Payment of Dividend comes under section 205 of The Companies Act, 1956.
Gist of Section 205
- Company can declare and pay dividend for any financial year only out of following two sources
- Out of profits of the Company for that year.
- Out of profits of the Company for any previous financial years.
- Calculation of available profit for the payment of dividend
Available profit for payment of dividend means Current profit. Current profit means profit after tax arrived after making following provisions
· for depreciation in respect of each item of depreciable asset for such an amount as is arrived by dividing 95% of the original cost thereof to the Company by the specified period in respect of such asset as mention in section 350 and schedule XIV. Schedule XIV specify minimum rate of depreciation for different class of assets (subsection 2 of Section 205).
· Transferring to the reserve of the Company of such percentage of profits for that year not exceeding ten percent as may be prescribed
Transfer of profit to Reserve Fund is governed by Companies (Transfer of Profit to Reserves) Rules, 1975 as per this rule No dividend shall be declared or paid by a Company for any financial year out of the profits of the Company for that year arrived after providing for depreciation in accordance with the provision of subsection 2 of section 205 (as mentioned above) except after the transfer to the reserves of the Company of percentage of its profits for that year as specified below:-
=) where the dividend proposed exceeds 10% but not 12.5% of the paid up capital the amount to be transferred to the reserves shall not be less than 2.5% of the current profits.
=) where the dividend proposed exceeds 12.5% but does not exceed 15% of the paid up capital, the amount to be transferred to the reserves shall not be less than 5% of the current profits;
=) where the dividend proposed exceeds 15% but does not exceed 20% of the paid up capital the amount to be transferred to the reserve shall not be less than 7.5% of the current profits
=) where the dividend proposed exceeds 20% of the paid up capital, the amount to be transferred to reserve shall not be less than 10% of the current profits
- Consequences of non-Compliance.
If a company fails to comply with any of the provisions of contained in these rules,the company and every officer of the Company in default shall be punishable with fine which may extend to five hundred rupees and where the contravention is a continuing one with a further fine which may extend to fifty rupees for every day ,after the first day, during which such contravention continues .
- Important Departments clarification regarding transfer to Reserve :
· No amounts is required to be transferred to reserve if dividend is less than 10% .
· The amount to be transferred to the General Reserve would be worked out in respect of the profits of the year in question and without bringing in the profits of the past year.
· Reserve referred in this section means free reserve.
· Rules regarding provision of depreciation and reserve is applicable only for equity dividend and also to the portion of dividend to participating preference shares over and above the fixed rate of preference dividend
- Important Departments clarification regarding depreciation provision :
· The rates contained in schedule XIV should be viewed as the minimum rates and therefore a Company shall not be permitted to charge depreciation at rates lower than those specified in the schedule in relation to assets purchased after the date of applicability of the schedule. However, if on the basis of bona-fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of note forming part of annual accounts.
SECRETARIAL POINTS FOR DIVIDEND DECLARATION
· Check whether dividend/interim dividend was declared out of profits arrived after providing for depreciation.
· In case no depreciation was provided ensure that approval was obtained from the Company Law Board before declaring the dividend/ interim dividend [205(1)(c)]
· Check whether the depreciation was provided in accordance with the methods specified in Section 205(2)
· Ensure that the minimum prescribed amount had been transferred to reserve according to the Companies (transfer of Profits to Reserves ) Rules, 1975,
· Conditions governed to transfer of higher percentage to reserve have been complied with.
· Ensure that the Board resolution recommending dividend or declaring interim dividend was passed.
· Ensure that register of members was closed as per provision of the section 154.
· Ensure that final dividend was declared only In the Annual General Meeting.
· Ensure that the amount of dividend including interim dividend has been deposited in a separate bank account within 5 days from the date of declaration of such dividend
· Ensure that the provision of sections 205, 205A, 205C, 206A and 207 has been complied with in case of interim dividend also.
· Ensure that the dividend /Interim dividend has been paid in the prescribed manner.
· Ensure that corporate dividend tax has been deposited within 14 days of the declaration of dividend /interim dividend.
· Ensure that dividend /interim dividend has been paid within 30 days to the registered holders or to their orders (section 207)
· Ensure that procedure prescribed by Reserve Bank of India for payment of dividend to non-resident shareholder has been complied with before dividend was remitted to them.
· Intimation sent to stock Exchange, in case of listed Company.
· If there were any complaints regarding non-payment or delay in payment of dividend ,ensure whether corrective action taken?