Dividend brief

All about Dividend: - Part I

Dividend: There is no definition on dividend except dividend means dividend includes interim dividend. When the company gets a profit, it sometimes distributes part of the profit to the shareholders. The dividend means a portion of profit will be given to the owners i.e. shareholders of the company on the basis of recommendation of the Board of Directors. The word profit defined in Concise English Oxford Dictionary as financial gain. Normally when a company does a business i.e. financial gain means Income minus expenditure in simple term. The dividend includes interim dividend.
Dividend to be paid after providing depreciation: Prior to amendment of Section 205 in 1988 , the depreciation to be charged as per Income tax rate. The income tax rates amended many times which went upward revision. It necessitates to make necessary amendment in Companies Act, 1956 The note on clause 26 which amend section 205 read as follows. The clause seeks to amend section 205 to provide that in future,depreciation shall be calculated in accordance with the rates specified in Schedule XIV to the Companies Act, 1956, thus delinking depreciation under Companies Act, from that Under Income tax Act…..”.
Can Higher rate of depreciation be charged: According to Departmental circular 2 0f 1989 dated 7-3-1989 provides that the companies are shall not be permitted to charge lower rate of depreciation as specified in Schedule XIV of the Companies Act, 1956. However, if on the basis of a bona fide technological evolution, higher rates of depreciation are justified, the necessary disclosure by way of note forming part of annual report.
Depreciation for immovable properties : According to departmental circular no.(10) =CL-VI/61 dated 27-9-1961, the company has obligation to provide depreciation for earning supplementary income except the immovable properties are kept as resale purpose.
Depreciation under SL/WDV method: The corporate can follow different methods of depreciation for different types of assets. The Department has opined that the same has to be followed consistently from year to year.
Depreciation of assets which are not under use: A question arose whether it is possible to charge depreciation for the assets which are not in use. The department has opined that as per accepted accounting principles, depreciation is based on expiration of time, it would be necessary as per Section 205 of the Companies Act, 1956, even if the assets are not in use, the depreciation has to be charged.Non compliance of Section 80A of Companies Act, 1956: The company has to comply the provision of Section 80A of Companies Act, 1956 relates redemption of redeemable preference shares. If default continues, the company cannot be declared dividend on the equity shares of the company.

Recommendation of the Board: As per clause 85 of Table A provides that the company in general meeting may declare dividends but no dividend shall exceed the amount recommended by the Board. It means the shareholders may reduce the dividend amount not to increase the dividend amount. The above interpretation is based on the company adopts Table A only. The board may decide the dividend payment as well as transfer to reserves. If board recommends then it is called recommendation of dividend and the same to be mentioned in the Directors’ Report as per clause ( c ) of sub section (1) of Section 217 of the Companies Act, 1956.

Interim Dividend: As per clause 86 of Table A empowers the Board to pay from time to time to members such interim dividends as appear justified by the profits of the company. Interim dividend is the dividend paid by the Board at any time between two annual general meetings of the company. The Board may pay more than one interim dividend during a financial year. The declaration of interim dividend depends much more on estimates and opinions than the declaration of final dividend which is made upon the information contained in a formal balance sheet. [Lucas v. Fitzgerald, (1903) 20 TLR 16, 18]. Prudence, however, requires that the Board of directors satisfies itself that the financial position of the company justifies the payment of interim dividend out of the profits available for distribution. It is, however not necessary to prepare interim accounts merely because the company pays interim dividends in anticipation of the final dividend for the year to be declared by the company in general meeting when the year’s accounts are presented. [Gower’s Principles of Modern Company Law, Sixth Edition, p. 288 )
Department’s circular letter dated 18-7-1981 not followed :
The Department of Company Affairs has expressed the view that approval of dividend is the privilege of the general meeting and the Board can pay interim dividend if so authorized by the articles of association subject to the regularization of the interim dividend by the company in general meeting — [Department’s letter no.8/13(205 A)/79-CL-V dated 18-7-1981]. Department’s view needs to be tested so far as interim dividend is concerned
Minimum amount to be transferred to General reserves before declaring a dividend:
Under Rule 2 of the Companies (Transfer of Profits to Reserves) Rules, 1975 before declaring dividend after providing for depreciation in accordance with provisions of sub section (2) of Section 205 of the Companies Act, 1956, the company must transfer the following minimum percentage to General Reserves
Proposed dividend at per centage to paid up share capitalPercentage of current profit to be transferred to Reserves
When the proposed dividend is less than 10% of the paid up share capitalNo transfer of profits to reserves required
When the proposed dividend is more than 10% but less than 12.5%2.5% of current profits.
When the proposed dividend is more than 12.5% but less than 15%5% of current profits
When the proposed dividend is more than 15% but less than 20%7.5% of current profits.
When the proposed is more than 20%10% of current profits.


Dividend to be deposited in a separate bank account — S. 205(1A) :
Ss.(1A) of S. 205 provides that the Board of directors may declare interim dividend. In the case of interim dividend there is no declaration of dividend, but there is payment of dividend by the Board without its declaration. Hence the word ‘declare’ may in the context be construed as ‘pay’ giving thereby statutory sanction to the payment of interim dividend as provided in Regulation 86 of Table A. The sub-section further provides that the amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of declaration of ‘such dividend’ i.e., dividend including interim dividend referred to in the earlier part of the sub-section. Both the final dividend and the interim dividend are to be deposited in a separate bank account within the period afore-said. Ramaiya’s observation that “the interim dividend shall be deposited in a separate bank account” (Ramaiya’s Guide to the Companies Act, 15th edition, p. 1789) is not correct and needs revision.


Failure to pay dividend : Section 207 Failure to pay a dividend within 30 days from the date of AGM is an offence and every director of a company who is knowingly party to the default , shall be punishable with simple imprisonment upto 3 years and also fine of Rs.1000 per day during which the default continues.
The following circumstances will not be treated as offence under section 207 of the Companies Act, 1956.
A) Where the dividend could not be paid by reason of operation of any law
B) Where a shareholder has given directions to the company regarding the payment of dividend and those directions cannot be complied with
C) Where 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 aforesaid was not due to any default on the part of the company.


Other than Table A: In case company adopts its own article then it is free to decided either to reduce or increase by the Board of Directors. Then how to mention the dividend amount in the directors report which has already mentioned x amount to be payable to the shareholders as recommended by the board.

Point 1 : Last year a listed Co in their Annaul Accounts recommended dividend but in the AGM Resolution was passed for NO Dividend after approving Item 1 of the Agenda ie. Passing of Accounts together with Directors' Report and Auditors' Report which contain provision for Dividend and amount set apart for General Reserve carry forward surplus amount to P & L Account credit Balance.
a) SEBI has not taken any action against the Company
b) what will happen to P & L Account and B S already approved by Members
c) Rejecting the recommended dividend does not amount to No Confidence with the Board of Directors who have recommended the Dividend

Point 2: A separate Dividend Account has to be opened within 5 days from the date of declaration of dividend If a company having few members (Private Co or a closely held unlisted public company pay the dividend by cheque on the date of AGM or within 5 days Is it necessary to open a separate bank account and pay the dividend.


Point 3 : Is it necessary to confirm or get the approval of Members in lthe AGM for interim dvidend already paid whether final dividend recommended or not

Point 4 : DIVIDEND SHOULD BE PAID IN CASH

Cheque includes cash Dividend should be paid in cash means not to be paid in kind.

Hon'ble Madras High Court in one case (Not Reported) approved a petition made by a listed company under Section 394 to issue shares at a premium in lieu of dividend not paid after the lapse of 42 days . In this case DCA did not raise any objection
Is it not the duty of DCA to point out the legal position to the Hon'ble Court and prosecute the 0irectors of the Company for violation of Section 205 A



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