Dividend is a return on the investment made in the share capital of a company, as distinct from the return on borrowed capital, which is in the form of interest. In commercial usage, the term “Dividend” refers to the distribution of profits by a corporation to its shareholders and the amount which not distributed is re-invested in the business under the head retained earnings. A dividend that is declared must be approved by a company’s board of directors/ shareholders of the company, as the case may be, before it is paid.
Regulatory provisions governing Dividend – Checkpoints
Sources of dividend: Dividend should be paid out of the profits of the company for the financial year or profit(s) for the previous financial years(s) which have not been transferred to reserves, after providing for depreciation.
Dividend is declared/paid by a company from its free reserves i.e., the reserves which are available for distribution as dividend. Dividend can’t be declared out of the securities premium account or the Capital redemption reserve account or revaluation reserve or Amalgamation reserve or out profit on re-issue of forfeited shares.
In a year where the profits are inadequate or there are no profits, the company may declare and pay dividend out of past year profit earned and transferred to reserves subject to the provisions of Rule 3 of the Companies (Declaration And Payment of dividend) Rules, 2014.
Restrictions on payment of dividend – A company should also not declare any dividend, if it has defaulted in compliance relating to acceptance and repayment of deposits, redemption of debentures or payment of interest thereon or creation of debenture redemption reserve, redemption of preference shares or creation of capital redemption reserve, payment of dividend declared in the current or previous financial year(s), repayment of any term loan to a bank or financial institution or interest thereon
Dividend in abeyance – The amount of dividend in respect of shares for which an instrument of transfer has been transferred to company, but which have not been registered for any valid reason should be transferred to Unpaid Dividend Account.
Non-payment of dividend and voting rights of preference shareholders – According to the provisions of Section 47 of the Companies Act, 2013 (“2013 Act”), in case dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
However, private companies, by way of a specific exclusion in Articles of Association, can exclude the applicability of section 47 of the 2013 Act.
Dividend, once declared, becomes a debt and shall not be revoked – Dividend when proposed does not become a debt. The right of shareholders to claim dividend arises only after the dividend is declared either by the company in an Annual General Meeting or, in the case of interim dividend, by the Directors in a Board Meeting.
In Bacha F. Guzdar v Commissioner of Income Tax 1955 AIR SC 740, the rights of members to claim divided was questioned, wherein it was decided the dividend, once declared, becomes a debt and shall not be revoked. Dividend when proposed does not become a debt. The right of Members to claim Dividend arises only after the Dividend is declared either by the company in an Annual General Meeting or, in the case of Interim Dividend, by the Directors in a Board Meeting. Until and unless it is so declared, no Member has any claim against the company in respect thereof, even though the company may have sufficient profits.
Dates to be aware of, while paying dividend:
Declaration date refers to the day the board of directors announces its intention to pay dividend. On that day, a liability is created and the company records that liability in its books.
Book closure date is a time period during which company will temporarily close its books for share transfers, which is also usually the record date. The companies will often use the book closure date to identify the cut-off date for determining which investors of record will receive a particular dividend payment.
Ex-dividend date is the date (or ex-date) set to be one business day before the record date. In order for an investor to receive dividend on the listed payment date, they would need to have their share purchase completed by the ex-dividend date. If the sale of shares has not been completed by the ex-dividend date, then the seller on record is the one who receives the dividend for that shares.
Payment date is the any date within 30 days from the date of the declaration of dividend by board /shareholders, as the case may be.
Companies That Pay Dividends—And Those That Don’t:
A company’s ability to pay out regular dividends or cash distributions goes a long way towards communicating its fundamental strength and sustainability to shareholders. The dividend coverage ratio i.e., the ratio between earnings and the net dividend shareholders receive is an important measure of a company’s wellbeing.
A company that is still growing rapidly usually won’t pay dividends because it wants to invest as much of it’s profits as possible into further growth.
In general, mature, slower-growing companies tend to pay regular dividends, while younger, faster-growing companies would rather reinvest the money toward growth.
Introduction of Investor Education and Protection Fund (“IEPF”):
Further to declaration of dividend, an important question which comes to one’s mind is on the status of the dividend which has remained unclaimed by the shareholders or the dividend which after declaration has remained un -paid by the companies. Accordingly, based on the representations made by the stakeholders, Ministry of Corporate Affairs came up with the IEPF (Accounting, Audit, Transfer and Refund) Rules, wherein detailed procedure for transfer of unpaid or unclaimed dividend amount/ shares to IEPF authorities has been specified.
As per section 124(6) and section 125(2) of the 2013 Act read with aforesaid rules, the amounts such as dividends, applications money, matured deposits etc., which have remained unpaid or unclaimed for a period of seven years are required to be transferred to the IEPF and the amount so credited to IEPF are maintained under the Consolidated Fund of India. The IEPF is utilized for promoting investor awareness and protection of investor interests.
In Sharepro Services (India) Private Limited (“RTA”) and others, it was held that the dividend/shares which remained unclaimed were to be transferred to IEPF. In the said case, the RTA provided corporate registry services to over 280 listed companies with a market capitalization of Rs 8.75 lakh crores, wherein Securities and Exchange Board of India (“SEBI”) received complaints since October 2015 wherein it was alleged that RTA had illegally transferred dividend and shares to fraudulent accounts rather than transferring the unclaimed dividend to IEPF.
Further, it was then held essential to communicate with shareholders and intimate them about dividend/share transfers through in-house resources, routinely. This way, any fraud being committed by the agency handling the actual transfer will come to light much sooner and to have random audits done of RTA by the companies.
Taxation– In the Union Budget 2020-21, dividend income from shares and mutual funds will be taxable in the hands of the recipient at the applicable income tax slab rates to the individual and had abolished the dividend distribution tax (“DDT”) levied on dividend income before distribution by the company or mutual fund house.
Also, Indian Companies are liable to withhold taxes on payment of dividend to a non-resident shareholder and the rate of taxation would vary based on the respective tax treaties.
Dividend Distribution Policy -SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, inserted a new regulation i.e. 43A as Dividend Distribution Policy (“DDP”), wherein the top five hundred listed entities based on market capitalization (calculated as on March 31st of every financial year) are required to formulate a DDP which will include the circumstances under which the shareholders of the listed entities may or may not expect dividend, the financial parameters along with analysing the internal and external factors while declaring dividend and policy as how the retained earnings shall be utilised. Further, it is mandatory for all these specified companies to disclose their DDP in their annual reports and on their websites.
Types of Dividend:
|Particulars||Interim Dividend||Final Dividend|
|Authority to declare||The dividend declared by the board of directors is called as interim dividend.||The dividend recommended by the board of directors and declared by the members at an annual general meeting is called as a final dividend.|
|Right||Articles must authorise the issuance of an interim dividend.||It is the right of the shareholders.|
|Source||The interim dividend is declared out of the surplus in the profit & loss account or out of the profits of current financial year or out of the profits generated from the financial year till the quarter preceding the date of declaration of the interim dividend.
However, in the event of a loss or inadequacy of profits during a financial year, no interim dividend can be declared/ paid out of free reserves.
|The final dividend can be declared out of the profits of the company for that particular year arrived at after providing for depreciation as specified in Companies Act, 2013 (the “2013 Act”) or out of the profits of the company for any previous financial year arrived at after providing depreciation, or out of money provided by Central Government or State Government in pursuance of guarantee given by such Government.
However, in the event of loss or inadequacy of profits, final dividend may be declared / paid out of the free reserves subject to the conditions as provided under Section 123 of the 2013 Act.
Furthermore, a company is not allowed to declare dividend unless carried overprevious losses and depreciation are provided in previous year or years are set off against profit of the company for the current year.
In Steel Co. of Canada Ltd. v. Ramsay  2 Comp., it was decided that the declaration of an interim dividend need not be only once a year. It may be done at any time the directors choose, and there may be several declarations in the course of one year.
In Biswanath Prasad Khaitan v. New Central Jute Mills Co. Ltd., (1961). 31 Comp., it was held that once a Final Dividend is declared at an Annual General Meeting, no further Dividend can be declared at an Extra-Ordinary General Meeting.
Waiver of dividend under the 2013 Act
Receipt of dividend is a right of shareholder and not an obligation. There may be situations when a Company would like to distribute dividends and shareholders of the Company would like to waive their right of dividend. Presently, the 2013 Act does not provide any specific provisions/regulations/procedure to waive the right of dividend by shareholders, however an article may be inserted in the Articles of Association (“AOA”) of the Company providing for waiver of right to receive dividend, irrespective of final or interim dividend. Such waiver can either be for full or partial receipt of dividend.
In case of interim dividend, right to claim dividend will only arise once it has been declared by the board of the Company, but the shareholders can waive their right of waiver, post the declaration of dividend.
In case of final dividend, since directors recommend the payment of final dividend subject to the approval of the shareholders of the Company, the shareholders of the Company can waive their right to receive the dividend once the same is proposed by the board of the company but in any case prior to it being declared by the shareholders.
It is important to note that the right of dividend can only be waived by the shareholder in favour of the Company and not in favour of other shareholders; and the waiver letter must be executed and signed by the shareholder who wish to waive their right of dividend.
Although, distribution of dividends acts as a booster to the shareholders and indicates that the company is doing well and has generated good profits, but considering the COVID-19 pandemic, the dividend pay-outs by various companies in the ongoing financial year will witness a dip as compared to previous years, as many companies are starving and are looking to conserve the cash to tide over the current COVID -19 situation.
Possible decline in free cash flow because of fall in net profit, additional expenses due to the COVID-19 pandemic, and cash conservation for prospective acquisitions are seen as key factors for this likely scenario.
It is also contemplated that dividend policy will have to undergo a change this financial year. This is mainly because companies are expected to keep cash for acquisitions to generate growth to beat the negative growth that the industry is likely to clock on organic basis and also to support the economy and absorb losses.
This material and the information contained herein prepared by Algo Legal is intended to provide general information on a subject or subjects and is not an exhaustive treatment of such subject(s). Algo Legal is not, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision. Algo Legal shall not be responsible for any loss whatsoever sustained by any person who relies on this material.