Dividends are the rewards shareholders receive for investing in a company. They represent a share of the company’s profits distributed among its owners. In India, the declaration of dividends is governed by the Companies Act, 2013. Section 123 of the Companies Act, 2013, outlines the rules and regulations related to the declaration of dividends by companies in India.
Understanding the provisions of this act is crucial for companies and shareholders alike and thats why Company law advisory and Retainership Services are required for every company registered in India under the Companies Act 2013.
Conditions for Dividend Declaration
In addition to the provisions outlined in Section 123 of the Companies Act, 2013, several other conditions and requirements must be met for a company to declare dividends. These conditions help ensure transparency, accountability, and compliance with the law:-
1. Depreciation Accounting: Before declaring dividends, a company must account for depreciation in the profit and loss account for the current year. Furthermore, there should be no outstanding balance of unprovided depreciation from any previous year or years. This requirement ensures that companies accurately reflect their financial health before distributing profits to shareholders.
2. Compliance with Sections 73 and 74: Any company that has failed to comply with the provisions of Section 73 and Section 74 of the Companies Act, which pertain to the prohibition and repayment of deposits accepted from the public, is prohibited from declaring any dividend on its equity shares. Compliance with these sections is crucial to protect the interests of depositors and shareholders.
3. Authorization in Articles: The articles of association of a company must include provisions authorizing the payment of dividends. Without such authorization, the board of directors cannot recommend dividends for approval by the members. Similarly, for the payment of interim dividends, there should be provisions in the articles authorizing the board to approve such payments. This ensures that dividend distributions are carried out in accordance with the company's constitutional documents.
4. Separate Bank Account: A crucial requirement is the opening of a separate bank account specifically for making dividend payments. The company is obligated to deposit the declared dividend amount into this account within a period of five days from the date of its declaration. This separation of funds helps maintain transparency and facilitates dividend disbursem*nts.
5. Member Approval: The approval of members at a general meeting is essential for declaring interim dividends. The board of directors must also include information about the interim dividend in the director's report for approval by members at the forthcoming Annual General Meeting (AGM). These steps ensure that shareholders have a say in dividend declarations, promoting transparency and shareholder democracy.
In summary, the declaration of dividends by companies in India is subject to several legal and procedural conditions, including compliance with depreciation accounting, adherence to Sections 73 and 74, authorization in the company's articles, the establishment of a separate bank account, and member approval at general meetings. Meeting these requirements is essential for companies to maintain their financial integrity and fulfill their obligations to shareholders and regulatory authorities.
Quick Guide to Interim and Final Dividends
Interim Dividend: 1. AOA Authorization: Before considering an interim dividend, check the company's Articles of Association (AOA) to ensure it has the power to pay interim dividends, and the Board of Directors is authorized to declare them.
2. Board Meeting Notice: Issue a notice to convene a Board Meeting of Directors.
3. Board Meeting Resolution: During the Board Meeting, pass resolutions for:
a. Declaring a record date for interim dividend payment.
b. Preparing a proforma profit and loss account and balance sheet for the financial year up to the latest possible date, considering all expenses and depreciation.
c. Opening an "Interim Dividend Account" with a bank.
d. Ensuring payment is made within 5 days of declaration, and this amount should not be used for any other purpose.
4. Second Board Meeting: Hold another Board Meeting to pass a resolution for the payment of interim dividends.
5. Dividend Statement: Prepare a statement for each shareholder, including details such as name, address, shares held, and dividend payable.
6. Payment Method: Interim dividends are payable in cash, and they can be distributed by cheque, warrant, or sent directly to the shareholder's registered address within 30 days of declaration. For joint shareholders, follow their instructions for dividend warrant delivery.
7. AGM Approval: Seek approval for the interim dividend at the next Annual General Meeting (AGM).
Final Dividend: 1. AOA Authorization: Verify that the AOA grants the authority for final dividends, and the Board of Directors is empowered to declare them.
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2. Board Meeting Notice: Issue a notice for a Board Meeting of Directors.
3. Meeting Agenda: The meeting agenda should include:
a. Approval of Annual Accounts.
b. Recommendation of dividend payment at the proposed rate for the forthcoming AGM.
c. Determining the Book Closure period/Record Date for eligible shareholders.
d. Approval of the date, time, place of AGM, and draft Notice of AGM.
4. Director's Report: As per Section 134(3)(k), the Director's Report should mention the proposed dividend amount. If no dividends are proposed, state this in the report.
5. AGM Conduct: Conduct the AGM as scheduled with the required quorum.
6. Dividend Rate: Shareholders cannot increase the dividend rate proposed by the Directors; they can only reduce it. Shareholders pass an Ordinary Resolution approving the dividend.
7. Special Account Opening: Open a Special Account with a Scheduled Bank immediately after shareholders approve the dividend.
8. Dividend Crediting: Within 5 days of declaring the dividend, credit the total dividend payable to the special bank account created for distribution to eligible shareholders.
9. Shareholder List: Prepare a list of eligible shareholders and a dividend statement. Distribute dividends within 30 days of declaration, making necessary arrangements with the bank for payment.
These steps ensure a systematic and compliant process for both interim and final dividend declarations, maintaining transparency and shareholder satisfaction.
To illustrate the practical implications of Section 123 of the Companies Act, 2013, we can refer to a case involving Chariot World Tours Limited, Adjudication order dated 01/07/2022.
Extract of Order -
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