Declaration and Payment of Dividend

In India, Companies Act, 2013 (hereinafter referred to as “act”) regulate the functioning of companies, including their formation, structure, transactions, shareholding patterns etc. The shareholders are entitled to certain rewards from the companies, which is known as dividend. Dividend in India is taxable just as other incomes are. A dividend can also be simply termed as a reward that a company which is publicly listed extend to their shareholders. The company is capable to do so because of a single source which is a company’s net profit. The abovementioned rewards can be in the form of shares, cash equivalents or simple cash. The BOD of the company decides the rate of the dividend, while also taking in account the consensus of the majority shareholders. However, a company is not bound to pay dividend and a company might decide to reinvest their net profit into their own company or reserve it for future use.

What is dividend?

Dividend is appropriation of profit distributed to shareholders for a financial year of a company. It is a return; a shareholder receives on the share capital of a company.

Sections 123 to 127 of Chapter VIII of the Act deals with the declaration and payment of dividend. There are two types of dividends- Interim and Final.

Interim dividend v. Final dividend

Interim dividend can be declared only if the Article of Association of the company permits the Board of Directors to do the same but no special provision is required for the declaration of final dividend.

Interim dividend can be declared and paid before closing of a financial year, i.e, given from the undistributed surplus of the previous fiscal year where as the latter can only be declared at the end of the current fiscal year.

In case of loss, the rate of interim dividend is lesser than the average of rates of dividend for the past 3 years but in case of final dividend, it is declared out of the free reserves of the company.

Procedure for payment of interim dividend

• The dividend is decided by the directors in the board meeting which is scheduled at least 7 days before the date of the meeting.
• The board meeting decides a date for transferring of the dividend to the shareholders, the rate of interim dividend, the amount of profit to be transferred to general reserve.
• Within 15 days of the board meeting, a written record containing summary of the meeting is sent to all the directors via various means including e-mail, speed post, courier etc.
• The directors are expected to present their opinions and suggestions within 7 days from the circulation of the meeting minutes.
• The board also instructs to open a bank account particularly for the payment of interim dividend in which the dividend amount is deposited within 5 days of declaration by the board of directors.
• The decided amount is then rounded off to nearest rupee and is then transferred into the bank accounts electronically or via cheques within 30 days of the declaration.

Unpaid/ unclaimed interim dividend

• Now, after 30 days of declaring the dividend, the unclaimed or unpaid dividend is determined.
• Again, a board meeting is scheduled and all directors are notified at least 7 days of the meeting.
• The board meeting then directs to open a separate bank account, especially for the unclaimed dividend and the amount is transferred to this bank account within 7 days.
• An account statement containing details like credentials of the shareholder and amount of dividend unpaid is then made and published on the company’s website or on IEPF, which is approved by the Central Government along with e-form IEPF-2 having the relevant information.
• As per IEPF Authority (Accounting Audit Transfer and Refund) Rules, 2016, it is ensured that this amount is then transferred online or offline to the Investor Education and Protection Fund (IEPF) via an authorized bank like Punjab National Bank along with a challan from the bank.

Exceptions

Dividend can only be declared by companies that have set off previous year profits and losses in the current year and only when depreciation in the profit and loss account has been charged.

Section 8 companies, which are formed with the primary motive of charity and not profit and trade, also cannot declare dividend. Examples include Federation of Indian Chambers of Commerce and Industry (FICCI).

Prerequisites for declaration of final dividend

• Dividend can only be declared from free reserves and not from any other reserves.
• Dividend can only be declared when previous year losses and depreciation are set off in the current year.
• Only when irregular amounts like unrealized gains, notional gains or revaluation of assets are excluded while calculating the profit, the dividend can be declared.

Procedure for payment of final dividend

The process to hold the board meeting is similar to that of interim dividend.

• One has to issue a notice as per section 173 of the act for holding a meeting with the board of directors.
• If the company is listed on any stock exchange and you have to notify those respective stock exchange(s) at least 2 working days prior to the board meeting.
• The purpose of the board meeting is to pass the following resolution-

1. Annual accounts approval
2. Recommendation of the amount of final dividend that is to be declared at the next AGM.
3. Deciding time, date and venue for holding the next AGM.

• Approval of the notice of the AGM and authorizing the company secretary or any other competent person apart from CS to issue such notice on behalf of the BOD to all the concerned persons.
• Deciding the date of closure of register of members and the share transfer register as per section 91.
• Ensuring that the decided percentage of profit is transferred to company’s reserves.
• In case of a listed company, one has to publish a notice regarding the book closure in a newspaper circulating in the district of the registered office of the company, 7 days prior to the commencement of the book closure.
• Closing of the register of the members and share transfer register of the company.
• Hold the AGM, and pass an ordinary resolution declaring the payment of dividend to the company’s shareholders as per board’s recommendation.
• It is to be noted that shareholders cannot declare the final dividend at a higher rate than the one as per board’s recommendation. However, they are free to declare at a lower rate.
• Once a company declares dividend for a FY at AGM, it is barred to declare dividend at any extraordinary GM in the same FY.
• The profits of a company are pro rata divided amongst the shareholders.
• Preparation of a statement of dividend with respect to each shareholder.
• Ensuring that the tax on the dividend is paid within the prescribed time.
• Open a separate bank account for the purpose of payment of dividend and credit the total amount of payable dividend within five days of declaration to the shareholders.

When we Transfer of unpaid/unclaimed Dividend Amount to IEPF?

Any unpaid or unclaimed amount for 7 years from the date of transfer shall be transferred by company with interest amount, if any to IEPF.

Documents required for the entire procedure

In case of declaration and payment of final dividend, primary documents needed are-

• Certified true copy [hereinafter referred to as “CTC”] of board meeting resolution should be duly signed by 2 directors other than the authorised director.
• Notice of scheduling of AGM along with explanatory statement which should be duly signed either by the director or the company secretary.
• CTC of AGM resolution should be duly signed by 2 directors other than the authorised director.
• Statement of the amounts that are to be credited to the IEPF.
• Copy of challan which was received while depositing to the IEPF
• List of all the shareholders present in the AGM should be duly signed by at least 2 directors.
• CTC of board resolution for transfer the amount to IEPF.
• Register of members.
• Copy of transfer deeds which were not taken in board meeting.

Taxability on dividend

Usually just like most incomes, income from dividend is taxable too, as per The Finance Act, 2020. The shareholders are liable to pay taxes on the dividend and not the company.

With the enactment of the act, the dividend distribution tax (DDT) was no longer paid by companies and mutual funds from April 1, 2020. According to the abovementioned act, companies are liable to pay Tax Deducted at Source (TDS) at a rate of 10% in usual cases. In case of NRIs, the TDS rate increases to 20%. Dividend received from a foreign company is liable for taxation as per the respective tax slab as it falls under the head “income from other sources”.

EXCEPTIONS- Insurance companies like LIC need not pay TDS. In case, an individual produces a Low/Nil TDS certificate or falls under the exemption limit by filling up form Form 15G/Form 15H to the company.

Case Laws

In the landmark judgement of Godrej & Boyce, the Bombay High Court clarified that the DDT was a tax on the company and is not to be levied on an individual. But this decision was reversed by the Supreme Court and did not clarify the same.

In another case of Globe Motors Ltd. v Globe Engineering, the Delhi High Court declared that the company must pay a predetermined dividend to preference shareholders, annually.

Conclusion

Dividend is the return on investment given to the shareholders, in case of profits incurred by a company. The procedure of interim and final dividend is closely similar, except for the fact that the former can be paid anytime in the whole accounting year but the latter can be paid only on the closing of the books, i.e., at the end of an accounting year. In case of non-settlement of losses and depreciation, dividends are not declared.

Author: Paridhi Agarwal- an Intern  at IP & Legal Filing, in case of any queries please contact/write back to us at support@ipandlegalfilings.com.