How to Declare Dividends from Company Reserves

Declaring dividends from company reserves is a critical aspect of corporate finance. It ensures shareholders receive a return on their investments, even when a company faces inadequate profits. In India, the procedure and regulations governing this process are outlined in the Companies Act, 2013, and the Companies (Declaration and Payment of Dividend) Rules, 2014. This article delves into the key provisions, conditions, and steps involved in declaring dividends from reserves.

Applicable Provision

The process is primarily governed by the Second Proviso of Sub-section (1) of Section 123 of the Companies Act, 2013, and Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.

Conditions for Declaring Dividend from Reserves

1. Rate of Dividend:
   • The rate of dividend declared must not exceed the average of the rates at which dividends were declared in the three years immediately preceding that year.
   • This rule does not apply to companies that have not declared any dividends in each of the three preceding financial years.
2. Amount Withdrawn from Reserves:
   • The total amount drawn from accumulated profits must not exceed 1/10th of the sum of the paid-up share capital and free reserves as shown in the latest audited financial statement.
3. Utilization of Withdrawn Amount:
   • The amount drawn must first be used to offset the losses incurred in the financial year in which the dividend is declared before declaring any dividend on equity shares.
4. Balance of Reserves:
   • The reserves’ balance after withdrawal must not fall below 15% of the paid-up share capital as per the latest audited financial statement.

Step-by-Step Procedure

1. Board Meeting:
   • Notify all directors of the company about holding a Board meeting. In this meeting, decide on declaring a dividend from the company’s reserves due to inadequacy or absence of profits.
   • Fix the date, time, and place of the Annual General Meeting (AGM).
   • Authorize the Company Secretary or a competent person to issue the AGM notice.
2. Compliance with Provisions:
   • Ensure compliance with the cited provisions and related rules regarding dividend in company law.
3. Profit Calculation:
   • Only net profit after tax should be considered when calculating previous years’ profits.
   • Include amounts transferred from the Development Rebate Reserve and exclude all items of capital reserves, including reserves created by asset revaluation.
4. Notification to Stock Exchange:
   • For listed companies, inform the stock exchange within 30 minutes of the Board meeting’s closure about the decision to declare a dividend from reserves.
5. AGM Notice:
   • Issue the AGM notice at least 21 days prior and pass the necessary resolution during the meeting.
6. Opening a Separate Bank Account:
   • Open a separate bank account for paying the dividend and credit it with the payable amount within five days of the declaration.
7. Issuing Dividend Warrants:
   • Issue dividend warrants within 30 days of the declaration. For joint shareholders, dispatch the warrant to the first named shareholder.
8. Publishing Notice:
   • Publish a notice in a newspaper circulating in the district of the company’s registered office, advising members who do not receive their dividend warrants within 15 days to contact the company.
9. Handling Unpaid Dividends:
   • Transfer unpaid or unclaimed dividends to the “Unpaid Dividend Account” within seven days after the 30-day period from the declaration.
   • After seven years of being unpaid, transfer the amount to the Investor Education and Protection Fund.

Frequently Asked Questions

1. What is the significance of declaring dividends from reserves?

Declaring dividends from reserves ensures that shareholders receive returns on their investments even in years when the company has inadequate profits. This is a crucial aspect of “dividend in company law.”

2. Can a company declare dividends if it has not declared any in the previous three years?

Yes, the rule restricting the dividend rate based on the average of the past three years does not apply to companies that have not declared any dividends in each of the preceding three financial years. This is a key provision in “dividend in company law.”

3. What happens if the reserves fall below 15% of the paid-up share capital after withdrawal?

The company must ensure that the balance of reserves does not fall below 15% of the paid-up share capital after withdrawal. This is a critical requirement in “dividend in company law.”

4. What is the process for listed companies?

Listed companies must inform the stock exchange about the decision to declare a dividend from reserves within 30 minutes of the Board meeting’s closure and comply with additional disclosure requirements. Compliance with “dividend in company law” is essential.

5. How are unpaid dividends managed?

Unpaid dividends are transferred to a special “Unpaid Dividend Account” and, after seven years, to the Investor Education and Protection Fund. This is a significant aspect of “dividend in company law.”

Conclusion

Declaring dividends from reserves is a structured process governed by dividend in company law provisions to ensure fairness and compliance. Companies must adhere to specific conditions and procedures to legally and ethically manage dividends. For businesses navigating these complexities, InstaFiling offers expert guidance and support, ensuring seamless compliance with all legal requirements. For further assistance and professional advice on declaring dividends from reserves, contact InstaFiling. Our team of experts is here to help you navigate the intricacies of dividend declaration and ensure your company remains compliant with all relevant laws and regulations.