Declaration of Dividend under Companies Act, 2013 CS Aakanchha Vyas

Dividend means the profit of a company, which is not retained in the business and distributed among the shareholders in proportion to the amount paid up on the shares held by them.

Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributional profits is available. Dividend are payable only if it is declared by the company at its annual general meeting on the recommendation of the directors. Sometimes dividends are also paid by the directors between two annual general meetings without declaring them at an annual general meeting, which is called interim dividend.


According to the provision of sec 123 of companies act 2013, a company shall declare dividend only out of profit of the company for the financial year or out of undistributed  profit of any previous financial year or out of both.

In case, any guarantee give by any government (central or state), the company may declare dividend out of money provided by that government for payment of dividend after providing for depreciation.

Before declaration of any dividend, a company may transfer a portion from the profit to the reserves of the company. The company is free to decide the percentage for such transfer to the reserve.

When a company has no adequate profit or any profit in financial year or accumulated profit to distribute as dividend, it may declare dividend out of reserves. The company may pay dividend only from free reserves, not from any other reserves.

Prohibition on declaration of dividend:-

A company which fails to comply with the provision of sec 73 and 74 related to deposit and repayment of deposit or interest thereon shall not declare and dividend on its equity shares as long as such failure continue.

Deposit of declared Dividend:-

The amount of dividend and interim dividend shall be deposited in a separate account in a scheduled bank within five days from the date of declaration of such dividend. The dividend shall be paid to shareholders in cash not otherwise. Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholders.

Unpaid Dividend:-

According to sec 124 of the companies act 2013, where a dividend has been declared by the company, but has not been paid or claimed within 30 days from the date of declaration to any shareholder entitled to  the payment of the dividend, the company shall within seven days from the date of expiry of said thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account “unpaid dividend account” opened by the company in any scheduled bank.

The company shall within a period of ninety days of making any transfer of an amount to the unpaid dividend account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company.

Any person who is entitled for the money transferred to the unpaid dividend account may apply to the company for payment of the money. The person can claim this amount from company only within seven years of its transfer to unpaid dividend account. After this period not only his dividend but also shares shall be transferred to the Investor Education Protection Fund.

If a company fails to comply with the requirement of this section, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Punishment for failure to distribute dividend:-

When a divided has been declared by a company but has not been paid within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, the company shall be liable to pay simple interest @18% per annum during the period for which such defaults continue and every director of the company shall, if he is knowingly party to the default be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues.

  • According to sec 127 no offence shall deemed to have been committed under following circumstances:-
  1. Where the dividend could not be paid by reason of the operation of  any law;

  2. Where shareholder has given directions to the company regarding to the payment of dividend and those directions cannot be complied with and the same has been communicated to him;

  3. Where there is dispute regarding the right to receive the dividend.

  4. Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder;

  • Rule 3 of the companies (Declaration and payment of dividend) rules2014 makes rule for declaration of dividend out of reserves. A company may declare dividend out of reserves subject to the fulfillment of following conditions,
  1. The rate of dividend shall not exceed the average of the rates at which dividend was declared by it in the three financial year immediately preceding that year. However this rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.

  2. 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.

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

  4. The balance of withdrawal shall not fall below fifteen percent of its paid up share capital as appearing in the latest audited financial statement.

  5. No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year.

Writer:- CS Aakanchha Vyas
Phone:- 7568442731

Advertise With Us

Click here to read the disclaimer

Write a Comment