Background

Dividend, inclusive of interim dividend, is an equal distribution of profits of the company amongst its shareholders from the investments made by such shareholders in the share capital of the company.  An interim dividend is declared by the Board of Directors during a financial year or at any time during the period from closure of the financial year till holding of Annual General Meeting, Approval of member is not required for the declaration of interim dividend. Final Dividend is recommended by the Board of Directors followed by approval of members at Annual General Meeting of the Company.

Compliance Requirements for Declaring Dividend

• Dividend may be declared or paid for any financial year: (Section 123(1) of the Companies Act, 2013) 

• • Out of profit of the company for that year after providing for depreciation or 
  • Out of the profit of the company for any previous financial year or years after providing for depreciation and remaining undistributed or 
  • Out of both of the above or 
  • Out of any money provided by the government (state or Central) in pursuance of the guarantee given by that government.
• 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
• Dividend can be declared out of free reserves if the company has failed to make any profits after fulfilling the following conditions: (Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014)
• The rate of the declared dividend shall not exceed the average of the rates of dividend declared by the company in preceding three financial years.
• The amount drawn from the accumulated profits shall not exceed the 1/10th of the total sum of its paid-up share capital and free reserves of the latest audited financial statement.
• Before declaring any dividend of equity shares the amount drawn must be first utilized to set off the losses incurring in the financial year in which the dividend is to be declared.
• After the amount is drawn, the reserve balance shall not be less than 15% of the paid share capital as per the latest audited financial statement.
• Dividend once declared becomes a debt and shall not be revoked [Clause 7.1 of SS-3]
• Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend
• A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares.
• No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash
• Nothing herein shall be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company
• Companies which are prohibited under Section 73 and 74 of the Companies Act, 2013 shall be prohibited to declare any dividend till the failure continues.
• Companies under Section 8 of the Companies Act are prohibited from declaring any dividend. [SS-3]
• The listed entity shall declare and disclose the dividend on per share basis only (Regulation 43(1) of LODR 2015)
• The listed entity shall not forfeit unclaimed dividends before the claim becomes barred by law and such forfeiture, if effected, shall be annulled in appropriate cases. (Regulation 43(2) of LODR 2015)
• The top 1000 listed entities based on market capitalization shall formulate a dividend distribution policy which shall be disclosed [on the website of the listed entity and a web-link shall also be provided in their annual reports] (Regulation 43A of LODR 2015)
• Where a company has an Audit Committee, this Committee shall consider the annual financial statements before submission to the Board. Dividend shall be recommended by the Board after consideration and approval of said financial statements. [Clause 2.1 of SS-3]

• A prior intimation to Stock Exchange shall be given by the Listed Company about the Board meeting for recommending dividend at least before 2 working days in advance (excluding the date of intimation and date of meeting). Regulation 29 SEBI (LODR) Regulations 2015] 
• As per the Code of Conduct of the Listed Company, the company shall close its trading window and also give a prior intimation to stock exchange about the same. (Regulation 9 of the SEBI (PIT) Regulation, 2015). 

• A list shall be prepared by the company having the names of the shareholders eligible for receiving the dividend. 

• The amount of the dividend shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. (Section 123(4) of the Companies Act, 2013) 

• Dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend [Second proviso to Section 123(5) of Companies Act 2013]. Dividend to be paid within 30 days from its declaration.
• E facility as approved by RBI to be used for payment of dividend. If it’s not feasible, then ‘payable-at-par’ warrants or cheques may be issued. Where amount of dividend exceeds Rs. 1500, ‘payable-at-par’ warrants or cheques shall be sent by speed post. [Regulation 12 of LODR 2015]

• Opening of an Unpaid Dividend Account 

• Unclaimed /unpaid dividend to be transferred to a special account called Unpaid Dividend Account within seven days of expiry of 30 days from declaration of dividend [Section 124(1) of Companies Act 2013]
• The company within 90 days of transfer of unclaimed dividend into the Unpaid Dividend account shall prepare a statement which shall contain the names, last known address and the unpaid dividend that is to be paid and publish the same statement on the website of the company. (Section 124 of the Companies Act, 2013 read with Rule 6 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016)

• Amounts in Unpaid Dividend Account which remain unpaid/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, to Investor Education and Protection Fund [Section 124(5) of Companies Act 2013 and Rule 5(1) of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016]

• Any amount required to be credited by the companies to the Investor Education and Protection Fund as provided under clause (a) to (n) of sub-section (2) of section 125 of the Act shall be remitted online as prescribed along with a Statement in Form No. IEPF 1 containing details of such transfer to the Authority within a period of thirty days of such amounts becoming due to be credited to the Fund specified account of the IEPF Authority maintained in the Punjab National Bank [and the details thereof shall be furnished to the Authority in Form No. I EPF 7 within thirty days from the date of remittance [Section 124(6) of Companies Act 2013 and Rule 6(14) and 6A(13) of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016] 

• The company shall, within 60 days of AGM and every year thereafter till completion of the seven years period, identify the unclaimed amounts, as referred in sub-section (2) of section 125 of the Act and prepare a statement containing the names, addresses and the unpaid dividend to be paid to each person and place it on the web-site of the company and any other site approved by the Central Government through IEPF 2 [Section 124(2) of Companies Act 2013 and Rule 5(8) and 7(2B) of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016]
• The company is required to transfer the shares and/or the dividend thereon to IEPF account under section 125. Due to the order of court or Tribunal or any statutory authority, if the company does not transfer the amount/shares then all such details shall be filed by the company/bank within 30 days of end of financial year. [Section 124(6) of Companies Act 2013 and Rule 18(3) of the Investor Education and Protection Fund Authority Rules, 2016]
• All companies require to transfer the unpaid and unclaimed dividend amount to IEPF account maintained by the Government shall also transfer the respective shares. Details of transferred shares shall be filed in form IEPF-4. [Section 124(6) of Companies Act 2013 and Rule 6(5) and 6(8) 6A (5), 6A (8) of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016.]
• Any dividend/shares remaining unpaid/unclaimed for 7 years has to be transferred to IEPF. Any amount required to be credited to IEPF against surrendering of such shares due to delisting/winding up and dividend received on such shares shall be remitted into the specified account of the IEPF Authority maintained in the Punjab National Bank and the details thereof shall be furnished to the Authority in Form No. I EPF 7 within thirty days from the date of remittance [Section 124(6) of Companies Act 2013 and Rule 6(14) and 6A(13) of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016]

Penalties under Companies Act, 2013:

• U/s 124(3): *For default in transferring unpaid/unclaimed dividend to Unpaid Dividend Account, interest @12% p.a. to be paid on such amounts 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

*U/s 124(7): Penalty for non-compliance on company – Rs. 1 lac and in case of continuing failure, Rs. 500 for each day subject to a maximum of ten lakh rupees
Penalty for non-compliance on officer in default – Rs. 25,000 and in case of continuing failure, Rs. 100 for each day subject to a maximum of two lakh rupees

• U/s 127: 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
• Section 450 – company and every officer of the company in default or such other person shall be liable to a penalty of Rs. 10,000, and in case of continuing default, with a further penalty of Rs. 1000 for per day of default, subject to a max Rs. 2 lakh in case of a company and Rs. 50000 in case of an officer who is in default or any other person

Penalties under SEBI (LODR) 2015:

Note: LODR provisions are applicable to Listed entities only.

For Detailed P Procedure for Declaration & Payment of Dividend refer: Procedure for Declaration & Payment of Dividend – 1-Comply