Expected marks in examination: Min: Max:

Chapter 6
Distribution of Profits

Introduction
 Profit or a portion of profit that can be legally distributed as a dividend to the
shareholders is known as Divisible Profit.
 Profits available for dividend to shareholders are known as divisible profits.
 On the other hand dividend refers to a reward that a company gives to its shareholders.
 A company’s dividend is decided by its board of directors and it requires the
shareholders’ approval.

Final Dividend
 Dividend is said to be a final dividend if it is declared at the annual general meeting of
the company.
 Final dividend once declared becomes a debt enforceable against the company. Final
Dividend can be declared only if it is recommended by the Board of Directors of the
Company.
 Board of directors must state in the Directors’ Report the amount of dividend, if any,
which it recommends to be paid.
 SS-3 defines final dividend so as to mean the dividend recommended by the Board of
Directors and declared by the Members at an Annual General Meeting.

Interim dividend
 Dividend is said to be an interim dividend, if it is declared by the Board of Directors
between two annual general meetings of the company. All the provisions relating to the
payment of dividend shall be applicable on the interim dividend also.
 SS-3 defines interim dividend so as to mean the Dividend declared by the Board of
Directors.

Provisions relating to dividend

Declaration of Dividend (Section 123)

 Section 51 of the Act, states that a company pays dividend in proportion to the
amount paid up on each share.

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Dividend in case of absence or inadequacy of profits
In case of inadequacy or absence of profits in any financial year, any company proposes to
declare dividend out of the accumulated profits earned by it in previous years and
transferred by the company to the reserves, such declaration of dividend shall be made in
accordance with such the following conditions, namely:-
(1) The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by it in the three years immediately preceding that year: This
shall not apply to a company which has not declared any dividend in each of
preceding 3 financial years.
(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 first be 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. The balance of reserves after such withdrawal shall not fall below
fifteen per cent of its paid up share capital as appearing in the latest audited financial
statement which charge is already created may be provided to other lenders as
second charge.
Dividend to be declared from free reserves only
 No dividend shall be declared or paid by a company from its reserves other than free
reserves.
 Provided that the following shall not be treated as free reserves;—
any amount representing unrealised 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 recognised in equity, including surplus in profit and loss account
on measurement of the asset or the liability at fair value..
Rate of interim dividend
 Section 123(3) of the Companies Act, 2013 provides that the Board of Directors of a
company may declare interim dividend during any financial year or at any time during
the period from closure of financial year till holding of the annual general meeting out
of the surplus in the profit and loss account or out of profits of the financial year for
which such interim dividend is sought to be declared or out of profits generated in the
financial year till the quarter preceding the date of declaration of the interim
dividend.
 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 immediately preceding three financial
years.
Dividend only to registered shareholder
No dividend shall be paid by a company in respect of any share therein except to the
registered shareholder of such share or to his order or to his banker and shall not be payable
except in cash.

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Mode of payment
Dividend to be paid by cheque or warrant or in any electronic mode to the shareholder
entitled to the payment of the dividend.
No dividend to be declared/paid in case of failure of repayment of deposits
 a company which fails to comply with the provisions of deposits, shall not, so long as
such failure continues, declare any dividend on its equity shares.

Procedure relating to dividend

Dividend is proposed by Dividend is declared Dividend is

Board in Board Meeting by members in transferred by
the company in
General Meeting separate bank
account within 5
days of declaration
by members

Dividend is paid to Unpaid dividend is Unpaid dividend is

the members transferred to transferred to Investor
within 30 days of unpaid dividend Education and
declaration by account within Protection Fund after
members next 7 days expiration of 7 years of
transferring in unpaid
dividend account

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Dividend to be recommended by Board of directors

Dividend to be declared by shareholders at general meeting

Amount of Dividend to be deposited in Special Account of a Schedule Bank

Section 123(4) provides that the amount of the dividend, including interim dividend, shall be
deposited in a scheduled bank in a separate account within five days from the date of
declaration of such dividend.

Payment of Dividend
Inferring from section 124(1) dividend must be paid within 30 days from the date of
declaration of dividend. SS-3 hereby clarifies that the Dividend shall be deposited in a
separate bank account within five days from the date of declaration and shall be paid within
thirty days of declaration.

Unpaid dividend account

When a dividend has been declared by a company but has not been paid or claimed within
thirty days from the date of the declaration to any shareholder entitled to the payment of the
dividend, the company shall, within seven days from the date of expiry of the said period of
thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a
special account to be opened by the company in that behalf in any scheduled bank to be called
the Unpaid Dividend Account.

Investor Education and Protection Fund

If the money remains in unpaid dividend account for 7 years, then the amount is transferred to
Investor Education and Protection Fund.

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RIGHT TO DIVIDEND, RIGHTS SHARES AND BONUS SHARES TO BE HELD IN ABEYANCE
PENDING REGISTRATION OF TRANSFER OF SHARES

 Section 126 provides that when any instrument of transfer of shares has been delivered
to any company for registration and the transfer of such shares has not been registered
by the company, it shall, notwithstanding anything contained in any other provision of
this Act,—
a. transfer the dividend in relation to such shares to the Unpaid Dividend Account referred
to in section 124 unless the company is authorised by the registered holder of such
shares in writing to pay such dividend to the transferee specified in such instrument of
transfer; and
b. keep in abeyance in relation to such shares, any offer of rights shares under clause (a) of
subsection (1) of section 62 and any issue of fully paid-up bonus shares in pursuance of
first proviso to sub-section (5) of section 123.

CLAIMING OF UNCLAIMED/UNPAID DIVIDEND

 In accordance with Section 124, a dividend which has been declared by a company but
has not been paid, or claimed, within thirty days from the date of the declaration, to/by
any shareholder entitled to the payment of the dividend, the company shall, within
seven days from the date of expiry of the said period of thirty days, transfer the total
amount of dividend which remains unpaid or unclaimed within the said period of thirty
days, to a special account to be opened by the company in that behalf in any scheduled
bank, to be called “Unpaid Dividend Account of...................................................Company
Limited/Company (Private) Limited”.

 Under the explanation, the expression “dividend which remains unpaid” means any
dividend the warrant in respect thereof has not been encashed or which has otherwise
not been paid or claimed.

 Any person claiming to be entitled to any money transferred to the Unpaid Dividend
Account of the company may apply to the company for payment of the money claimed.
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 amount but also
shares shall be transferred to the Invest or Education and Protection Fund (IEPF).

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 CASE LAWS
Bombay High Court in Bacha F Guzdar v. CIT

Right to claim dividend will only arise after a dividend is declared by the company in general
meeting and until and unless it is so declared, the shareholder has no claim against the
company in respect of it.

The observation of the Bombay High Court in Bacha F Guzdar v. CIT was improved upon by the
Supreme Court saying that the right to participation in the profits exists independent of any
declaration by the company with only difference that the enjoyment of profits is postponed
until dividends are declared.

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 Practice Questions
1. Distinguish between: Interim Dividend & Final Dividend (Dec. 2014)

2. Write a short note on: Interim Dividend (June 2009)

3. Write a short note on: Investor Education & Protection Fund (Dec 2010)

4. Can the dividend be declared out of previous year's profits transferred to reserve? (Dec 2008)

5. Dividend can be paid out of capital if the articles of association authorize such payment.
Comment. (Dec 2011)

6. Board of Directors of AVB Limited wants to declare dividend 15 lakhs out of capital profits for
the year ended 31st March, 2017, without making a provisions for depreciation. Referring to the
provisions of the Companies Act, 2013, you being the Secretary of the Company advise the
board whether it can go ahead with its proposal? (June 2017)

7. A resolution was passed by the shareholders in an annual general meeting approving final
dividend @ 20% for the financial year 2016-2017 and one month later the Board of directors
decided to pay further dividend @ 5% for the financial year 2016-2017. (Dec. 2008)

8. The board of directors of a company in a meeting held on 30th April, 2015 declared interim
dividend. In another meeting held on 18th May 2015, the board of directors revoked the interim
dividend declared without assigning any reason. Advise the company in the matter (Dec. 2013)

9. A company for financial year 2014-2015 declared dividend on 19th September 2015 but failed to
pay the same within the prescribed time. A case was filed against director in this regard. The
director has contended that he had resigned before the declaration of dividend. Decide the fate
of directors in the light of relevant provisions of the Companies Act, 2013. (Dec 2013)

10. The Board of Directors of American Express Ltd. declared interim dividend third time during the
financial year 2015¬2016. After declaration, the Board of Directors decided to revoke third
interim dividend as they noticed that company's financial position did not permit payment of
such interim dividend. The Board of Directors seeks your advice in this matter. Please advise the
Board as a company secretary. Will your advice be different in case it was a regular dividend
instead of interim dividend? (Dec. 2017)

11. The Board of Directors of Peculiar Ltd. proposes to recommend a final dividend of 25 each to all
the equity shareholders of the company. The company seeks your opinion on the following:
i. The company wants to deposit the dividend amount to co-operative bank.
ii. The company is a defaulter in the repayment of deposits and proposes to repay its all
deposit after the payment of dividend within 10 days.
iii. Dividend will be declared out of the capital reserves of the company.
iv. The company wants to pay such dividend through the cash counter by way of cash
voucher. (June 2018)

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