In order to understand the process better regarding the dividend distribution in a listed company, one needs to understand what exactly is ‘dividend’ and all the mandatory steps taken by the board when it comes to dividend distribution in a company.
To start off the concept of dividend distribution, one needs to have a clear idea that dividend is basically a portion of the profit (revenue profit or capital profit) of the company which is not kept in the business instead, it’s distributed among its shareholders in exact proportion (pro rata) of the paid up amount on shares held by the shareholders. It can be paid on both equity & preference shares.
The same has been defined under section 2 (35) of the Companies Act, 2013. The types of the dividend are listed under 3 categories-
Interim dividend (declared at a board meeting of directors between the dates of two AGMs)
Preference share dividend (dividend allotted to the preference shareholders)
Final dividend (dividend declared at an Annual General Meeting).
CHECKLIST FOR DIVIDEND DISTRIBUTION
Declaration of Dividend
The declaration of dividend takes place only on the recommendation of the board of the company at an Annual General Meeting (AGM).-It is paid out of the profits of the company for that financial year after charging depreciation or out of the profits of the previous financial year (kept in reserves) in accordance with the provisions of the section 123 of the Act.-Or out of the money given by the Central Government or by the State Government for the payment of dividend by the company as a guarantee provided by that particular government.
Eligibility (who is entitled to dividend distribution)
According to the Secretarial Standard- 3 (SS-3)- Only the Registered shareholders or their bankers are eligible. In case of a listed company, it is decided (shareholders between whom the dividend distribution will take place) by the company 7 days prior before closing the registers of the members at the AGM.-Preference shareholders will be paid the dividend before the equity shareholders as they enjoy a preferential right.
In case of absence of Profits
If there comes a time where there is the absence of profits or there aren’t sufficient profits earned by a company in a financial year, then, in that case, the company will take the dividend out of the gathered profits in any previous financial year which was transferred in reserves. But, it will be done in accordance with the Companies (Declaration & Dividend payment) Rules 2014.
Under no circumstances the company will pay the dividend before charging depreciation i.e., if the company has suffered any loss in the previous year or years then the amount of the loss for the previous year or years will be set off against the profits of that financial year, and only then the dividend distribution will take place.
Payment of dividend
-Dividend is deposited in a spate bank account within 5 days from the date of its declaration and is paid within 30 days from it date of declaration.-It is paid in cash, cheque, and dividend warrant or in any electronic manner and not in kind.-It is paid proportionally to the paid up value of shares.
Unpaid Dividend Account
-If the dividend is unclaimed or unpaid after 30days of its declaration then the amount of that dividend is transferred to a special account called the ‘Unpaid dividend account’ within 7 days from the date of expiry of thirty days given for the payment of the dividend.-If any amount in the Unpaid dividend account remains unclaimed for 7 years then that amount is transferred to the Investor Education & Protection Fund. But, an intimidation to all the members will be given individually 6 months prior to any such transfer.
Revocation of Dividend
-Once the dividend is declared it becomes a debt to the company and cannot be revoked.
Prohibition on Dividend
If a company is under default with respect to section 73 & 74 of the Act, which deals with deposit and repayment of deposit or interest thereon may not declare a dividend for that financial year.
Failure to Distribute Dividend
Where a company fails to comply with the provisions relating to dividend distribution i.e. if any dividend has not been paid after 30 days from its declaration to any shareholder who is entitled to its payment. Then, every director who knowingly is a party to default is liable for imprisonment which may extend to 2 years or a fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen percent per annum during the period for which such default continues as per section 127 of the Act. If the non compliance was due to-(a) It could not be paid by reason of the operation of any law;(b) Where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;(c) If there is a dispute regarding the right to receive the dividend;(d) Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or(e) Where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company. Then, no offence under this section shall be deemed to have been committed.
Note: In the case of a listed company, as it is listed on the stock exchange, SEBI is the regulatory authority.
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