Types of Dividend

2. Types of Dividend

The Maharashtra HSC Secretarial Practice syllabus asks you to know dividend along two independent classifications: (A) by when it is declared during the financial year — interim vs final; and (B) by which class of share it is paid on — equity vs preference.

(A) Interim Dividend vs Final Dividend

Interim Dividend — Section 123(3): dividend declared by the Board of Directors at any time between two Annual General Meetings (AGMs), i.e. during the course of the financial year, before the company's final accounts for that year are ready. The Board may declare an interim dividend out of: (i) the surplus in the profit and loss account, and (ii) the profits of the financial year in which the interim dividend is sought to be declared, or out of profits of any previous financial year(s) remaining undistributed — but only after providing for depreciation. If the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of the interim dividend, the interim dividend cannot be declared at a rate higher than the average of the rates at which dividend was declared by the company during the immediately preceding three financial years.

Final Dividend: dividend recommended by the Board of Directors after the financial year has closed and the final accounts are ready, and then declared by the shareholders at the AGM. The shareholders can approve the Board's recommended rate, or reduce it, but they cannot increase it above what the Board has recommended.

(B) Equity Dividend vs Preference Dividend

Preference Dividend: paid to preference shareholders at a fixed rate, stated at the time the preference shares are issued (e.g. "9% Preference Shares"). Preference shareholders have a priority over equity shareholders — under Section 43, preference shares carry a preferential right to be paid dividend before any dividend is paid to equity shareholders. …