Distribution of Profits

The Companies Act, 2013 is silent on waiver of dividend. However, enabling provision in Articles of Association of the company is necessary since the same is binding on all members. Under the provisions of Section 5(2) of Companies Act, 2013, the Company shall include additional matters in its Articles which may be considered necessary for its management.

Some Companies have altered their AOA to insert provisions for waiving/forgoing the Dividend. In case of final dividend, board of directors recommends the payment of dividend after complying with the statutory provisions, and the same is then approved by the shareholders of the company at the AGM.

Hence, shareholders of the company can waive their right to receive dividend once the same is proposed by the board of directors of the company but before it is declared.

Hence, the waiver instructions are to be provided every year by the members willing to forgo their rights of dividend. It should be preferably received by the Company before the record date is fixed for payment of the Dividend.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 1(d) (Old syllabus).

Dividend can be declared by all types of companies except section 8 companies (i.e companies with charitable objects etc.) which prohibit the payment of any dividend to its members. According to Section 8(1)(c) of the Companies Act, 2013, the company having license under Section 8 (Formation of Companies with Charitable Objects etc.) are prohibited from paying any dividend to its members. Their profits are intended to be applied only in promoting the objects of the Company.

In the above case Green Initiatives., a section 8 company was planning to declare dividend. As per the provisions of section 8 a company registered under this section is prohibited from declaring dividend. Hence, Green Initiatives, which is planning to declare dividend, cannot do so according to the provisions of the Companies Act, 2013.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2A(ii) (Syllabus 2017).

Disclosure(s) to stock exchange after the conclusion of a board meeting by Silence Ltd. a listed company -

In the case of a listed company, not later than 30 minutes of the closure of the Board meeting, intimate the stock exchanges with regard to the Board’s decision about the declaration and payment of dividends [Regulations 30 of SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 read with Schedule III].

Notice of book closure:

Rule 10 of Companies (Management and Administration) Rules, 2014 mentions to publish notice of book closure in a newspaper circulating in the district in which the registered office of the company is situated and at least once in English language in an English newspaper circulating in that district and having wide circulation in the place where the registered office of the company is situated and publish the notice on the website as may be notified by the Central Government and on the website, if any, of the Company at least seven days before the date of commencement of book closure and in such manner as may be specified by Securities and Exchange Board of India In case of listed companies:

(i)To give notice in advance of at least 7 working days (excluding the date of intimation and the record date) or as many days as the stock exchange may prescribe, before the closure of transfer books or record date, specifying the purpose of Record Date [Regulation 42 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015].

The company shall recommend or declare all dividend at least five working days (excluding the date of intimation and the record date) before the record date fixed for the purpose.

(ii)Time gap between two book closures would be at least 30 days [Regulation 42(4) of SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015].

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 3(c) (Syllabus 2017).

As per Section 123(1) of the Companies Act 2013 provides that no dividend shall be declared or paid by a company for any financial year except-(a) out of the profits of the company.

Under the second Proviso to sub-section (1) of Section 123 of the Companies Act 2013, a company may, before the declaration of any Dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company.

Analysis and Conclusion:

In this case, Zen wave Technologies Pvt. Ltd. earned a profit of ₹70 crore and the Board proposed a final dividend of 30% without transferring any portion of its profits to the general reserve. Since second proviso of Section 123(1) of Companies Act 2013, uses the expression “may”, the transfer of profits or some portion thereof to reserves is not mandatory but discretionary of the Board of Directors of the Company. The Board is not mandatorily required to transfer 10% or any minimum percentage of profits to reserves before recommending or declaring the dividend. Therefore, the shareholders’ objection is not justifiable, and the AGM may validly declare the proposed final dividend.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 2(b) (Syllabus 2022).

Advisory on Declaration of Interim Dividend: Under Section 123(3) of the Companies Act, 2013

As per Section 123(3), 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 the immediately preceding three financial years. Further, SS-3 provides that in the event of loss or inadequacy of profits during the financial year, no interim dividend shall be declared/paid out of free reserves.

Analysis and Conclusion:

Jo Ltd. has a P&L surplus of ₹10 lakh, but the current-year loss up to 31 December 2025 is ₹3 lakh. Thus, only ₹7 lakh is available for interim dividend. The proposed dividend @ ₹5 per share requires ₹25 lakh, which exceeds the available amount.

The company has incurred a loss during the current year up to the preceding quarter-

Proviso to subsection (3) of Section 123 of the Companies Act, 2013 states that 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.

Average rate = (10% + 12% + 8%) / 3 = 10%. Maximum permissible interim dividend = 10% of ₹50 lakh = ₹5 lakh, i.e., ₹1 per share.

Free Reserves of ₹30 lakh are not available for interim dividend.

Hence, the Board cannot declare interim dividend @ ₹5 per share as proposed.

It may declare a maximum of ₹1 per share, being within both:

1.Available profits (₹7 lakh); and

2.The average of the past three years’ dividend rates (10%).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 4(c) (Syllabus 2022).

i)According to Section 123(1) of Companies Act, 2013 read with Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, in case of inadequacy or absence of in case of inadequacy or absence of profits in any financial year, if a company proposes to declare dividend out of accumulated profits earned by the company in previous years and transferred by it to free reserves, such declaration shall be made subject to the following conditions:

a)The rate of dividend shall not exceed the average of the rates at which dividend was declared by it in the immediately preceding three years

b)The total amount to be withdrawn from such accumulated profits shall not exceed one tenth of its paid-up capital and free reserves as appearing in the latest audited financial statement.

c)The amount so withdrawn shall first be utilized to set off the losses and provide for the depreciation incurred in the financial year in which the dividend is proposed to be declared.

d)The balance of reserves after such withdrawal shall not fall below 15% of its paid-up share capital as appearing in the latest audited financial statement.

ii)Thus, the maximum dividend that can be declared by the company in FY 23-24 is

•Average of previous three years’ dividend rates = (20%+10%+30%)/3

•Average Rate = 60%/3=20%

The maximum dividend rate that can be declared is 20%.

The maximum amount that can be withdrawn from free reserves is

•Maximum amount to be withdrawn = 10% of (Paid-up Capital + Free Reserves)

•Maximum amount to be withdrawn = 10% of ₹125(30+10+85) Crores = ₹12.5 Crores

(iii)The current FY losses need to be first set-off. Hence, the balance available after setting off the current year losses and also preference dividend @ 10 % on Rs. 10 crore of preference shares is (12.5 - 2 - 1) = Rupees 9.5 crore.

The balance left in free reserve after such withdrawal (85-12.5 = 72.5) is more than the required (15% of (30+10) (equity share capital+ preference share capital)= Rupees 6 crore)

Hence, the company can proceed with declaring 20 % dividend on equity shares amounting to Rs. 6 Crore in spite of current year losses amounting to Rupees 6 crores only after payment of contracted preference dividend @ 10 % amounting to Rupees. 1 crore and also after setting-off current year losses of Rupees 2 crore.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 3(a) (Syllabus 2022).

(i)Validity: Authority to declare interim dividend: As per Section 123(3) of the Companies Act, 2013, 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.

Time limit to open a separate bank account: In terms of sub-section (4) of Section 123 of the Companies Act, 2013, the amount of Dividend, including Interim Dividend, shall be deposited in a scheduled bank in a separate account within 5 days from the date of declaration of such Dividend.

Revocation of Dividend:

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 [Bacha F. Guzdar v Commissioner of Income Tax 1955 AIR SC 740].

Members cannot compel the company by any process of law to declare Dividend [C.W. Spencer V. ITO, (1957) 27 Comp. Cases 15, 25 (Mad)].

A Dividend once declared becomes a debt due to the Members and hence cannot be revoked. It gives rise to an enforceable obligation or creates a debt enforceable immediately or in the future.

Conclusion: The Board of directors are the competent authority to declare interim dividend in the Board meeting. Hence, the declaration of interim dividend by the Board of directors in its meeting held on 1st February, 2024 is valid.

The interim dividend declared by the Board has become debt and it cannot be revoked. Hence, the revocation of interim dividend by the Board in the board meeting of 10th February, 2024 is not valid.

Time limit: In accordance with the provision, the company should have opened a separate bank account to deposit the interim dividend amount by the latest date of 6th February 2024, which is within 5 days from 1st February 2024, the date of declaration of the interim dividend.

(ii)Shareholders increasing the proposed rate of dividend: The dividend recommended by the board of directors as mentioned in the Directors Report is declared at the annual general meeting of the company.

Article 80 of Table F of schedule 1 Companies Act, 2013, states that “the company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the Board.”

The shareholders have no right to declare a final dividend in the annual general meeting at a rate exceeding the rate proposed by the Board. Hence, the decision of the shareholders to declare the dividend @ 20% which is more than the rate of 10% proposed by the Board, is invalid.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 4(a) (Syllabus 2022).

‘Divisible profits’ means the profits which the law allows the company to distribute to the shareholders by way of dividend. According to Palmer’s Company Law, the terms ‘divisible profits’ and ‘profits in the legal sense’ are synonymous. Thus, the profits of a business mean the net proceeds of the concern after deducting the necessary outgoings without which those proceeds could not be earned. [Bharat Insurance Co. Ltd. v. CIT (1931) 1 Com Cases 192, 196 (Lah)].

Divisible profits are that portion of the profit which can be distributed legally among the shareholders of the company. These profits are distributed by way of dividends, but only after provisions for past losses and reserves have been made.

Interim Dividend

As per Section 123(3) of the Companies Act, 2013, 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 the immediately preceding three financial years.

It is also provided in Article 81 of table F that Subject to the provisions of section 123, the Board may from time to time pay to the members such interim dividends as appear to it to be justified by the profits of the company.

Therefore, before approving payment of interim dividend, the directors should satisfy themselves that the profit is available for distribution by way of dividend.

SS-3 provides that in the event of a loss or inadequacy of profits during a financial year, no Interim Dividend shall be declared/ paid out of Free Reserves. Hence, in this case interim dividend cannot be declared by the Board of directors.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 1(c) (Syllabus 2022).

Section 123(3) of the Companies Act, 2023 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 the closure financial year till holding of the annual general meeting out of the surplus profit and loss account or out of the 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 upto 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.

In the given question, Glass Making Ltd. has incurred loss of Rs. 107 crore during the current financial year till the end of quarter ended on 30th September, 2023, thus company cannot declare interim dividend at a rate higher than the average dividends declared by the company during immediately preceding three financial years of 2020-21, 2021-22 and 2022-23. Dividend rate of financial year of 2019-20 is not relevant for the declaration of interim dividend. Average rate of dividends during immediately preceding three financial years is 17%, while company has decided to declare interim dividend @18%, which is higher than the average rate of dividend during the immediately preceding three financial years.

Thus, the decision of Board of directors is not as per the provisions of Companies Act, 2023.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 2A(iii) (Syllabus 2017).

According to third proviso to Section 123(1) read with rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014, 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 sub rule 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.

(4)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.

Computation:

1.Average rate of dividend; (10%+12%+14%)/3=12%

2.1/10th of paid up capital and free reserves: Rs. 86 lakh as computed below:

(i)Equity capital Rs. 5 crore + Preference Capital Rs. 2 crore + GR Rs. 1.50 crore + Surplus as per P & L A/c Rs. 10 lakh=Rs. 8.60 crore

(ii)1/10th *Rs. 8.60 crore = 86 lakh

3.Available reserve for drawing as computed below:

4.Distributable amount for dividend Rs. 55 lakh being lower than Rs. 86 lakh as computed under point 2 above

5.Rs. 55 lakh – amount set aside for dividend to preference shareholders Rs. 20 lakh i.e. 10% of share capital of Rs. 2 crore. Hence, available reserve for equity dividend is Rs. 35 lakh.

6.Rate of dividend, if Rs. 35 lakh is distributed: (Rs. 35 lakh/equity capital Rs. 5 crore)*100=7%

7.Dividend @7% may be distributed being less than the average rate of dividend.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 3(b) (Syllabus 2017).

A company limited by guarantee is primarily used for non-profit purposes and the profits are reinvested and used for promoting its non-profit activities. Although the Companies Act, 2013, does not specifically prohibit distribution of dividend in such companies; however, the Articles of Association of such companies usually provides that all the income of the company shall be applied solely towards the promotion of the objects of the company and that no portion shall be paid or transferred directly or indirectly by way of dividend or bonus or by way of profit to its members.

Therefore, the statement is correct. Articles of Association of the company limited by guarantee may provide that all the income of company shall be applied towards promotion of the objects of company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 1(a) (Syllabus 2017).

(a)

Section 123(1) of the Companies Act, 2013 provides that the dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed, or out of both.

Proviso to this section provides that a company shall not declare dividend unless carried over previous losses and deprecation not provided in previous year or years are set off against profits of the company for the current year.

Therefore, XYZ Ltd has to set off the previous year’s carry forward loss and deprecation from current year profit before declaration of dividend.

(b)

As per section 123(3), 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 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 quarter preceding the date of declaration of the interim dividend.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2A(iii) (Syllabus 2017).

Dividend in case of absence or inadequacy of profits

Proviso to Section 123(1) of the Companies Act, 2013 states that owing to inadequacy or absence of profits in any financial year, if any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the free reserves, then such declaration of dividend shall not be made except in accordance with such rules as prescribed in this behalf.

Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 provides that in the event of adequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the fulfilment of 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:

Provided that this sub rule 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.

(4)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.

Further, Fourth Proviso to Section 123(1) provides that, no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year. However, this proviso is not applicable to Government Company in which entire paid-up share capital is held by the Central Government or by any State Government or Governments or by the Central Government and one or more State Governments.

Accordingly, in the above case among other things to follow as per section 123, as Nozama International Ltd. has incurred loss during the current year, as per Rule 3(1), it cannot declare dividend @ 12% out of its accumulated profits, as its average of the rates at which dividend was declared by it in immediately preceding three years is only 10%, so it cannot pay dividend out of accumulated profits @ more than 10%.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 3(a) (Old syllabus).

As per Section 123 (1) of the Companies Act, 2013, a company can distribute dividends out of profits of the current year or from profits of previous financial years.

In the event of inadequacy or absence of profits in any financial year, if the company wants to propose declaration of dividend, it can pay it out of accumulated profits earned by it in previous years and transferred by the company to the free reserves, according to the conditions prescribed under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.

In the instant case, the net loss for the year 2018-19 is ₹25000.

According to Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 the following conditions must be fulfilled:

(i)The rate of dividend cannot exceed the average of the rates at which dividend was declared in the three years immediately preceding that year i.e. (8%+10%+12%)/3 = 10%, so in this case, the amount of dividend should not exceed ₹1 Lakh.

(ii)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. Thus the company can draw only upto ₹1.2 lakh.

(iii)The balance of reserves after such withdrawal shall not fall below 15% of its paid up capital as appearing in the latest audited balance sheet. Accordingly the maximum that may be withdrawn cannot exceed ₹ 50000.

(iv)However, the amount so withdrawn must be used to set-off losses of the current year i.e. ₹25000.

Therefore, the maximum amount in this instant case that can be paid by way of dividend is ₹25000.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2(b) (Syllabus 2017).

Section 123 of the Companies Act, 2013 provides for the provisions relating to declaration of dividends.

Since interim dividend is also a dividend, companies should provide for depreciation under section 123 of the Companies Act, 2013 before declaration of interim dividend. However, the first proviso to the section 123(1) of the Companies Act, 2013 provides that a company may, before declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it consider appropriate to the reserves of the company irrespective of the size of declared dividend i.e. company is not mandatorily required to transfer the profit to reserves, and it is only an option made available to the company to transfer such percentage of profit to reserves.

In the instant case, the Board has decided to pay interim dividend @12% of the paid up capital. Assuming the company has complied with the depreciation requirement and other applicable provisions, the interim or final dividend can be declared without transferring such percentage of its profits as it may consider appropriate to the reserve of the company. Thus, from the facts and provisions, it may be concluded that Prima Ltd is under no violation of law by not transferring i.e. the company is free to transfer any amount of its profit to the reserves, without any compulsion or restriction before declaration of any 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. The amount of dividend including interim dividend should be deposited in a separate bank account within five days from declaration of such dividend for compliance of section 123(4) of the Companies Act, 2013.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2(a) (Syllabus 2017).

SPECIMEN OF BOARD RESOLUTION RECOMMENDING PAYMENT OF DIVIDEND ON EQUITY SHARES OUT OF CURRENT PROFITS

"RESOLVED THAT in accordance with the provisions of Section 123 and other applicable provisions, if any, of the Companies Act, 2013 and the Companies (Declaration and Payment of Dividend) Rules, 2014, the Board of directors of the company do hereby recommend a dividend at the rate of Rs................ per equity share out of the current profits of the company for the year ended on 31st March 2019 on the.................... fully paid equity shares of the company absorbing Rs................ out of the profits of the year and that, subject to the declaration by the members of the company at the ensuing annual general meeting, such dividend be paid to the registered holders of the equity shares whose names would appear on the register of members on ________2019."

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 5(a)(i) (Old syllabus).

SPECIMEN EXTRACTS OF MINUTES CONTAINING THE BOARD RESOLUTION FOR RECOMMENDING DECLARATION OF DIVIDEND OUT OF RESERVES

The Chairman informed the meeting that the profits of the current year, i.e. the financial year ended on the 31st March, 2019 are inadequate for payment of a reasonable amount of dividend to the members of the company.

He further informed that the free reserves of the company do, however, permit the distribution of dividend not exceeding the average of the rates at which dividend was declared by it in the three years immediately preceding that year. The directors considered the matter and passed the following resolution:

RESOLVED THAT the Board of directors of the company do hereby recommend to the members of the company, the declaration and payment of a dividend at the rate of ten per cent on all the fully paid equity shares of the company out of the free reserves of the company that stood in the books of the company on............ 2019 absorbing a total of’............., with due compliance of the Companies (Declaration and Payment of Dividend) Rules, 2014, and that, subject to the declaration by the members at the forthcoming annual general meeting, to the holders of the equity shares whose names will appear on the register of members on .................2019.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 5(a)(ii) (Old syllabus).

Section 123(4) of the Companies Act, 2013 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 dividend.

However, in case of Government Company sub section 4 of Section 123 shall not apply in which the entire paid up share capital is held by the Central Government, or by any Stale Government or Governments or by the Central Government and one or more State Governments or by one or more Government Company.

Inferring from section 124(1) dividend must be paid to any shareholder entitled to the payment of the dividend, within 30 days from the date of declaration of dividend.

Secretarial Standard-3(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 30 days of declaration. The intervening holidays, if any, falling during such period shall be included.

Therefore in the given illustration the dividend shall be deposited into a separate bank account of a scheduled bank on or before 05.10.2018 and the same must be paid to the registered shareholder or to his order or to his banker on or before 30.10.2018.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2A(i) (Syllabus 2017).

According to Section 124 of Companies Act, 2013 (the Act), when dividend, has been declared by company but has not been paid by the company or not claimed by the shareholder within 30 days of the date of declaration of dividend, the company shall, within 7 days from the expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened in a scheduled bank called unpaid dividend account.

Any member entitled to any money transferred u/s 124(1) of the Act as unpaid dividend may apply to the company u/s 124(4) for the payment of unpaid dividend up to a period of 7 years from the date of transfer to the unpaid dividend account.

Effects of non-transfer of the dividend:

As per section 124(3) of the Companies Act, 2013 if any default is made in transferring the total amount referred in section 124(1) of the Act or any part thereof to the unpaid Dividend Account of the company, it shall pay, from the date of such default, interest on so much amount as has not been transferred to the said account, at the rate of 12% per annum and interest accruing on such amount shall ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them.

Section 124(5) of the Companies Act 2013 states that any money transferred to the unpaid dividend account of a company which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along with interest accrued if any thereon to the Investor Education and Protection fund.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2(a) (Syllabus 2017).

According to Section 124 of the Companies Act, 2013 dividends must be paid within 30 days from the date of declaration and if any amount remains unpaid or unclaimed then the company is required to transfer the unpaid dividend to a special account, known as Unpaid Dividend Account opened by the company in any scheduled bank within seven days from the date of expiry of thirty days. If any money transferred to this account remains unpaid or unclaimed for a period of seven years from the date of transfer to such account it shall be transferred by the company to the Investor Education and Protection Fund established under Section 125 (1) of the Companies Act, 2013 maintained and administered by the Central Government.

In the present case, the amount of dividend for the first 3 years must have been transferred to the Investor Education and Protection Fund. The amount for remaining period must be in the Unpaid Dividend Account of the Company.

According, to Section 125 of the Companies Act, 2013 read with Rule 7 of the IEPF(Accounting, Audit, Transfer and Refund) Rules, 2016, the person whose amounts has been transferred to Investor Education and Protection Fund, shall be entitled to get refund out of the fund in respect of such claims by submitting an online application in Form IEPF-5.

Manish should approach the company for amount of dividend for last 7 years.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 3(b) (Syllabus 2017).

Rule 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, details the procedure of refund to claimants from the Investor Education Protection Fund (Fund). It provides as under:

-Any person whose shares, unclaimed dividend, matured deposits, matured debentures, application money due for refund, or interest thereon, sale proceeds of fractional shares, redemption proceeds of preference shares etc., has been transferred to the Fund, may claim the shares under proviso to Section 124 (6) of the Companies Act, 2013 or apply for refund under clause (a) of Section 125(3) or under proviso to Section 125(3) of the Companies Act, 2013, as the case may be, to the Authority by submitting an online application in Form IEPF-5 available on the website www.iepf.gov.in along with fee specified by the Authority from time to time in consultation with the Central Government.

-Upon submission, Form No. IEPF-5 shall be transmitted online to the Nodal Officer of the company for verification of claim. Further, the claimant after making an application in Form No. IEPF-5 , shall send original physical share certificate, original bond, deposit certificate, debenture certificate, as the case may be, along with Indemnity Bond, Advance Receipts, and any other document as enumerated in Form No. IEPF-5, duly signed by him, to the Nodal Officer of the concerned company at its registered office for verification of the claim.

-The company shall, within 30 days from the date of receipt of claim, send an online verification report to the Authority after verification of details in Form No. IEPF-5 in the format specified by the Authority along with all the documents submitted by the claimant and shall attach the scanned copy of all the original documents submitted by the claimant in physical form duly certified by its nodal officer along with the e-verification report along with a scanned copy of both sides of original physical share certificate or original bond or deposit or debenture certificate/s duly cancelled and certified.

-If the online verification report is not sent by the company within 30 days of filing of claim, the company may do so by paying additional fee of ₹50 for every day subject to maximum of ₹2500. Further, the company shall be liable to maintain the original documents submitted to it by the claimant and shall produce such documents whenever required.

-In case of non-receipt of verification report along with documents by the Authority after the expiry of 60 days from the date of filing of Form No. IEPF-5, the Authority may reject Form No. IEPF-5, after sending a communication to the claimant and the concerned company, on the e-mail address of the claimant and the company, to furnish response within a period of 15 days.

Accordingly, Rahul has to follow the above mentioned procedure to claim certain shares and unclaimed dividend from the company, which has been transferred into Investor Education Protection Fund.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 5(b) (Old syllabus).

Unpaid Dividend Account

Section 124(1) of Companies Act, 2013 states that where 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.

Consequences of Non- Transfer to investor education and protection fund

Section 124(3) of Companies Act, 2013 states that if any default is made in transferring the total amount referred to in sub-section (1) or any part thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve per cent per annum and the interest accruing on such amount shall ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 2(c) (Old syllabus).

Section 125(3) of the Companies Act, 2013, provides the Investor Education and Protection Fund shall be utilised for-

a)The refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon;

b)Promotion of investor’s education, awareness and protection;

c)Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture holders or depositors who have suffered losses due to wrong actions by any person, in accordance with the order made by the Court which had ordered disgorgement;

d)Reimbursement of legal expenses incurred in pursuing class action suits under section 37 and 245 by members, debenture-holders or depositors as may be sanctioned by the Tribunal; and

e)Any other purpose incidental thereto, in accordance with Rule of IEPF authority (Accounting, Audit, Transfer and Refund) Rules, 2016.

Thus, as per above provisions, Investor Education and Protection Fund cannot be utilised for the activities related to “Har Ghar Tiranga” a campaign under the aegis of Azadi Ka Amrit Mahotsav, under the provisions of Companies Act, 2013.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 2(e) (Syllabus 2017).

According to Section 126(1) of the Companies Act, 2013 where 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.

In the given case the company declared dividend on 21st November, 2018, the dividend remains unpaid after 30 days of declaration i.e. 22nd December, 2018. The company is advised to transfer the remaining unpaid or unclaimed dividend to a special account called the Unpaid Dividend Account in any scheduled bank within seven days from the date of expiry of the said period of thirty days. Further any money transferred to the Unpaid Dividend Account of a company which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along with interest accrued, if any, thereon to the Investor Education and Protection Fund.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 2A(ii) (Syllabus 2017).

As per Para 1.1.2 of SS-3, a company shall not declare any dividend, if it has defaulted in, inter alia –

Repayment of any term loan to a bank or financial institution or interest thereon, till such time the default is subsisting.

The term “any dividend” used in the paragraph refers to declaration of dividend on both equity and preference shares. Accordingly, as a good governance practice, the restrictions in section 123 are equally made applicable to declaration of dividend on equity as well as preference shares. In such cases, the Board should neither declare nor recommend any dividend.

Here, the company AEASPL has paid the principal part of term loan taken from bank but it defaulted in repayment of interest on term loan. Hence, the decision of Board of directors not to pay preference dividend to preference shareholders owing to above is valid.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 1(a) (Syllabus 2022).

Section 127 of the Companies Act, 2013, deals with punishment for failure to distribute dividends. It provides that where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent per annum during the period for which such default continues.

Provided that no offence under this section shall be deemed to have been committed: —

a)where the dividend could not be paid by reason of the operation of any law;

b)where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;

c)where there is a dispute regarding the right to receive the dividend;

d)where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or

e)where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

The company was unable to distribute the dividend owing to dispute over entitlement to receive the dividend. Hence, as per clause (c) of the proviso the company shall not be deemed to have committed an offence and shall not be liable for punishment.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 3(a) (Syllabus 2022).

(i)The given problem is based on the exception provided in section 127 (d) of the Companies Act, 2013. As per the law, where the dividend is declared by a company and there remains calls in arrears and any other sum due from a member, in such case no offence shall be deemed to have been committed where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder. As per the facts given in the question, Akar is holding equity shares of face value of Rupees 10 Lakhs and has not paid an amount of Rupees 1 lakh towards call money on shares. Referring to the above provision, Akar is eligible to get Rupees 1.20 lakh towards dividend, out of which an amount of Rupees 1 lakh can be adjusted towards call money due on his shares. Rupees 20,000 can be paid to him in cash or by cheque or by any electronic mode. According to the above-mentioned provision, the company can adjust the sum of Rupees 1 lakh due towards calls in arrears on shares against the dividend amount payable to him.

(ii)According to section 123(5) of the Companies Act, 2013, the dividend shall be payable only to the registered shareholder of the share or to his order or to his banker. Facts in the given case state that Akruti the holder of equity shares, transferred the shares to Raka whose name has been registered on 20th May 2024. Since he became the registered shareholder before the declaration of the dividend in the Annual General Meeting of the company held on 10th September 2024, Raka, being the registered holder and not Akruti shall be entitled to the dividend and not Akruti.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(d) (Syllabus 2017).

Article 84 of Table F of Schedule I to the Companies Act, 2013 provides that, Board may deduct from any Dividend payable to any member all sums of money, if any, presently payable by him to the company on account of calls or otherwise in relation to the shares of the company.

According to Section 127(d) of Companies Act, 2013, no offence under this section shall be deemed to have been committed where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder.

In the given case PTR Ltd. may adjust the entire dividend amount of Rs. 10,000 against the total dues of Rs. 10,000 consisting of calls in arrears (Rs. 3,000), unpaid securities premium (Rs. 5,000) and other debts (Rs. 2000/-).

However, if PTR Ltd. has adopted Article 84 of the Table F of Schedule I, it is entitled to adjust the dues on account of calls in arrears (Rs.3,000) and unpaid securities premium (Rs.5,000) against the dividend, being related to the shares. The “other debts” of Rs. 2,000 which are unrelated to the shares cannot be adjusted against the dividend.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(b) (Syllabus 2022).

Section 127 of Companies Act, 2013 provides that, when a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent. per annum during the period for which such default continues.

Exceptions: Proviso to section 127 has provided a list where no offence under this section shall be deemed to have been committed:-

a)where the dividend could not be paid by reason of the operation of any law;

b)where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;

c)where there is a dispute regarding the right to receive the dividend;

d)where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or

e)where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

In case of a Nidhi Company, section 127 applies with the modification that where the dividend payable is less than Rs. 100 or less, it is sufficient, if declaration of dividend is announced in local language and the same is displayed in the notice board of the company for 3 months.

Hence, the statement is correct, failure to distribute dividend always attracts punishment but subject to the exceptions under which the non- distribution of dividend shall not attract penalties.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 1(a) (Syllabus 2017).

Section 127 of the Companies Act, 2013 provides that dividend shall be paid or dividend warrant shall be posted within period of thirty days from date of declaration of dividend; otherwise the company and the defaulting directors will be liable for default.

However, proviso to section 127 of the Act further provides a list of situations where no offence under this section shall be deemed to have been committed:-

(a)where the dividend could not be paid by reason of the operation of any law;

(b)where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;

(c)where there is a dispute regarding the right to receive the dividend;

(d)where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder;

(e)where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

In this case, delay has taken place due to strike in the postal department and it can be attributed as "for any other reason" and without any default on the part of company. Hence, the Statement is correct.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 1(d) (Syllabus 2017).

In terms of the proviso to Section 127 of the Companies Act, 2013 where dividend has been lawfully adjusted by the company against any sum due to it from the shareholder, there is no contravention of the said Section.

Regulation 84 of Table F of Schedule I to the Companies Act, 2013 provides that the Board may deduct from any dividend payable to any member all sums of money, if any, presently payable by him to the company on account of calls or otherwise in relation to the shares of the company.

In the given case, JUMBO Ltd. may adjust the amount of dividend only on account of calls or otherwise in relation to the shares of the company, if any due from Subhash in the capacity of a Member and not otherwise. Therefore, the amount due from Subhash in the capacity of trade debtor will not be adjusted and the company need to pay dividend amount to Subhash.

In the above example if JUMBO is a private limited company, still Section 127 as well as Regulation 84 of Table F of schedule - I to the Companies Act, 2013 (in view of Section 5(6) and 6 of the Companies Act, 2013) are applicable to it and the Board of Jumbo Ltd., can adjust the amount due from Subhash only on account of calls or otherwise in relation to the shares of the company, if any and not otherwise.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 3(c) (Old syllabus).

With effect from 08/07/2016, according to Regulation 43A of SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2015 (LODR), top 1000 listed companies shall formulate a dividend distribution policy which shall be disclosed on the website of the listed company and also a web-link shall be provided in its annual reports. The company has to disclose both on its website and in its annual reports its dividend distribution policy. Non-payment of dividend on equity shares as a matter of policy is also a dividend distribution policy. Thus, the contention of CFO is incorrect.

The listed entities other than top 1000 listed entities based on market capitalization may disclose their dividend distribution policies on a voluntary basis on their websites and provide a web-link in their annual reports. Thus, in this case it is a voluntary disclosure requirement for the company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(d) (Syllabus 2017).

In the case of XYZ Limited there is inadequacy or absence of profits during the current year ending on 31st March, 2023. Hence, as per rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, the rate of dividend declared shall not exceed the average of the rate at which dividend was declared by it in the immediately preceding 3 financial years. The average rate of dividend is 12% (10%+12%+14% divided by 3) and the maximum amount of dividend can be Rs. 55.2 lakh (12% of Paid-up Capital i.e. Rs. 460 lakhs)

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 1(c) (Syllabus 2022).

Total amount to be drawn from such accumulated profits shall not exceed 1/10th of the sum of its paid-up share capital and free reserves as per the last audited financial statements.

The amount so drawn shall first be utilised 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.

Paid-up capital + Free reserves = Rs. (460+740) Lakhs

(Total paid up capital & free reserves) = Rs. 1200 Lakhs

10% thereof – Rs. 120 Lakhs

Less: loss for the year – Rs. 74 Lakhs

Amount available = Rs. 46 Lakhs

Hence, the quantum of dividend is further restricted to Rs. 46 lakhs.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 1(d) (Syllabus 2022).

As per the Regulation 43(A) of SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015, the Dividend Distribution Policy shall include following parameters:

a)The circumstances under which the shareholders of the listed entities mayor may not expect dividend;

b)The financial parameters that shall be considered while declaring dividend;

c)Internal and external factors that shall be considered for declaration of dividend;

d)Policy as to how the retained earnings shall be utilized; and

e)Parameters that shall be adopted with regard to various classes of shares.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 3(a) (Syllabus 2017).

Regulation 43A of the SEBI (LODR) Regulations, 2015 provides for formulation of policy for dividend distribution which broadly specifies the external and internal factors including parameters that may be considered while declaring dividend and the circumstances under which the shareholders of the company may or may not expect dividend.

The dividend distribution policy shall include the following parameters:

(a)the circumstances under which the shareholders of the listed entities may or may not expect dividend;

(b)the financial parameters that shall be considered while declaring dividend;

(c)internal and external factors that shall be considered for declaration of dividend;

(d)policy as to how the retained earnings shall be utilized; and

(e)parameters that shall be adopted with regard to various classes of shares.

Therefore, the top 500 listed entities based on market capitalization (calculated as on March 31 of every financial year) is required to formulate a dividend distribution policy which shall be disclosed in their annual reports and on their websites.

The listed entities other than top 500 listed entities based on market capitalisation may also disclose their dividend distribution policies on a voluntary basis in their annual reports and on their website.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 1(c) (Syllabus 2017).