CA Final Paper 4: Corporate and Allied Laws Chapter 2 CS. Subrata Kumar Ray

To understand the concept of dividend, legal provisions for determination of dividend amount and approval of dividend.

To know the consequences of non payment and non claim of dividend.

To understand the powers and responsibilities of the directors, shareholders and regulatory authorities with regard to payment and non payment of dividend.

To know the sources of the fund required for payment

To understand the sequence of events from preparation of accounts, payment, non payment of dividend

Various disclosures required on payment and non payment of dividend.

Though Divided is not defined under the Companies Act, dividend is the part of profit payable to shareholders as gain from the amount of investment. Section 2(14A) mentions “dividend” includes “interim dividend”. Interim dividend mean any dividend paid before the dividend declared at the AGM, which may be declared and paid by the Board of Directors and paid even before finalization of annual accounts.

Company is supposed to be managed on “going concern” basis and make revenue profit on year to year basis.

Divisible profit is the profit which the law allows the company to distribute to the shareholders.

Dividend payment determines the capability of the company to make profit and its intention to share with the shareholders.

The payout ratio determines company profit vis a vis dividend paid.

Some of the company’s shares attract investors because of substantial dividend which such companies pay, though even kept as reserves , also come under shareholders’ fund.

When we say dividend, it includes dividend to both preference and equity shareholders and also dividend to participating preference shareholders.

May not be necessarily mentioned in the Articles of Association Board may recommend and shareholders may agree but they cannot increase the rate. They may however, decide not to take or take lesser dividend than proposed by the Directors. It requires simple majority decision of the shareholders. Shareholders cannot compel the directors to pay dividend. Board may decide and pay interim dividend without the approval of shareholders subject to certain conditions.

It is payable to all registered shareholders or to his bankers with their mandate or bearer of share warrant.

Issue of bonus shares instead of dividend is not permissible.

Return from debt instruments is called interest, rate of which is predetermined. Return from Ownership instruments like shares are called dividend.

Listed companies cannot issue or have equity shares with differential rights to dividend.

Preference shareholders shall be paid dividend before it is paid to equity shareholders. This includes arrears of dividend in case of cumulative preference shares and dividend to participating preference shares. This is not essential in case of payment of interim dividend;

In case of cumulative preference shares dividend arrears can be paid in the subsequent years where there is sufficient profits.

In case of non cumulative preference shares right to claim dividend in future is not available, if the company do not pay dividend in the current year.

RBI from time to time notifies the maximum rate of dividend on preference shares to be issued to non residents, linked to the base rate of State Bank of India as on the date of board meeting where issue of such instrument is recommended.

To provide for depreciation before ascertaining profit;

Mandatory transfer of profit to reserves;

Provision for taxation.

In case of listed companies, the relevant clauses of listing agreement relating to dividend needs to be complied with.

To comply with provisions of sec. 80A of The Companies Act which provides for proper issue and redemption of preference shares;

Cannot be declared without prior approval of financial institutions in case such approval is required as per loan agreement.

Current year’s profit after depreciation

Out of reserves created out of profits earned in previous year(s)

Money provided by Central /State Govt. out of guarantee given.

Depreciation of the year including accumulated depreciation should be set off against the profit of the year for which dividend is proposed.

If the company has incurred any loss in any previous year(s) the amount of depreciation or loss, whichever is less, shall be set off against the profit of the year for which dividend is proposed.

Central Govt. may allow a company to pay dividend without providing for depreciation.

As mentioned in section 350 of the Companies Act. (as per schedule XIV to the Companies Act)

If any asset is sold, discarded, demolished or destroyed whose depreciation have been provided in full, the excess of written down value of such asset over its sale proceeds shall be written off in the year the asset is sold or demolished.

Such amount arrived at by dividing 95%of the original cost of the depreciable asset on the expiry of specific period.

Any other basis approved by Central Govt.

Electricity generation and supply companies may distribute dividend after providing for depreciation as stipulated by the Central Electricity Regulatory Commission.

Proposed dividend ( % of paid up capital)

% of the current profits

<=10 Not required.

> 10- 12.5 2.5

>12.5 - 15 5

>15 - 20 7.5

>20 10

Arrears of depreciation shall have to be provided before arriving at a profit for the purpose of transfer of specified percentage of profit

Current profit means profit after tax.

More than 10% of profit can be transferred, provided:

minimum amount, equal to the average rate of dividend in last 3 years preceding the financial year ,is ensured;

If bonus share is issued in the year( or preceding 3 yrs) a minimum amount sufficient to pay dividend at the average rate of last 3 yrs immediately preceding the financial year should be ensured;

If the net profit is lower by 20% or more than the average net profit of preceding two years, no minimum amount is to be ensured;

Where no divided is declared, the amount to be transferred shall be lower than the average amount of dividend for preceding three years.

Dividend can be distributed by taking out fund from the reserves to the extent the reserve is created by transfer of profits in previous years.

Cannot be declared out of securities premium account, capital redemption reserve account, revaluation reserve, amalgamation reserve or profit out of reissue of forfeited shares.

the rate of dividend shall not exceed average rate of dividend in last 5 years or 10% whichever is less.

total withdrawal from the reserves not to exceed 10% of company’s paid up capital and free reserves and such amount shall first be utilized to set off the losses before dividend is paid to preference / equity shareholders.

After drawal, balance should not fall below 15% of paid up share capital.

Section 2(14A) mentions “dividend” includes “interim dividend”

Declared and and paid by directors at its meeting without approval of shareholders. Mere declaration by the Board shall not create liability and can be withdrawn by the Board.

May be paid before finalisation of account.

Board may pay further dividend to be called as “final dividend”. Both interim and final dividend shall be considered as dividend for the year.

All regulations which apply to dividends shall also apply to interim dividend.

Board has to take into account depreciation for the full year and arrears of depreciation, divided to preference shares at agreed rate, appropriations, taxation and statutory transfers for the whole year.

Cannot be declared out of reserves.

MCA has clarified that interim dividend has to be regularised in next AGM held after the Board meeting where Board has decided for payment of interim dividend.

Board to recommend the rate of dividend with justification, if required; to be informed to stock exchange at least 2 working days in advance about the bard meeting at which proposal for recommendation of dividend is to be considered.

21 days notice of “record date” of for payment of dividend is to given to stock exchange.

Such recommendation has to be disclosed in Directors’ Report;

Further, the listed companies shall disclose the date of payment of dividend in Corporate Governance report under the shareholders’ information.

to be approved and declared in Annual General Meeting (AGM);

once declared in AGM it becomes a debt to the shareholders;

Once a dividend is declared in a AGM further dividend declaration or payment for the same year cannot be made.

There can be no declaration of dividend for past years in respect of which accounts have been closed. ( Raghnunadan Neotia vs Swadeshi Cotton Dealers Ltd.)

the amount of dividend shall be deposited in a separate bank account within 5 days of AGM;

Divided warrant to be posted within 30 days of declaration;

Dividend can also be transferred to the bank account of the shareholder with his consent.

SEBI has requested the companies to print the bank account number of the shareholders in the warrant.

MCA has advised listed companies to make arrangements for direct bank transfer through electronic mode.

Non payment of dividend within the time shall make the directors liable for punishment which includes imprisonment and fine and the company shall be liable to pay simple interest @ 18% during the default.

As per section 274(1)(g) of the Act, if a public company fails to pay dividend for one year or more none of the directors shall be eligible to be appointed in any other public company for next 5 yrs.

Revocation of dividend is not possible unless declared illegally.

An authorised dealer is empowered to remit payment of dividend by Indian companies to non residents.

As per present regulations, any company can remit dividend outside India. (repatriation basis)

FEMA/ Income Tax regulation would need to be complied with.

Due to operation of law;

Shareholder’s direction on payment of dividend cannot be complied with the company,;

Some dispute is existing on title;

Lawful adjustment of dues i.e. calls in arrears.;

Delay was not due to any default by the company;

When, in spite of receipt of transfer of shares, transfer have not been effected. Dividend and other benefits shall be kept in abeyance (sec. 206A)

All listed companies are supposed to have ‘Shareholders/Investors Grievance Committee’ under the chairmanship of a non-executive director to look into the complaints regarding non-receipt of dividends.

The listed companies also compulsorily place the grievance of the shareholders related to non receipt of dividend in Board Meeting.

Unpaid dividend means a dividend which has not been paid/ claimed or warrants have not been cashed.

The balance in the dividend account shall be transferred to an account called ‘unpaid dividend account’ within 7 days from expiry of 30 days from the date of AGM.

Non compliance would attract interest @ 12% in the account to be proportionally given to shareholders whose dividend is unpaid.

As per the IEPF (awareness and protection of investors) Rules, 2001, any money remaining unpaid/unclaimed shall be transferred to IEPF after lapse of 7 yrs from the date of such transfer to the unpaid dividend account.

In May 2012, Central Govt. has made regulations called IEPF (uploading of information regarding unpaid and unclaimed amounts lying with companies) Rules 2012. As per these Rules, every company, shall, within 90 days of holding AGM or the date at which the AGM should have been held and every year thereafter, till the completion of 7 yrs, shall identify unclaimed dividend separately and upload it on its own website and MCA website in e-form 5 INV.

This form has to verified by practicing CA/CS/ACMA/ auditors of the company before filing.

Company shall keep the record folio nos. certificate nos. in respect of persons to whom the amount of unpaid or unclaimed divided has accrued or payable for a period of 3 yrs after the filing which may be inspected by the committee of IEPF.

Other payable amounts like refund of application, matured deposits or debentures, both principal and interest etc. also has to filed and records kept as above.

Under section 205C of the Companies Act, Central Govt. has established IEPF.

Once it is transferred, no claim of the shareholders/investors shall be entertained by the Govt.

The fund shall be utilised for promotion of investor awareness and protection of interest of investors.

Authority/ committee constituted by the Central Govt. shall use the fund for the objects of the company.

The application moneys received by the company for allotment of any securities and due for refund.

Matured deposits with the company.

Matured debentures with the company.

Interest accrued on debentures and deposits.

Grants and donations if any, made by the Central Govt., State Govt., Companies or any other organizations to the fund.

The interest or other income received from the investment made out of the money credited in the fund.

Where shares are issued to use the money for construction of work or building, or plant which cannot be made profitable for a lengthy period.

company can pay interest subject to certain restrictions and conditions. Should be authorised articles or by special resolution and permission of Central Govt.

The rate of interest shall not exceed 4 %

Charge the interest to capital expenditure.

Dividend on equity capital is paid on the recommendation of the Board of Directors which must be passed in general meeting by shareholders.

It is paid as a percentage of paid up share capital.

Rate of dividend in case of preferential share is predetermined as per terms of issue.

Dividend can be paid out of reserves subject to specified restrictions.

In case of infrastructure companies having large gestation period, where dividend can not be paid for a long period of time, interest can be paid out of capital.

Details of unpaid dividend account has to be electronically filed to ROC.

Amount lying in unpaid dividend account for 7 years is to be transferred to IEPF.

On event of non-payment of dividend, directors are liable to be punished with fine and/or imprisonment.

The shareholders at an annual general meeting passed an unanimous resolution for payment of dividend at a higher rate than that recommended by directors. Discuss the validity of the resolution.

Under the regulation 85 of table A of the Companies Act 1956, the power to declare dividend vests with the general meeting. Pursuant to Secretarial Standard 3 issued by The institute of Company Secretaries of India, the dividend recommended by the Board of Directors is declared by a resolution passed at the Annual General Meeting by the shareholders.

The declaration of dividend should form part of an ordinary business item transacted in the notice of Annual General Meeting. While approving rate of dividend at the general meeting, the share holders have power to declare lower rate of dividend than what is recommended by the Board but they have no power to increase the rate of dividend recommended by the Board. Further, shareholders cannot force the directors to declare dividend.

Advise on the following situations:

• (i) A company wants to transfer more percentage of profits to reserves.

• (ii) A company wants to declare dividends out of past reserves instead of current year profits.

• (iii) A company wants to provide depreciation higher than the rates provided in Schedule XIV.

(i)Pursuant to rule 3 of Companies (Transfer of Profits to Reserves) Rules 1985 ‘reserves’ means “free reserves” i.e. reserve which are not created or set apart or intended for any special purpose. A company voluntarily may transfer to the reserves more than 10% subject to following conditions.

(a) The minimum dividend rate must be equal to the average rate of the dividend for the last three financial years.

(b) where bonus share have been issued during the financial year in which the dividend is declared or in three years immediately preceding financial year , a minimum distribution would be average of the amount (quantum) of dividend for last three financial years.

(c) However if net profit after tax for the financial year are lower by 20% or more than the average net profits after tax of immediately preceding two financial years, it shall not be necessary to ensure such minimum distribution.

(d) If no dividend is declared then the transfer to reserves from current profit shall be lower than the average amount of the dividend for the last three financial year.

(ii) the second part of the question relates to declaration of dividend out of reserves. For the answer we need to refer to Companies(Declaration of Dividend out of reserves) Rules

Dividend can be distributed by taking out fund from the reserves to the extent the reserve is created by transfer of profits in previous years.

the rate of dividend shall not exceed average rate of dividend in last 5 years or 10% whichever is less.

total withdrawal from the reserves not to exceed 10% of company’s paid up capital and free reserves and such amount shall first be utilized to set off the losses before dividend is paid to preference / equity shareholders.

After drawal, balance should not fall below 15% of paid up share capital.

(iii) The next part of the question relates to depreciation rates. The rates specified under schedule XIV are minimum rates below which companies cannot charge. However, company may provide for higher rate of depreciation. Company shall give a statement that management has estimated the life of the asset and as a result the asset requires provision of higher rate of depreciation than the rates provided under schedule XIV to the Act.

A Public Company has been declaring dividend at the rate of 20% on equity shares during the last 5 years. The Company has not made adequate profits during the year ended 31st March 2009, but it has got adequate reserves which can be utilized for maintaining the rate of dividend at 20%. Advice the Company as to how it should go about if it wants to declare dividend at the rate of 20% for the year 2008-09. Would your answer be different if the company utilized only the profits made in previous years and retained in the profit and loss account for the purpose of payment of dividend at the rate of 20% for the year 2008-09?

Pursuant to Rule 2 of the Companies (Declaration of Dividend Out of Reserves) Rules, 1975, in the event of inadequacy or absence of profits in the current financial year, dividend can be declared out of accumulated profits earned by it in previous years and transferred by it to the reserves subject to following conditions:

Dividend can be distributed by taking out fund from the reserves to the extent the reserve is created by transfer of profits in previous years.

The rate of dividend shall not exceed average rate of dividend in last 5 years or 10% of its paid up capital whichever is less.

After drawal, balance should not fall below 15% of paid up share capital.

Cannot be declared out of securities premium account, capital redemption reserve account, revaluation reserve, amalgamation reserve or profit out of reissue of forfeited shares.

In the above mentioned problem the dividend rate of the public company was 20% on equity shares for the last 5 years. So in the current financial year, if the public company declares dividend at the rate of 20%, then it exceeds the specified maximum limit of 10% of paid up capital. Therefore if the public company wants to declare 20% dividend on equity shares it shall do so after the prior approval of Central Government, even when other conditions are fulfilled.

However credit balance, if any, carried in profit and loss account can be utilised to declare dividend without permission from Central Govt.

The Board of directors of M/s RRP Ltd in a meeting held on 30st April 2012 declared an interim dividend payable on the paid up equity share capital of the company. In the board meeting scheduled for 15th May 2012, the board wants to revoke the said declaration. State with reference to the provisions of the Companies Act 1956 whether the board of directors can do so.

Pursuant to section 205 of the Companies Act 1956, declaration of dividend once approved by the shareholders, creates debt to the shareholders on whose favour it is declared. Generally dividend once declared can not be revoked, except with the consent of shareholders.

But in case of interim dividend, the Board of Directors may , on further consideration, and any time before payment of the same, revoke the resolution for payment if the circumstances do not justify such payment.

Therefore the Board of M/s RRP Ltd can revoke the declaration of interim dividend any time before payment.

DAJ Ltd. engaged in construction work issued to public certain shares. The money received was used for construction purposes. Since the company is not in a position to pay any dividend for a long time because of longer gestation period, the Board of Directors of the company wants to pay interest out of capital to its shareholders. Advice the Board about the conditions to be complied with as required under the provisions of the Companies Act 1956.

Pursuant to section 208 of the Companies Act 1956, Board may pay interest out of capital subject to following conditions: Where shares are issued to use the money for construction of work or building, or plant which cannot be made profitable for a lengthy period.

Interest can only be given on paid up share capital.

company can pay interest subject to certain restrictions and conditions. Should be authorised by Articles or by special resolution and prior approval of Central Govt.

The rate of interest shall not exceed 4 %

Charge the interest to capital expenditure.

Before sanction Central Government may if considers necessary, make an inspection/ investigation.

The payment of interest shall be made only for such period as may be determined by the Central Government and that period shall not extend beyond the close of the half year next during which the work has been actually completed.

Therefore by complying with the above provisions DAJ Ltd. may pay interest to its shareholders.