CHAPTER 8

DECLARATION AND
PAYMENT OF DIVIDEND

LEARNING OUTCOMES
At the end of this chapter, you will be able to:
♦ Comprehend the legal provisions relating to declaration and
payment of dividend
♦ Identify about the conditions which need to be fulfilled before
declaring dividend out of accumulated reserves.
♦ Appreciate the manner in which unpaid and unclaimed
dividend is to be dealt with.
♦ Identify the nature and framework of the Investor Education
and Protection Fund (IEPF).
♦ Appreciate the consequences for failure to distribute
dividend.

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 8.2 CORPORATE AND OTHER LAWS

Dividend

Meaning of Declaration of Unpaid/ IEPF Punishment

Dividend Dividend [Sec. 123 Unclaime for failure to
[Sec. 125]
[Sec. 2(35] & Companies d distribute
(Declaration and Dividend dividend
Payment of [Sec. 124] within 30
Types of Dividend) Rules, Establisment days [Sec.
Dividend 2014] of Fund 127]

Interim
Dividend Credits to
Current the Fund
Final Year and
Dividend profits Exemptions
Utilization of
Fund
Past Year
profits

Reserves

1. MEANING OF DIVIDEND
Definition
Section 2(35) of the Companies Act, 2013, while defining the term dividend simply
states that “dividend” includes any interim dividend. In common parlance,
“Dividend” implies a distribution of any sums to members out of profits and
wherever permitted out of free reserves available for the purpose.

Dividend is the shareholders return on their investment / capital in the company.

Dividend is part of the distributable profits which has been paid out to them. In
simple words, it is a distribution of profits i.e. a portion of profits earned and
allocated as payable to the shareholders whenever declared.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.3

The company in general meeting may declare dividends, but no dividend shall
exceed the amount recommended by the Board. (Clause 80 of Table F in Schedule I)

Dividend is recommended by Board of Directors in the Board’s Report 1 and

approved by Shareholders at the Annual General Meeting. Dividend is not a
liability unless it is declared by the shareholders at a validly constituted general
meeting by passing an ordinary resolution 2 at the rates recommended by the
Board or such lower rates as they may decide.

Declaration of dividend by the company at a rate higher than the rate

recommended by the Board is not permitted.

Dividend is Declared as a proportion of Nominal or Face Value of a share.

Example 1: AB Ltd. has issued equity shares having face value of ` 10 per share.
The shares are currently quoting on the NSE at ` 250/- per share. The company at
its AGM held on 27.7.24 has declared a dividend of 20%. Mr. Shekar owns 1000
shares which he purchased at ` 300/- per share. What is the amount of dividend
he will receive?

The dividend is to be calculated on Face Value i.e. ` 10/-. So dividend per share is
20% of ` 10/- = ` 2/- per share. So, Mr. Shekar will receive ` 2 * 1000 shares =
` 2000/-.

Example 2: The shareholders at an annual general meeting unanimously passed a

resolution for payment of dividend at a rate higher than that recommended by
the directors. Discuss the validity of the resolution.

Articles of Association companies usually contain provisions with regard to

declaration of dividend on the pattern of regulations 80 to 85 of Table F to
Schedule I of the Companies Act, 2013. Under regulation 80, although the power
to declare a dividend vests with the shareholders however under no
circumstances they can declare dividend exceeding the amount recommended by
the Board of Directors.

1
As per Section 134 (3) (k).
2
As per section 102 (2) declaration of any dividend at the AGM is an ordinary business
requiring ordinary resolution. At any other general meeting it will be special business.

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 8.4 CORPORATE AND OTHER LAWS

2. TYPES OF DIVIDEND
I. Classification based on time i.e. when declared

Dividend

Interim Dividend Final Dividend

Interim Dividend
Section 123 (3) and also section 123 (4) contain provisions regarding interim
dividend. Following points are noteworthy:
♦ Interim dividend may be declared by the Board of Directors at any time
during the period from closure of financial year till holding of the annual
general meeting.
The declaration of interim dividend is done out of profits before the final
adoption of the accounts by the shareholders and therefore, interim
dividend is said to be declared and paid between two AGMs.
♦ The sources for declaring interim dividend include:
• Surplus in the profit and loss account; or
• Profits of the financial year in which such dividend is sought to be
declared; or
• Profits generated in the financial year till the quarter preceding the
date of declaration of the interim dividend.
♦ If the company has incurred loss during the current financial year up to the
end of the quarter immediately preceding the date of declaration of interim
dividend, such interim dividend shall not be declared at a rate higher than
the average (rate of) dividend declared by the company during the
immediately preceding three financial years.
Example 3: If a company declared dividend at the rate of 16% during the
immediately preceding three financial years, then in case the company

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 DECLARATION AND PAYMENT OF DIVIDEND 8.5

incurs loss in the current financial year, it is permitted to declare interim

dividend at a rate which is not higher than 16%.
♦ The amount of the dividend, including interim dividend, shall be deposited
in a separate account maintained with a scheduled bank within five days
from the date of declaration.
♦ All provisions which are applicable to the payment of dividend shall also
apply in case of interim dividend.
Final Dividend
♦ When the dividend is declared at the Annual General Meeting of the
company, it is known as ‘final dividend’.
♦ The rate of dividend recommended by the Board cannot be increased by the
members.
The table given below provides a quick summary of the above concepts of Interim
Dividend and Final Dividend.

BASIS FOR INTERIM DIVIDEND FINAL DIVIDEND

COMPARISON

Definition Interim dividend is declared Final dividend is the

and paid during an accounting dividend recommended by
year, i.e. before the finalization the board of directors, and
of accounts for the year. approved by shareholders
at the company's Annual
General Meeting, after the
close of financial year.

Announcement Announced by Board of Recommended by Board of

Directors. Directors and approved by
shareholders.

Time of Before preparation of financial After preparation of

Declaration statements. financial statements.

Revocation It can be revoked with the It cannot be revoked.

consent of all shareholders.

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 8.6 CORPORATE AND OTHER LAWS

II. Classification based on Nature of Shares does not require any

specific provision in the articles.
Dividend
Cumulative
accumulates
Preference
unless it is paid
Shares
in full
Preference
Shares Non-
No arrears of
cumulative
dividend in
Preference
future is payable
Shares Shares

Dividend dependent on dividend

Equity policy and the availability of profits
Shares after satisfying the rights of
preference shareholders.

Shares can be classified into two categories i.e. preference shares and equity shares.
The manner of payment of dividend is dependent upon the nature of shares.
(i) Preference Shares: According to Section 43 of the Companies Act, 2013,
shareholders holding preference shares are assured of a preferential
dividend at a fixed rate during the life of the company.
Preference dividend unless otherwise agreed as cumulative in nature need
not be paid every year i.e. a company may decide not to declare any
dividend where there is deficiency of profits.
Classification of preference shares on the basis of payment of dividend is as
follows:
(a) Cumulative Preference Shares: A cumulative preference share is one
in respect of which dividend gets accumulated and any arrears of such
dividend arising due to insufficiency of profits during the current year
is payable from the profits earned in the later years. Until and unless
dividend on cumulative preference shares is paid in full, including
arrears, if any, no dividend is payable on equity shares.

(b) Non-cumulative Preference Shares: A non-cumulative preference

share is one where the dividend is payable only in a year of profit.
There is no accumulation of profit as in the case of cumulative
preference shares. In case no dividend is declared in a year due to any
reason, the right to receive such dividend for that year lapses and the

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 DECLARATION AND PAYMENT OF DIVIDEND 8.7

holder of such a share is not entitled to be paid arrears of dividend

out of future year profits.

(ii) Equity Shares: Equity shares are those shares, which are not preference
shares. They do not enjoy any preferential rights in the matter of payment
of dividend or repayment of capital. The rate of dividend on equity shares is
recommended by the Board of Directors and may vary from year to year.
Rate of dividend depends upon the dividend policy and the availability of
profits after satisfying the rights of preference shareholders.

3. PROVISIONS REGARDING DECLARATION

AND PAYMENT OF DIVIDEND
A. Sources for Declaration of Dividend
According to Section 123 (1), the dividend for any financial year shall be declared
or paid from the following sources:
(a) Profits of the current financial year- Profits arrived at after providing for
depreciation in accordance with Schedule II 3.
(b) Profits of any previous financial year or years- Profits of any previous
financial year(s) arrived at after providing for depreciation in accordance
with Schedule II and remaining undistributed i.e. credit balance in profit and
loss account and free reserves. It is to be noted that only free reserves 4 and
no other reserves are to be used for declaration or payment of dividend 5.
(c) Both (a) and (b).

3
As per Section 123 (2).
4
Section 2 (43) defines the term ‘free reserves’ to mean such reserves which, as per the latest
audited balance sheet of a company, are available for distribution as dividend. However,
following items shall not be treated as free reserves:
(a) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise; or
(b) any change in carrying amount of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair
value.
5
As per Third Proviso to Section 123 (1).

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 8.8 CORPORATE AND OTHER LAWS

(d) Provision of money by the Government- Money provided by the Central

Government or a State Government for the payment of dividend by the
company in pursuance of a guarantee given by that Government.

Note 1: Before declaration of any dividend, carried over previous losses and
depreciation not provided in previous year or years are required to be set
off against profit of the company for the current year 6.

Note 2: In computing profits any amount representing unrealised gains,

notional gains or revaluation of assets and any change in carrying amount
of an asset or of a liability on measurement of the asset or the liability at
fair value shall be excluded 7.

Note 3: Capital profits are not same as distributable profits because they
are not earned in the normal course of business; and therefore, normally not
available for distribution as dividend.

Need for providing for depreciation out of profits before declaring

dividend

Dividend is an apportionment from revenue profits. Therefore, dividend

should never be declared out of capital. This is also the reason for
prohibition on issue of shares at a discount which you studied in the topic
Share Capital and Debentures.

"Depreciation" is a notional estimate of the reduction in the value of an

asset due to

i. wear and tear,

ii. efflux of time,

iii. improvements in technology etc.

If depreciation is not provided for there will be two consequences:

i. The value of the asset will be overstated in Balance Sheet

ii. The profits of the current year will be overstated.

6
As per Fourth Proviso to Section 123 (1).
7
As per Proviso to Section 123 (1) (a).

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 DECLARATION AND PAYMENT OF DIVIDEND 8.9

Let us take a hypothetical case where a company declares all the profits
earned during any year as dividend.

At the time of winding up of the company the value of assets appearing in

the Balance-sheet would appear to be sufficient to repay the capital of the
shareholders but the actual realizable value thereof will be a paltry sum
which may not be sufficient even to meet the expenses of winding up.

This is because the company has failed to retain the amount of wear and
tear in the value of the asset by way of provision for depreciation. In a way
the company would have declared dividend out of capital, which is
prohibited.

Hence the law mandates provision for depreciation out of profits before
declaration of dividend.

Example 4: Shreyas Mechanics Limited owns a plot of land which was

purchased long before. As the property rates are going up, it is decided to
revalue the plot at fair value which is moderately ten times the original
price, thus resulting in a revaluation profit of ` 20,00,000. The Board of
Directors is keen to utilize this ` 20,00,000 along with free reserves of
` 24,00,000 for declaration of dividend at the forthcoming Annual General
Meeting (AGM) to be held on 28th September, 2023. But according to
Proviso to Section 123(1)(a), the amount of ` 20,00,000 cannot be
considered as it does not form part of Free Reserves as the same cannot be
utilized towards declaration of dividend.

B. Transfer to Reserves
Transfer of profits to reserves for any financial year has been left to the discretion of
the company. Therefore, a company is free to transfer any portion of its profit to
reserves as it may deem fit. It may also decide not to transfer any amount to reserves.

Illustration 1: For the current year, Alma Watches Limited proposes to transfer
more than 10% of its profits to the reserves before declaration of dividend at the
rate of 12%. Can the company do so?

Answer: The amount to be transferred to reserves out of profits for any financial
year before the declaration of dividend has been left to the discretion of the

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 8.10 CORPORATE AND OTHER LAWS

company. Therefore, Alma Watches Limited is free to transfer any part of its
profits to reserves as it may deem fit.

Illustration 2: Brix Shipyards Limited has earned a profit of ` 1,000 crore for the
financial year 2023-24. It has proposed a dividend @ 8.75%. However, it does not
intend to transfer any amount to the reserves out of the profits earned. Can the
company do so?

Answer: The amount to be transferred to reserves out of profits for any financial
year has been left to the discretion of the company. The company is free to
transfer any part of its profits to reserves as it may deem fit or it may even not
transfer any profits to reserve if it is deemed appropriate before the declaration
of dividend. Thus, Brix Shipyards Limited is justified in its action if it does not
transfer any amount of profits to the reserves.

C. Declaration of Dividend when there is inadequacy or Absence of

Profits (Second Proviso to Sec. 123)
Where in any year there are no adequate profits for declaring dividend, the
company may declare dividend out of the accumulated profits earned by it in
previous years and transferred by it to the free reserves only in accordance with
the procedure laid down in Rule 3 of the Companies (Declaration and Payment of
Dividend) Rules, 2014.

Free Reserves 8 means such reserves which, as per the latest audited balance sheet
of a company, are available for distribution as dividend:

The following shall not be treated as free reserves;

Any amount representing unrealized gains, notional gains or revaluation of assets,

whether shown as a reserve or otherwise, or

Any change in carrying amount of an asset or of a liability recognized in equity,

including surplus in profit and loss account on measurement of the asset or the
liability at fair value.

Under Rule 3 such declaration shall be subject to the following conditions:

8
Section 2 (43)

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 DECLARATION AND PAYMENT OF DIVIDEND 8.11

CONDITION I

The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the immediately preceding three years.

Rate of Dividend ≤ (RD1 +RD2 + RD3)/3

Where, RD1, RD2, RD3 are rates at which dividend was declared by the company in
the immediately preceding three years.

However, this condition shall not apply if the company has not declared any
dividend in each of the three preceding financial year.

CONDITION II

The total amount to be drawn from such accumulated profits shall not exceed 10% of
its paid-up share capital and free reserves as appearing in the latest audited financial
statement. In other words:

Total amount that can be drawn from ≤ 10% of (paid up

accumulated profits
share capital + free reserves)

CONDITION III

The amount so drawn shall first be utilised to set off the losses incurred in the
financial year in which dividend is declared and only thereafter, any dividend in
respect of equity shares shall be declared.

CONDITION IV

The balance of reserves after such withdrawal shall not fall below 15% of its paid up
share capital as appearing in the latest audited financial statement.

Free Reserves – Amount of withdrawal >= 15 % of paid up share capital

It may be noted that all the above three conditions have to be satisfied.

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 8.12 CORPORATE AND OTHER LAWS

The conditions prescribed by Rule 3 are not applicable to a Government company

in which the entire paid up share capital is held by the Central Government, or by
any State Government or Governments or by the Central Government and one or
more State Governments (vide Notification No. 463 (E), dated 05-06-2015).

Illustration 3: Capricorn Industries Limited has a paid-up capital of ` 200 lakh and
accumulated Reserves of ` 240 lakh. Loss for the year ending 31st March 2024 is
` 30 lakh. Dividend was declared at the following rates during the three years
immediately preceding.

Year 1 9%

Year 2 10%

Year 3 12%

What is the maximum rate at which the company can declare dividend for the current
year?

Answer: In the given case, Capricorn Industries Limited has not made adequate
profits during the current year ending on 31st March, 2024, but it still wants to
declare dividend. Let us apply the conditions:

Condition I:
9 + 10 + 12
Average rate = =10.33%
3

Therefore, the rate of dividend shall not exceed 10.33%.

i.e. 10.3% of Paid up Capital i.e. ` 200 lakh = ` 20.6 lakh

Condition II:

Paid-up capital + Free reserves = ` (200+240) lakh

(Assuming all reserves are free) ` 440 lakh

10% thereof = ` 44 lakh

Less: loss for the year [Condition III] = ` 30 lakh

Amount available = ` 14 lakh

Hence, the quantum of dividend is further restricted to ` 14 lakh.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.13

Condition IV:
Amount of reserves available after adjustment of current year loss = ` 210 lakh
Proposed withdrawal declaration of dividend ` 14 lakh
Balance of Reserves ` 196 lakh
This is more than 15% of paid-up capital (i.e 15% of ` 200 lakh) i.e. ` 30 lakh.
Thus, the company can declare a dividend of ` 14 lakh i.e. at a rate of 7% on its paid-
up capital of ` 200 lakh.
Illustration 4: Shipra Sugar Mills Limited has been regularly declaring dividend at the
rate of 20% on its equity shares for the past 3 years. However, the company has not
made adequate profits during the current year ending on 31st March, 2024, but it has
got adequate free reserves which can be utilized for maintaining the rate of dividend at
20%.
Advise the company as to how it should proceed in the matter if it wants to declare
dividend at the rate of 20% for the year 2023-24, as per the provisions of the
Companies Act, 2013.
Answer: The company can declare a dividend out of its Accumulated Free Reserves
subject to satisfaction of the following conditions:
• The rate of dividend declared shall not exceed the average of the rates at
which dividend was declared by the company in the immediately preceding
three years.
However, this condition shall not apply if the company has not declared any
dividend in each of the three preceding financial year.
• The total amount to be drawn from free reserves shall not exceed 10% of its
paid-up share capital and free reserves as per the latest audited financial
statement.
• The amount so drawn shall first be utilised to set off the losses incurred in
the current financial year and only thereafter, dividend at 20% shall be
declared.
• After such withdrawal from free reserves, the residual reserves shall not fall
below 15% of its paid-up share capital as per the latest audited financial
statement.

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 8.14 CORPORATE AND OTHER LAWS

The company is advised to get the desired dividend recommended by the Board of
Directors and propose the same for the approval of the members at the ensuing
Annual General Meeting as the authority to declare dividend lies with the members
of the company.

D. Depositing of Amount of Dividend

In terms of section 123(4), the amount of the dividend (including
interim dividend), shall be deposited in a separate account maintained
with a scheduled bank. This is to be done within 5 days from the date
of declaration of dividend 9.
Example 5: The authorised and paid-up share capital of Avantika Ayurvedic
Products Limited is ` 50 lakh divided into 5,00,000 equity shares of ` 10 each. At
its Annual General Meeting (AGM) held on 24th September, 2024, the company
declared a dividend of ` 2 per share by passing an ordinary resolution. The
amount of dividend must be deposited in a scheduled bank in a separate account
latest by 29th September, 2024.

E. Payment of Dividend
Section 123(5) contains provisions regarding payment of dividend. These are
stated as under:
(a) Dividend shall be payable only to the registered shareholder or to his
order or to his banker.
In case a shareholder informs the company to pay dividend to a particular
banker and if the payment is so made by the company, then it shall be
deemed to be made to the shareholder himself.
A purchaser of shares whose name is not entered in the Register of
Members cannot claim payment of dividend to him though he might have
made full payment to the seller of shares. In this regard we will, later in this
chapter, see Section 126 which provides for keeping of dividend etc., in

9
In terms of Notification No. 463 (E), dated 05-06-2015, this requirement shall not apply
to a Government Company in which the entire paid up share capital is held by the Central
Government, or by any State Government or Governments or by the Central Government
and one or more State Governments or by one or more Government Company.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.15

abeyance pending registration of transfer of shares, unless the registered

holder has authorized the company to pay the dividend to the purchaser.
Illustration 5: The Directors of East West Limited proposed dividend at 15% on
equity shares for the financial year 2023-2024. The company announced 7th
September 2024 as the record date for payment of dividend. The dividend was
approved in the Annual General Meeting held on 3rd September 2024.
Mr. Binoy was the holder of 2000 equity of shares since 31st March, 2018, but he
transferred the shares to Mr. Mohan in 2024, whose name has been entered in
the register of members on 18th June, 2024. Who will be entitled to the above
dividend?
Answer: According to section 123, dividend shall be paid by a company
only to the registered shareholder of such share.
Record date is the date announced by the company for determining
entitlement to dividend. All those persons whose name is included in the
register of members on that date shall be entitled to dividend.
In the instant case, on the date announced by the company as the record
date, Mr. Mohan’s name is present in the register of members (i.e. Mr.
Binoy’s name is NOT present therein). Therefore, the dividend should be
paid to Mr. Mohan who is the registered shareholder on the record date.

Note: In terms of section 51, a company may, if so authorised by its articles,

pay dividend in proportion to the amount paid-up on each share. Suppose,
some of the shareholders have paid only ` 5 (face value ` 10) on each share
held by them. In case of declaration of dividend at the rate of ` 5 per share,
the company, if authorised by its articles, shall be justified in paying
dividend of ` 2.50 per share in respect of such partly paid shares.

(b) Dividends are payable in cash and not in kind. Dividends

that are payable to the shareholders in cash may also be
paid by cheque or dividend warrant or through any
electronic mode.

Section 127 requires that the declared dividend must be paid to the entitled
shareholders within the prescribed time limit of thirty days from the date of
declaration of dividend. In case dividend is paid by issuing dividend

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 8.16 CORPORATE AND OTHER LAWS

warrants, such warrants must be posted at the registered addresses within

the prescribed time.

Note: Dividends shall be paid only in cash. The exception to this is the
capitalization of profits or reserves of a company for the purpose of issuing
fully paid-up bonus shares or paying up any amount for the time being
unpaid on any shares held by the members of the company 10.

But you may note that while Declaration of dividend does not affect the
company’s power to issue fully paid up bonus shares, such shares cannot be
issued in lieu of dividend.

(c) Applicability of Section 123 (5) to Nidhis: In terms of Notification No. GSR
465 (E), dated 05-06-2015, this sub-section shall apply to the Nidhis, subject
to the modification that any dividend payable in cash may be paid by
crediting the same to the account of the member, if the dividend is not
claimed within 30 days from the date of declaration of the dividend.
Chart depicts the mode of payment and recipient of dividend

Payment of dividend

Payable in Payable to Nidhis

Cash
the registered
shareholder of the any dividend payable in cash may be
cheque share, or paid by crediting the same to the
account of the member, if the
warrant dividend is not claimed within 30 days
to his order, from the date of declaration of the
or dividend.
any electronic
mode
to his banker

F. Prohibition on Declaration of Dividend

In the following cases declaration and payment of dividend is prohibited.

10
First Proviso to Section 123 (5)

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 DECLARATION AND PAYMENT OF DIVIDEND 8.17

(i) Prohibition in case of any Defaulting

Company: 11 A company which fails to
comply with the provisions of section 73
(Prohibition on acceptance of deposits from
public) and section 74 (Repayment of
deposits, etc., accepted before the
commencement of this Act of 2013) shall not,
so long as such failure continues, declare any
dividend on its equity shares.
(ii) Prohibition in case of Section 8 Companies:
According to section 8(1), a company having
licence under Section 8 (Formation of
companies with charitable objects, etc.) is
prohibited from paying any dividend to its
members. Its profits are intended to be applied only in promoting the
objects for which it is formed.

4. UNPAID DIVIDEND ACCOUNT (UDA)

Section 124 of the Act contains the provisions relating to Unpaid Dividend
Account (UDA). These are as follows:

(i) Unpaid or Unclaimed Dividend to be transferred to the Unpaid

Dividend Account- Where a dividend has been declared by a company but has
not been paid or claimed within thirty (30) days from the date of declaration, the
company shall, within seven (7) days from the expiry of the said period of 30 days,
transfer the total amount of unpaid or unclaimed dividend to a special account
called the Unpaid Dividend Account (UDA). The UDA shall be opened by the
company in any scheduled bank.

(ii) Preparing of Statement of the Unpaid Dividend- Within 90 days of

transferring any amount to the Unpaid Dividend Account, the company shall
prepare a statement containing the names, last known addresses and the amount
of unpaid dividend to be paid to each person and place such statement on its

11
Section 123 (6)

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 8.18 CORPORATE AND OTHER LAWS

web-site, if any, and also on any other web-site approved by the Central
Government for this purpose.

(iii) Payment of Interest if default is made in transferring the Amount- If

any default is made in transferring the total unpaid dividend amount or any part
thereof to the Unpaid Dividend Account, the company shall pay, from the date of
such default, interest at the rate of twelve per cent per annum on the amount not
so transferred to the said account. The interest accruing on such amount shall
ensure i.e. be available to the benefit of the members of the company in
proportion to the amount remaining unpaid to them.

(iv) Claimant to apply for payment of Claimed Amount- Any person claiming
to be entitled to any money transferred to the Unpaid Dividend Account may
apply to the company concerned for payment of the money so claimed.

(v) Transfer of Unclaimed Amount to Investor Education and Protection

Fund (IEPF)- Any money transferred to the Unpaid Dividend Account which
remains unpaid or unclaimed for seven (7) years from the date of such transfer
shall be transferred by the company along with interest accrued thereon to the
Investor Education and Protection Fund.

Further, the company shall send a prescribed statement containing the details of
such transfer to the IEPF Authority and in turn, the Authority shall issue a receipt
to the company as evidence of such transfer.

(vi) Transfer of Shares to IEPF- All shares in respect of which dividend has not
been paid or claimed for 7 consecutive years or more shall be transferred by the
company in the name of Investor Education and Protection Fund along with a
statement containing the prescribed details.

By way of Explanation, it is clarified that in case any dividend is paid or claimed

for any year during the said period of seven consecutive years, the share shall not
be transferred to Investor Education and Protection Fund.

(vii) Right of Owner of ‘transferred shares’ to Reclaim- Any claimant of shares

so transferred to IEPF shall be entitled to reclaim the ‘transferred shares’ from
Investor Education and Protection Fund in accordance with the prescribed
procedure and on submission of prescribed documents.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.19

(viii) Punishment for Contravention- If a company fails to comply with any of

the requirements of this section, such company shall be liable to a penalty of one
lakh rupees and in case of continuing failure, with a further penalty of five
hundred rupees for each day after the first during which such failure continues,
subject to a maximum of ten lakh rupees and every officer of the company who is
in default shall be liable to a penalty of twenty-five thousand rupees and in case
of continuing failure, with a further penalty of one hundred rupees for each day
after the first during which such failure continues, subject to a maximum of two
lakh rupees.

Declared Dividend

Within 30 Days

Dividend Not Paid/ Claimed

Within 7 Days

Deposit the unpaid/ unclaimed If not done Pay Interest @

dividend amount in Scheduled Bank 12% p.a. (from the
(Called Unpaid Dividend Account) date of default)

Within 90 Days

Prepare Statement (Name, Last known

address, Unpaid dividend amount)

Website of Place on Website approved by

Company Govt. for this purpose

After the expiry of 7 Years from date of transfer

Transfer unpaid/unclaimed dividend along with interest to

IEPF

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 8.20 CORPORATE AND OTHER LAWS

5. INVESTOR EDUCATION AND PROTECTION

FUND (IEPF)
Section 125 of the Act along with various Rules framed from time to time
including 12Investor Education and Protection Fund Authority (Accounting, Audit,
Transfer and Refund) Rules, 2016 deal with the Investor Education and Protection
Fund (IEPF). This fund, being established by the Central Government, shall be
credited with specified amounts and utilized for refund of unclaimed and unpaid
amounts, promotion of investors’ awareness and protection of the interests of
investors, etc.
The relevant provisions are discussed below:
1. Credit of Specified Amounts to the Fund: Following specified amounts
shall be credited to the Fund:
(a) Amount given by the Central Government- The amount given by
the Central Government by way of grants after due appropriation
made by Parliament;
(b) Donations by the Central Government- Donations given by the
Central Government, State Governments, companies or any other
institution for the purposes of the Fund;
(c) Amount lying in the Unpaid Dividend Account- The amount lying in
the Unpaid Dividend Account (UDA) of companies which is transferred
by them to the Fund under section 124(5);
(d) Amount in the General Revenue Account of the Central
Government- The amount in the General Revenue Account of the
Central Government which had been transferred to that account under
section 205A(5) of the Companies Act, 1956 as it stood immediately
before the commencement of the Companies (Amendment) Act, 1999
and remaining unpaid or unclaimed on the commencement of the Act
of 2013;
(e) Amount in IEPF- The amount lying in the Investor Education and
Protection Fund under section 205C of the Companies Act, 1956;
(f) Income from Investments- The interest or other income received out
of investments made from the Fund;

12
Notified vide Notification No. GSR 854 (E), dated 05.09.2016 w.e.f. 07.09.2016.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.21

(g) Amount received through disgorgement or disposal of Securities-

The amount received under section 38(4) i.e. amount received through
disgorgement 13or disposal of securities seized from a person who has
been convicted for personation for acquisition of securities as
provided in section 38(3);
(h) Application Money- The application money received by companies
for allotment of any securities and due for refund (only if such amount
has remained unclaimed and unpaid for a period of seven years from
the date it became due for payment);
(i) Matured Deposits- Matured deposits with companies other than
banking companies (only if such amount has remained unclaimed and
unpaid for a period of seven years from the date it became due for
payment);
(j) Matured Debentures- Matured debentures with companies (only if
such amount has remained unclaimed and unpaid for a period of
seven years from the date it became due for payment);
(k) Interest- Interest accrued on the amounts referred to in clauses (h) to
(j);
(l) Amount received from Sale Proceeds- Amount received from sale
proceeds of fractional shares arising out of issuance of bonus shares,
merger and amalgamation for seven or more years;
(m) Redemption Amount- Redemption amount of preference shares
remaining unpaid or unclaimed for seven or more years; and
(n) Other Amounts- Such other amounts as prescribed in Rule 3 of the
Investor Education and Protection Fund Authority (Accounting, Audit,
Transfer and Refund) Rules, 2016. They are as under:
(a) all amounts payable as mentioned in clause (a) to (n) of section
125 (2) of the Act [as stated above];
(b) all shares in accordance with section 124 (6) i.e. all those shares
in whose case dividends have not been claimed or paid for seven
consecutive years or more;

13
Disgorgement is the legally enforced repayment of ill-gotten gains imposed on wrongdoers
by the courts. Funds that were received through illegal or unethical business transactions are
disgorged, or paid back, often with interest and/or penalties to those affected by the action.

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 8.22 CORPORATE AND OTHER LAWS

(c) all the resultant benefits arising out of shares held by the
Authority under clause (b) above;
(d) all grants, fees and charges received by the Authority under
these rules;
(e) all sums received by the Authority from such other sources as
may be decided upon by the Central Government;
(f) all income earned by the Authority in any year;
(fa) all shares held by the Authority in accordance with proviso of
sub-section (9) of section 90 of the Act and all the resultant
benefits arising out of such shares, without any restrictions;
(g) all amounts payable as mentioned in sub-section (3) of section
10B of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970, section 10B of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1980 sub-section
(3) of section 38A of the State Bank of India Act, 1955 and
section 40A of the State Bank of India (Subsidiary Bank) Act,
1959; and; and
(h) all other sums of money collected by the Authority as envisaged
in the Act.
Further, according to Rule 3 (3), in case of term deposits and debentures of
companies, due unpaid or unclaimed interest shall be transferred to the
Fund along with the transfer of the matured amount of such term deposits
and debentures.
2. Utilization of the Fund: According to section 125 (3) the Fund shall be
utilized for:
(a) refund of unclaimed dividends, matured deposits, matured
debentures, the application money due for refund and interest
thereon;
(b) promotion of investors’ education, awareness and protection;
(c) distribution of any disgorged amount among eligible and identifiable
applicants for shares or debentures, shareholders, debenture-holders
or depositors who have suffered losses due to wrong actions by any
person, in accordance with the orders made by the Court which had
ordered disgorgement;

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 DECLARATION AND PAYMENT OF DIVIDEND 8.23

(d) reimbursement of legal expenses incurred in pursuing class action

suits under sections 37 and 245 by members, debenture-holders or
depositors as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto in accordance with the rules
framed under the Investor Education and Protection Fund Authority
(Accounting, Audit, Transfer and Refund) Rules, 2016.
Refund of Amount- A person amounts referred to in clauses (a) to (d) of
sub-section (2) of section 205C were transferred to IEPF, after the expiry of 7
years as per provisions of the Companies Act, 1956, shall be entitled to get
refund out of the fund in respect of such claims in accordance with rules
made under this section.
3. Application to the Authority for payment: According to section 125 (4),
any person claiming to be entitled to the amount referred in section 125 (2)
may apply to the Authority constituted under section 125 (5) for the
payment of the money claimed.
4. Other Provisions governing the IEPF
(i) Constitution of the Authority for Administration of Fund- In terms
of Notification dated 13.01.2016 14, the Ministry of Corporate Affairs
has notified sub-section (5), sub-section (6) (except with respect to the
manner of administration of the Fund) and sub-section (7) of section
125 of the Act w.e.f. 13.01.2016. With this Notification, an Authority is
being constituted for the administration and maintenance of accounts
as well as other relevant records of the Fund.
Further, with the notification of IEPF Authority (Appointment of
Chairperson and Members, holding of Meetings and provision for
Offices and Officers) Rules, 2016 on 13.01.2016, the Secretary, Ministry
of Corporate Affairs shall be the ex-officio Chairperson of the
Authority. In addition, there shall be six members (maximum limit
seven) and a Chief Executive Officer who shall be the convenor of the
Authority.

(ii) Provision of required Resources by the Central Government for

Administration of the Fund- The Central Government may provide to

14
Vide Notification No. GSR 26 (E), dated 13.01.2016.

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 8.24 CORPORATE AND OTHER LAWS

the Authority such offices, officers, employees and other resources in

accordance with the IEPF Authority (Appointment of Chairperson and
Members, holding of Meetings and provision for Offices and Officers)
Rules, 2016.
(iii) Authority to work in consultation with CAG of India- The Authority
shall administer the Fund and maintain separate accounts and other
relevant records in relation to the Fund in such form as may be
prescribed after consultation with the Comptroller and Auditor-
General of India.
(iv) Spending of Money- The Authority shall be competent to spend
money out of the Fund for carrying out the objects specified in section
125 (3) i.e. purposes for which the fund shall be utilized.
(v) Audit of the Fund- The accounts of the Fund shall be audited by the
Comptroller and Auditor-General of India at such intervals as may be
specified by him. Such audited accounts together with the audit report
thereon shall be forwarded annually by the Authority to the Central
Government.
(vi) Preparation of Annual Report by the Authority- For each financial
year, the Authority shall prepare in the prescribed form and at
prescribed time its annual report giving full account of its activities
during the financial year and forward a copy thereof to the Central
Government. In turn, the Central Government shall cause the annual
report and the audit report given by the Comptroller and Auditor-
General of India to be laid before each House of Parliament.

6. RIGHT OF DIVIDEND, RIGHTS SHARES AND

BONUS SHARES TO BE HELD IN ABEYANCE
PENDING REGISTRATION OF TRANSFER OF
SHARES
According to Section 126, in case any instrument of transfer of shares has been
delivered by a shareholder for registration and the transfer of such shares has not
been registered by the company, such company shall take the following steps:

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 DECLARATION AND PAYMENT OF DIVIDEND 8.25

(a) Transfer the dividend in relation to such shares to the Unpaid Dividend
Account unless it is authorised by the registered holder of such share in
writing to pay such dividend to the transferee specified in the instrument of
transfer; and
(b) Keep in abeyance in relation to such shares any offer of rights shares under
section 62 (1) (a) and any issue of fully paid-up bonus shares in pursuance
of first proviso to section 123 (5).

7. PUNISHMENT FOR FAILURE TO DISTRIBUTE

DIVIDENDS WITHIN 30 DAYS
Section 127 of the Act contains time limit for distribution of dividends and
punishment for failure to distribute dividend on time. Certain exemptions from
punishments are also provided. These provisions are stated as under:

A. Time Limit for Distribution of Dividends

Where a company declares dividend, it must be paid or the dividend
warrant thereof must be posted within 30 days from the date of declaration
of dividend to the shareholders entitled to the same. Posting of dividend
warrants within 30 days absolves the company from any punishment
irrespective of whether it is received by the shareholder concerned within
this time or not. The offence is committed only when the company fails to
post dividend warrants to the registered address of the members within 30
days of declaration. Non-receipt of dividend warrants by the shareholders
within the prescribed time does not attract any punishment.

B. Punishment for Failure

In case a company fails to pay declared dividends or fails to post dividend

warrants within 30 days of declaration, following punishments are
applicable:

(i) Every director of the company shall be punishable with imprisonment

of up to two years, if he is knowingly a party to the default. And, he
shall also be liable to pay minimum fine of ` 1,000 for every day
during which such default continues.

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 8.26 CORPORATE AND OTHER LAWS

(ii) The company shall be liable to pay simple interest at the rate of 18%
p.a. during the period for which such default continues.

C. Exemption from Punishment

Under the following cases, where the company has failed to pay declared
dividend within 30 days of declaration, no offence shall be deemed to have
been committed and therefore, no punishment is attracted:
(a) where the dividend 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) 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;
(e) where, for any other reason, the failure to pay the dividend or to post
the warrant within the prescribed period of 30 days was not due to
any default on the part of the company.

Exemption from Punishment under Section 127

Dividend Shareholder for any

could gave Dispute Dividend other
not be directions regarding has been reason,
paid by regarding right to lawfully the failure
reason of payment of receive adjusted to pay/
operation dividend, dividend against post
of any AND any sum dividend
law due from warrant
those shareholder within the
directions to prescribed
cannot be company time, was
complied not due to
with and the any
same has default on
been the part of
communicated the
to him company.

© The Institute of Chartered Accountants of India

 DECLARATION AND PAYMENT OF DIVIDEND 8.27

Illustration 6: Mr. Alok, holding equity shares of face value of ` 10 lakh, has
not paid ` 80,000 towards call money due on shares. Can the dividend amount
payable to him be adjusted against such dues? Give reasons for your answer.
Answer: Yes. As per clause (d) of Proviso to Section 127, where the dividend
is declared by a company and there remains calls in arrears or any other
sum due from a member, then the dividend can be lawfully adjusted by the
company against any such dues.
Thus, the action of the company adjusting dividend payable to Mr. Alok
towards call money due on shares amounting to ` 80,000 is justified and
therefore, no punishment is attracted.

Applicability of Section 127 to Nidhis

In terms of Notification No. GSR 465 (E), dated 05-06-2015, Section 127 dealing
with punishment shall apply to the Nidhis, subject to the following
modification:
In case the dividend payable to a member is ` 100 or less, it shall be
sufficient compliance of the provisions of the section 127, if the declaration
of the dividend is announced in the local language in one local newspaper
of wide circulation and announcement of the said declaration is also
displayed on the notice board of the Nidhis for at least 3 months.

SUMMARY
 Section 2(35) of the Companies Act, 2013, states that “dividend” includes
any interim dividend.
 Dividend can be declared out of:

 Profits of the current year after depreciation,

 Profits for any previous financial year or years arrived at after
providing for depreciation and remaining undistributed,

 Both of the above,

 Money provided by the Central Government or a State Government
for the payment of dividend by the company in pursuance of a
guarantee given by that Government.

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 8.28 CORPORATE AND OTHER LAWS

[Note: Depreciation shall be provided in accordance with the provisions of

Schedule II.]
 Before declaration of dividend, the company may, at its discretion, transfer
any appropriate percentage of its profits to the reserves.
 When there is inadequacy or absence of profits, the company may declare
dividend out of free reserves after following the conditions prescribed in the
Rules.
 Amount of dividend (including interim dividend) shall be deposited in a
separate bank account maintained with a scheduled bank within 5 days
from the date of declaration of dividend.
 Payment of dividend-
 Payable
 in cash; or
 by cheque; or
 by dividend warrant; or
 by any electronic mode
 Payable
 to the registered shareholder of the shares; or
 to his order; or
 to his banker.
 In case of Nidhis
 any dividend payable in cash may be paid by crediting the same to
the account of the member, if the dividend is not claimed within 30
days from the date of declaration of the dividend.
 Unpaid Dividend Account (UDA)
 Declared dividend not paid or claimed to be transferred to the Unpaid
Dividend Account (UDA).
 Prepare statement of particulars of the unpaid dividend.
 Default in transferring of amount to UDA - Interest @ 12% p.a.
 Entitled shareholders can apply for payment of amount from UDA.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.29

 Transfer unpaid or unclaimed amount of dividend (and shares thereof) to

Investor Education and Protection Fund (IEPF) after the expiry of seven
years from the date of such transfer to UDA.
 Right of owner of shares transferred to IEPF to claim from IEPF: Claimant
of transferred shares is entitled to reclaim the transfer of shares from IEPF
by following the prescribed procedure and on submission of prescribed
documents.
 In case any dividend is paid or claimed for any year during the said
period of 7 consecutive years, the shares shall not be transferred to IEPF.
 Punishment: In case a company fails to pay declared dividends or fails to
post dividend warrants within 30 days of declaration, company shall be
liable to a penalty of one lakh rupees and in case of continuing failure,
with a further penalty of five hundred rupees for each day after the
first during which such failure continues, subject to a maximum of ten
lakh rupees and every officer of the company who is in default shall be
liable to a penalty of twenty-five thousand rupees and in case of
continuing failure, with a further penalty of one hundred rupees for
each day after the first during which such failure continues, subject to
a maximum of two lakh rupees.
 Exemptions from punishment under section 127
 dividend could not be paid by reason of operation of any law;
 shareholder gave directions regarding payment of dividend but those
directions could not be complied with and the same had been
communicated to him;
 dispute regarding right to receive dividend;
 dividend had been lawfully adjusted against any sum due from the
shareholder to the company;
 for any other reason and the failure to pay/post dividend warrant within
the prescribed time was not due to any default on the part of the
company.

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 8.30 CORPORATE AND OTHER LAWS

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. When the dividend is declared at the Annual General Meeting of the
company, it is known as ….

(a) Final Dividend

(b) Interim Dividend
(c) Dividend on preference shares
(d) Scrip Divided
2. Amount to be transferred to reserves out of profits before any declaration of
dividend is ___________

(a) 5%
(b) 7.5%
(c) 10%

(d) at the discretion of the company.

3. The Board of Directors of Vidyut Limited are contemplating to declare interim
dividend in the last week of July, 2024 but the company has incurred loss
during the current financial year up to the end of June, 2024. However, it is
noted that during the previous five financial years i.e., 2019-20, 2020-21,
2021-22, 2022-23 and 2023-24, the company had declared dividend at the
rate of 8%, 9%, 12%, 11% and 10% respectively. Advise the Board as to the
maximum rate at which they can declare interim dividend despite incurring
loss during the current financial year.
(a) Maximum at the rate of 10%.
(b) Maximum at the rate of 11%.
(c) Maximum at the rate of 10.5%.

(d) Maximum at the rate of 11.5%.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.31

4. The amount accumulated in the Investor Education and Protection Fund shall
not be used for:

(a) refunds in respect of unclaimed dividends, matured deposits, matured

debentures, application money due for refund and interest thereon.
(b) reimbursement of legal expenses incurred in pursuing class action suits
under section 37 and 245.
(c) grants or donation to the Central Government for the purpose of
investor’s education and training.
(d) distribution of any disgorged amount among eligible and identifiable
applicants who have suffered losses.
5. In case a company fails to pay declared dividends or fails to post dividend
warrants within 30 days of declaration, company shall be liable to pay simple
interest at the rate of ………during the period for which such default continues.

(a) 6% p.a.
(b) 12% p.a.
(c) 15% p.a.
(d) 18% p.a.

Descriptive Questions
1. The Annual General Meeting of ABC Bakers Limited held on 30th May, 2024,
declared a dividend at the rate of 30% payable on its paid-up equity share
capital as recommended by Board of Directors. However, the company was
unable to post the dividend warrant to Mr. Ranjan, an equity shareholder, up
to 25th July, 2024. Mr. Ranjan filed a suit against the company for the
payment of dividend along with interest at the rate of 20 percent per annum
for the period of default. Decide in the light of provisions of the Companies
Act, 2013, whether Mr. Ranjan would succeed? Also, state the directors’
liability in this regard under the Act.
2. The Board of Directors of Future Fashions Limited at its meeting
recommended a dividend on its paid-up equity share capital which was later
on approved by the shareholders at the Annual General Meeting. Thereafter,
the directors at another meeting of the Board passed a board resolution for

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 8.32 CORPORATE AND OTHER LAWS

diverting the total dividend to be paid to the shareholders for purchase of

certain short-term investments in the name of the company. As a result,
dividend was paid to shareholders after 45 days.
Examining the provisions of the Companies Act, 2013, state whether the act of
directors is in violation of the provisions of the Act and if so, state the
consequences that shall follow for the above violative act.
3. Referring to the provisions of the Companies Act, 2013, examine the validity
of the following:
The Board of Directors of ABC Tractors Limited proposes to declare dividend
at the rate of 20% to the equity shareholders, despite the fact that the
company has defaulted in repayment of public deposits accepted before the
commencement of this Act.
4. Star Computers Limited declared and paid dividend in time to all its equity
holders for the financial year 2023-24, except in the following two cases:

(i) Mrs. Sheela Bhatt, holding 250 shares had mandated the company to
directly deposit the dividend amount in her bank account. The company,
accordingly remitted the dividend but the bank returned the payment
on the ground that there was difference in surname of the payee in the
bank records. The company, however, did not inform Mrs. Sheela Bhatt
about this discrepancy.
(ii) Dividend amount of ` 50,000 was not paid to the successor of Late
Mr. Mohan, in view of the court order restraining the payment due to
family dispute about succession.
You are required to analyse these cases with reference to provisions of the
Companies Act, 2013 regarding failure to distribute dividends.
5. Alpha Herbals, a Section 8 company is planning to declare dividend in the
Annual General Meeting for the Financial Year ended 31-03-2024. Mr. Chopra
is holding 800 equity shares as on date. State whether the act of the company
is according to the provisions of the Companies Act, 2013.
6. YZ Medical Instruments Limited is a manufacturing company & has proposed
a dividend @ 10% for the year 2023-2024 out of the profits of current year.
The company has earned a profit of ` 910 crore during 2023-2024. The

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 DECLARATION AND PAYMENT OF DIVIDEND 8.33

company does not intend to transfer any amount to the general reserves out
of the profits. Is YZ Medical Instruments Limited allowed to do so? Comment.
7. PQ Ltd. declared and paid 10% dividend to all its shareholders except Mr.
Kumar, holding 500 equity shares, who instructed the company to deposit the
dividend amount directly in his bank account. The company accordingly
remitted the dividend, but the bank returned the payment on the ground that
the account number as given by Mr. Kumar doesn't tally with the records of
the bank. The company, however, did not inform Mr. Kumar about this
discrepancy. Comment on this issue with reference to the provisions of the
Companies Act, 2013 regarding failure to distribute dividend.
8. Alex limited is facing loss in business during the financial year 2023-2024. In
the immediate preceding three financial years, the company had declared
dividend at the rate of 7%, 11% and 12% respectively. The Board of Directors
has decided to declare 12% interim dividend for the current financial year
atleast to be in par with the immediate preceding year. Is the act of the Board
of Directors valid?

ANSWERS
Answer to MCQ based Questions
1. (a) Final Dividend
2. (d) at the discretion of the company.

3. (b) Maximum at the rate of 11%

4. (c) grants or donation to the Central Government for the purpose
of investor’s education and training.
5. (d) 18% p.a.

Answer to Descriptive Questions

1. Section 127 of the Companies Act, 2013 lays down the penalty for non-
payment of dividend within the prescribed time period of 30 days.
According to this section where a dividend has been declared by a company
but has not been paid or the warrant in respect thereof has not been posted

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 8.34 CORPORATE AND OTHER LAWS

within 30 days from the date of declaration of dividend to any shareholder

entitled to the payment of dividend:

(a) every director of the company shall, if he is knowingly a party to the

default, be punishable with imprisonment maximum up to two years
and with minimum fine of rupees one thousand for every day during
which such default continues; and
(b) the company shall be liable to pay simple interest at the rate of 18%
per annum during the period for which such default continues.
Therefore, in the given case Mr. Ranjan will not succeed if he claims interest
at 20% interest as the limit under section 127 is 18% per annum.
2. According to section 124 of the Companies Act, 2013, where a dividend has
been declared by a company but has not been paid or claimed within 30 days
from the date of the declaration, the company shall, within 7 days from the
date of expiry of the said period of 30 days, transfer the total amount of
dividend which remains unpaid or unclaimed to a special account to be opened
by the company in any scheduled bank to be called the Unpaid Dividend
Account.
Further, according to section 127 of the Companies Act, 2013, where a
dividend has been declared by a company but has not been paid or the
warrant in respect thereof has not been posted within 30 days from the date
of declaration to any entitled shareholder, every director of the company
shall, if he is knowingly a party to the default, be liable for punishment.
In the present case, the Board of Directors of Future Fashions Limited at its
meeting recommended a dividend on its paid-up equity share capital which
was later on approved by the shareholders at the Annual General Meeting.
Thereafter, the directors at another meeting of the Board decided by
passing a board resolution for diverting the total dividend to be paid to the
shareholders for purchase of certain short-term investments in the name of
the company. As a result, dividend was paid to shareholders after 45 days.
(i). Since, declared dividend has not been paid within 30 days from the
date of the declaration to any shareholder entitled to the payment of
dividend, the company shall, within 7 days from the date of expiry of
the said period of 30 days, transfer the total amount of dividend which

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 DECLARATION AND PAYMENT OF DIVIDEND 8.35

remains unpaid or unclaimed to a special account to be opened by the

company in any scheduled bank to be called the Unpaid Dividend
Account.
(ii). The Board of Directors of Future Fashions Limited has violated section
127 of the Companies Act, 2013 as it failed to pay dividend to
shareholders within 30 days due to its decision to divert the total
dividend to be paid to shareholders for purchase of certain short-term
investments in the name of the company.

Consequences: The following are the consequences for violation of the

above provisions:
(a) Every director of the company shall, if he is knowingly a party to the
default, be punishable with maximum imprisonment of two years and
shall also be liable for a minimum fine of rupees one thousand for
every day during which such default continues.
(b) The company shall also be liable to pay simple interest at the rate of 18%
p.a. during the period for which such default continues.
3. Section 123(6) of the Companies Act, 2013, specifically provides that a
company which fails to comply with the provisions of section 73 (Prohibition
of acceptance of deposits from public) and section 74 (Repayment of
deposits, etc., accepted before the commencement of this Act) shall not, so
long as such failure continues, declare any dividend on its equity shares.
In the given instance, the Board of Directors of ABC Tractors Limited
proposes to declare dividend at the rate of 20% to the equity shareholders,
in spite of the fact that the company has defaulted in repayment of public
deposits accepted before the commencement of the Companies Act, 2013.
Hence, according to the above provision, declaration of dividend by the ABC
Tractors Limited is not valid.
4. (i) Section 127 of the Companies Act, 2013 provides for punishment for
failure to distribute dividend on time. One of such situations is where
a shareholder has given directions to the company regarding the
payment of the dividend and those directions could not be complied
with but the non-compliance was not communicated to him.

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 8.36 CORPORATE AND OTHER LAWS

In the given situation, the company has failed to communicate to the

shareholder Mrs. Sheela Bhatt about non-compliance of her direction
regarding payment of dividend. Hence, the penal provisions under
section 127 will be applicable.
(ii) Section 127, inter-alia, provides that no offence shall be deemed to
have been committed where the dividend could not be paid by reason
of operation of law.
In the present case, the dividend could not be paid because it was not
allowed to be paid by the court until the matter was resolved about
succession. Hence, there will not be any liability on the company and its
directors, etc.
5. According to Section 8(1) of the Companies Act, 2013, the companies
licenced under Section 8 of the Act (Formation of companies with
Charitable Objects, etc.) are prohibited from paying any dividend to their
members. Their profits are intended to be applied only in promoting the
objects for which they are formed.
Hence, in the instant case, the proposed act of Alpha Herbals, a company
licenced under Section 8 of the Companies Act, 2013, which is planning to
declare dividend, is not according to the provisions of the Companies Act,
2013.
6. According to section 123 of the Companies Act, 2013 a company may,
before the declaration of any dividend in any financial year, transfer such
percentage of its profits for that financial year as it may consider
appropriate to the reserves of the company. Such transfer is not mandatory
and the percentage to be transferred to reserves is at the discretion of the
company.
As per the given facts, YZ Medical Instruments Limited has earned a profit
of ` 910 crore for the financial year 2023-2024. It has proposed a dividend
@ 10%. However, it does not intend to transfer any amount to the reserves
of the company out of the profits of current year.
As per the provisions stated above, the amount to be transferred to reserves
out of profits for any financial year is at the discretion of the company
acting through its Board of Directors. Therefore, at its discretion, if YZ
Medical Instruments Limited decides not to transfer any profit to reserves
before the declaration of dividend at 10%, it is legally allowed to do so.

© The Institute of Chartered Accountants of India

 DECLARATION AND PAYMENT OF DIVIDEND 8.37

7. Section 127 of the Companies Act, 2013 provides for punishment for failure
to distribute dividend on time. One of such situations is 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 not been communicated to the shareholder.
In the instant case, PQ Ltd. has failed to communicate to the shareholder Mr.
Kumar about non-compliance of his direction regarding payment of dividend.
Hence, the penal provisions under section 127 will be attracted.
8. As per Section 123(3) of the Companies Act, 2013, the Board of Directors of
a company may declare interim dividend during any financial year out of
the surplus in the profit and loss account and out of profits of the financial
year in which such interim dividend is sought to be declared.

Provided that in case the company has incurred loss during the current
financial year up to the end of the quarter immediately preceding the date
of declaration of interim dividend, such interim dividend shall not be
declared at a rate higher than the average dividends declared by the
company during the immediately preceding three financial years.
According to the given facts, Alex Ltd. is facing loss in business during the
financial year 2023-2024. In the immediate preceding three financial years,
the company declared dividend at the rate of 7%, 11% and 12%
respectively. Accordingly, the rate of dividend declared shall not exceed
10%, the average of the rates (7+11+12=30/3) at which dividend was
declared by it during the immediately preceding three financial years.
Therefore, the act of the Board of Directors as to declaration of interim
dividend at the rate of 12% during the F.Y 2023-2024 is not valid.

© The Institute of Chartered Accountants of India