The companies act, 2013 has not provided any specific definition of the dividend. But basically, dividend is that part of the profit of a company that is distributed among shareholders. From the shareholders’ view, the distribution is a return on their investments in the share capital of the company. The term dividend includes the final dividend and interim distribution.
Final dividend is the amountthat is declared by the company at the annual general meeting (AGM) held at the end of the financial year and interim dividend is announced and paid during any time before the end of a financial year.
Declaration and payment of dividend
A dividend is paid on equity shares as well as preference shares. Dividend may be distributed at a fixed rate or at a rate determined by the shareholders of the company.
The directors of the company shall organize a board meeting. The agenda of the board meeting may include approval of annual accounts, appointment or reappointment of a director, an appointment of auditor etc.
The company in board meeting will decide on the amount that would be declared and paid as a dividend to its shareholders.
The company shall get the approval of its shareholders before finalizing the rate and amount. However, the shareholders cannot increase the rate.
Once the shareholder approves the rate of distribution, the company shall open a dedicated account.
The total amount of the dividend payable by the company shall be credited with the special account opened for the distribution of dividend.
The company shall draft a resolution for declaring distribution along with record date announced by the directors.
The payment must be made by the company within 30 days of the declaration and all unpaid distribution must be transferred to a special account.
Key points for payment of dividend:
Payment of amount may be made by the company from the current year profit, or out of the previous years profit or even from both the current and previous year profit after providing for depreciation. A distribution may also be paid out the amount available to a company by the state or central government for payment.
It is not mandatory for a company to transfer the amount of profit to be distributed as a dividend to a reserve. However, the company may on its own, may transfer any percentage of profit to the reserves.
The amount always payable by the company in cash form. Payment in cash includes payment made by cheque, warrant or any electronic mode.
Once the final distribution is approved at the general meeting of the Board, the company in no case can revoke the decision, except if the shareholders had given their consent for the same.
It is compulsory that a resolution is passed by the company at the time of opening distribution account in any nationalized bank and also at the time of declaration of dividend in Board meeting after the approval of the shareholders of the company.
Also, if the payment declared by a company has not been paid within a period of thirty days from the date of declaration to any shareholder who is entitled to receive the amount, then the Directors of the company are punishable with imprisonment up to two years along with fine of minimum one thousand rupees for every day during which such default continues. Further, the company will be liable to pay simple interest at the rate of 18 % per annum during the period for which such delay in payment continues.