Q.Explain in detail the legal provisions relating to declaration and payment of dividend under the Companies Act, 2013.
1. Sources of dividend — Section 123(1). Dividend for any financial year may be declared and paid only out of: current-year profit after providing for depreciation; undistributed previous years' profit after depreciation; both together; or money provided by the Central/State Government under a guarantee. Past losses and unprovided depreciation of earlier years must be set off first.
2. Voluntary transfer to reserves. Before declaring dividend, a company may, at its own discretion, transfer such percentage of profit as it considers fit to reserves — this is voluntary under the 2013 Act.
3. Dividend out of free reserves. In a year of inadequate/no profit, a company may draw on free reserves subject to the Companies (Declaration and Payment of Dividend) Rules, 2014 — the rate capped to the average of the preceding three years, the amount drawn capped at one-tenth of paid-up capital plus free reserves, losses set off first, and reserves never falling below fifteen per cent of paid-up capital afterward.
4. Separate bank account — Section 123(4). Within 5 days of declaration, the entire dividend amount must be deposited in a separate scheduled-bank account.
5. Payment within 30 days. The dividend must actually reach every entitled shareholder within 30 days of declaration.
6. Unpaid Dividend Account — Section 124. Any amount still unpaid/unclaimed at that point must be transferred, within a further 7 days, to the Unpaid Dividend Account, and a statement of such amounts published on the company's website within 90 days of the transfer.
7. Investor Education and Protection Fund — Section 125. Amounts (and the related shares) remaining unclaimed for 7 consecutive years in the Unpaid Dividend Account are transferred to the IEPF, from where a shareholder can still recover them by proving their claim to the IEPF Authority.
8. Penalty for default — Section 127. Failure to pay within 30 days makes every knowingly-defaulting director liable to imprisonment up to 2 years and a fine of at least ₹1,000 per day of default, and obliges the company to pay 18% p.a. simple interest for the default period, subject to the Act's specific exceptions (legal bar, unfulfilled shareholder instructions, bona fide dispute, lawful adjustment, no fault of the company).
The Companies Act, 2013 regulates dividend end-to-end: Section 123 fixes its lawful sources and the 5-day bank-account rule; the dividend must be paid within 30 days; Section 124 moves unpaid amounts to the Unpaid Dividend Account within a further 7 days; Section 125 moves 7-year-unclaimed amounts (with the shares) to the IEPF; and Section 127 penalises directors and the company for missing the 30-day payment deadline.
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.