5: Dividend Payment

• The company should pay or dispatch the dividends within 30 days from the declaration date to the entitled shareholders.
• Electronic modes of payment are preferred.
• Ensure proper documentation and record-keeping of the payment.

Step 6: Transfer to Unpaid Dividend Account

Any dividend amount that remains unpaid or unclaimed after 30 days of its declaration should be transferred to the ‘Unpaid Dividend Account’ as per Section 124 of the Act. Inform the shareholders about this transfer.

Step 7: Transfer to Investor Education and Protection Fund

(IEPF)

If any amount in the ‘Unpaid Dividend Account’ remains unclaimed or unpaid for 7 years, the company shall transfer it to the Investor Education and Protection Fund established under Section 125 of the Companies Act.

Step 8: Maintain Statutory Registers and Records

The company must maintain the prescribed registers and records, including:

• The register of dividends (Form SH-7).
• Any documentation related to unpaid dividends.

Step 9: Compliance and Reporting

• File the necessary forms with the Registrar of Companies (RoC) within the prescribed timelines.
• Ensure compliance with tax laws regarding dividend distribution tax (DDT), as applicable.

Step 10: Address Discrepancies and Grievances

The company should set up a mechanism to address any discrepancies and grievances that shareholders might have regarding dividend payments.

Following these steps in accordance with the Companies Act of 2013 helps ensure legal compliance and good corporate governance practices, protecting the interests of the shareholders and maintaining the company’s reputation in the corporate ecosystem.

Additional Considerations for Dividend Declaration

1. Recommendation by the Board: Dividends are declared only on the recommendation of the Board, made at a Board meeting.
2. Unconditional Declaration: All requisite approvals must be obtained before declaring a dividend. It should not be subject to any conditions such as approval from financial institutions or banks.
3. Dividend Policy: The Board should consider the company’s dividend policy, if any, when recommending dividends. The policy typically considers legal restrictions, earnings, cash position, financial needs, and tax considerations.
4. Mandatory Dividend Distribution Policy: The top 500 listed entities must formulate a “Dividend Distribution Policy” per SEBI’s Regulation 43A of the Listing Regulations.

Interim Dividend

Interim dividends are declared at a Board meeting and do not require shareholder approval. The Board should carefully consider interim financial statements before declaring interim dividends.

Prohibited Practices

• Bonus Shares in Lieu of Dividend: Companies are prohibited from issuing bonus shares in lieu of dividends as it does not result in the release of assets to shareholders.

Frequently Asked Questions

What are the different sources from which a company can declare dividends?

A company can declare dividends from the profits of the current financial year, accumulated and undistributed profits of previous years, or from the funds provided by the Central or State Governments under a guarantee.

What steps must a company follow to declare dividends?

To declare dividends, a company must ascertain profit availability, hold a board meeting, get shareholder approval at the AGM, deposit the dividend amount in a separate bank account, pay the dividends within 30 days, transfer unpaid dividends to the ‘Unpaid Dividend Account’, and eventually to the Investor Education and Protection Fund if unclaimed for seven years.

What are interim dividends and how are they different from regular dividends?

Interim dividends are declared by the Board of Directors at a Board meeting and do not require shareholder approval. They are distributed before the company’s annual general meeting based on interim financial statements, unlike regular dividends which require shareholder approval at the AGM.

Are there any prohibited practices related to dividend distribution?

Yes, companies are prohibited from issuing bonus shares in lieu of dividends. This practice is banned as it does not result in the actual release of assets to the shareholders.

Conclusion

Declaring and managing dividends is a critical aspect of corporate governance, ensuring shareholders receive their fair share of the company’s profits. By adhering to the guidelines set forth in the Companies Act, 2013, and maintaining transparent communication with stakeholders, companies can foster trust and uphold their fiduciary duties. InstaFiling can assist with the entire dividend declaration process, ensuring compliance with the Companies Act, 2013, and other relevant regulations. From board meeting coordination to AGM facilitation, and from compliance reporting to addressing shareholder grievances, InstaFiling provides comprehensive support. Contact us for expert guidance on managing your company’s dividends efficiently and legally.