Secretarial Practice · Ch 10 — Dividend and Interest
Distinction between Dividend and Interest, and the Secretary's Duties
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Distinction between Dividend and Interest, and the Secretary's Duties
6. Distinction between Dividend and Interest, and the Secretary's Duties
Distinguish between Dividend and Interest:
| Basis | Dividend | Interest |
|---|---|---|
| Meaning | Share of distributable profit paid to shareholders | Compensation for the use of borrowed money, paid to debenture-holders/depositors |
| Paid to | Shareholders — the owners of the company | Debenture-holders and depositors — creditors of the company |
| Nature of payment | An appropriation of profit (paid out of profit that already exists) | A charge against profit (deducted as an expense in arriving at profit) |
| Payable when there is no profit? | No — dividend can be declared only out of profits/free reserves as Section 123 allows | Yes — interest must be paid on the due date whether or not the company has made a profit |
| Rate | Variable for equity shares (Board/members decide each year); fixed for preference shares | Always fixed, as agreed at the time of issue of the debentures or acceptance of the deposit |
| Legal character before payment | Discretionary until declared; only after declaration does it become a debt | Always a pre-existing contractual/statutory obligation, whether or not yet due |
| Statutory authority governing it | Sections 2(35), 123, 124, 125 and 127, Companies Act, 2013 | General law of contract, plus the Companies Act's deposit-acceptance rules and RBI directions where applicable |
| Consequence of non-payment | Section 127 penalty on defaulting directors + 18% p.a. company interest, once declared | Breach of contract; can lead to legal proceedings or even a winding-up petition |
Duties of the Company Secretary regarding Dividend:
- Guiding the Board on the legal sources of dividend under Section 123 — confirming depreciation has been provided and past losses set off before any dividend figure is even discussed.
- Drafting the Board resolution recommending the dividend rate, and the AGM notice and ordinary resolution declaring it.
- Fixing (and communicating) the record date, and ensuring the Register of Members is accurate and up to date as on that date.
- Arranging for the required amount to be deposited into a separate scheduled bank account within 5 days of declaration, as Section 123(4) requires.
- Ensuring dividend warrants/electronic payments are despatched to every entitled shareholder within 30 days, with correct TDS deduction, to keep the company clear of Section 127 liability.
- Identifying unpaid/unclaimed amounts and transferring them to the Unpaid Dividend Account within 7 days of the 30-day deadline expiring, and preparing the statement of unclaimed dividend for the company's website within 90 days.
- Tracking the 7-year unclaimed period and arranging the eventual transfer of unclaimed dividend and the related shares to the IEPF, and assisting any shareholder who later wishes to claim a refund from the IEPF Authority.
Duties of the Company Secretary regarding Interest (on debentures/deposits):
- Maintaining an accurate Register of Debenture-holders / Register of Deposits, and a schedule of interest due-dates for each.
- Ensuring interest is computed correctly at the rate fixed at issue/acceptance, and paid strictly on the due date, regardless of whether the company has earned a profit that period, since any delay is a breach of contract, not merely a missed distribution.
- Ensuring TDS is deducted on interest payments where applicable, and that the amounts are reflected correctly as a charge in the Statement of Profit and Loss, never mistaken for a profit appropriation. …
Definition 1Appropriation of Profit
A distribution made out of profit that has already been arrived at (e.g. dividend, transfer to reserves) — as opposed to a charge, which is deducted in the cou …
Definition 2Charge against Profit
An expense (such as interest on debentures/deposits) deducted from revenue in arriving at the profit figure, payable irrespective of whether the resulting f …