Dividend refers to the reward a corporation offers to its shareholders, in cash or otherwise. Dividends can be given in various ways, such as cash payment, inventory, or some other form. It is determined by its Management Board and requires the approval of the shareholders. The dividend is also typically a portion of the income shared by the company with its shareholders within the businesses having private limited company registration in India.

Types of Dividend 

There are two types of dividends:

  1. Interim dividend: Interim dividends are announced by the company’s board at any point of the year before the final closing of the financial year and holding the Annual General Meeting. Under the Act, the corporation may declare interim dividends from income accrued from current or previous fiscal years.
  2. Final dividends: Dividends paid by the corporation after the financial year has been closed, and the Board of Directors accepted an AGM. The term used except as specified in the Companies Act, 2013 refers only to final dividends.

Note: Most provisions for both Interim and Final are the same, but the Act has some specific requirements for interim dividends. The risk for Default occurs only in the case of the Final Dividend announcement and not the not interim one.

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Procedure of Declaration and Payment of Dividend

Companies are expected to report and pay dividends following a procedure:
1. Notification of the Meeting of Directors – The matter must be announced in a Board of Directors meeting. The same must be conveyed to the managers concerned.

2. Hold required meetings – Dividend resolutions must be debated and accepted at board meetings. Recommendations can include the acceptance of the annual loss and benefits accounts, the specification of the final amount of the dividend, the date of the book closure and acceptance of AGM’s notice as the same must be addressed and accepted in the Company’s Annual General Meeting.
3. Dividend Declaration – The organization has to pay dividends following due review and acceptance of resolutions.
4. Open a bank account – A separate bank account must be opened for payment of dividends and the complete credit payable in five days after the declaration.
5. Dividend payment – The dividend has to be paid in cash to the shareholders within 30 days of notification.

6. Outstanding dividend collection – The corporation is responsible for adding to the outstanding dividend account the balance remaining on the dividend account. After seven years, the same amount will be transferred to the Investor Education and Security Fund if not requested.

Punishment for failure to distribute dividends (Section 127)

It is when the company declares about the distribution of dividend but has not paid, or the warrant in respect thereof has not been posted within thirty days from the date of the declaration to any shareholder who is entitled to the payment of the dividend then:

i) Every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment, which may extend to 2 years and with fine which shall not be less than Rs. 1000/- for every day during which such default continues.

ii) The company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues. An offense under this section shall be deemed not to have been committed in the following circumstances.

  • If the dividend is not paid due to reason of the operation of any law.
  • If there are any directions of the shareholders regarding payment of dividend which cannot be complied with and the same has been communicated to him;
  • If there is a dispute regarding the right to receive the dividend;
  • If the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder;
  • For any other reason if the failure to pay the dividend or to post the warrant within the period under the provisions of Companies Act,2013 was not due to any default on the part of the company.

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Investor Education and Protection Fund

The Education and Protection Fund (IEP) is an investment fund that transfers money from the Central Government for the benefit of this fund on a variety of occasions, as discussed below.

  • Donations provided for this fund.
  • Unpaid Dividend Account Number.
  • The balance in the IEP fund formed under Section 205C of the Companies Act of 1956.
  • Revenues from savings under the plan.
  • Revenue obtained under Section 38(4) of the Act.
  • The debentures matured with businesses.
  • Some other numbers prescribed.

Funds may be used to promote investor awareness, understanding, and security. This can also be used for other reasons, such as overdue redemption of dividends, aged deposits, etc.

Conclusion

Dividend concerns financial policies on paying cash dividends in the present or paying at a later stage. Whether to issue it and what amount is calculated primarily based on the company’s  profit (excess cash) and affected by long-term earning power.