DIVIDEND POLICY :

DETERMINENTS VIS-À-VIS
COMPETETION
A PROJECT REPORT
Submitted to the

University of Rajasthan

Jaipur

FIVE YEAR LAW COLLEGE

(As per requirement of fifthth semester)

for the B.A.LLB.(HONS). Examination-

2010
Paper-V (COMPANY LAW - I)

Under Supervision of Submitted by

Ms. SONY KULSHRESHTHA AJIT YADAV

Faculty Lecturer B.A.,LL.B(Hons.)

University of Rajasthan V Semester (07)

FIVE YEAR LAW COLLEGE

UNIVERSITY OF RAJASTHAN
 JAIPUR

CERTIFICATE

This is to certify that AJIT YADAV , a student of B.A LL.B

(hons.) V Semester, Five Year Law College, Rajasthan University,

Jaipur has written this project entitled "DIVIDEND PLOICY :

DETERMINENTS VIS-À-VIS COMPETETIONS" under my

supervision and guidance.

It is further certified that the candidate has done a sincere

efforts in this work on the topic mentioned above.

Ms. Sony Kulshreshtha

Supervisor
 ACKNOWLEDGEMENT

I have written this presentation entitled "

DIVIDEND PLOICY : DETERMINENTS VIS-À-VIS
COMPETETIONS " under the supervision of Ms. Sony
Kulshreshtha, Faculty Lecturer, Five Year Law
College, University of Rajasthan, Jaipur.

I find no words to express my sense of gratitude

for Ms. Sony Kulshreshtha, Faculty lecturer for
providing the necessary guidance and constant
encouragement at every step of her endeavour.
The pains taken by her in the scrutiny of the rough
draft as well his valuable suggestions to plug the
loopholes therein have not only helped immensely
in making this work see the light of the day, but
above all, have helped in developing an analytical
approach to this work.

I am grateful and thankful to Prof. (Mrs.) Mridul

Srivastava, Director of Five Year Law College,
University of Rajasthan, Jaipur for her cooperation
and guidance.
 Further I am grateful to my learned teachers for
their academic patronage and persistent
encouragement extended to me.

I am highly indebted to the office and Library

Staff of the Five Year Law College, University of
Rajasthan, Jaipur for the support and cooperation
extended by them from time to time.
I cannot conclude with recording my gratefulness
to my friends for the assistance received from
them in the preparation of this project for which I
am indebted to them.

Ajit Yadav.
B.A.,LLB.
(hons.)
V Semester
Roll No. 07
Five Year Law College
University of Rajasthan,
Jaipur
 CONTENTS

Sr.no. Topic Page no.

1. Certificate i

2. Acknowledgement ii

3. Introduction 1

4. Legal Provisions as regards Dividend. 2

5. Provision for Depreciation. 4

6. a. Declaration of Dividends. 5

b. Interim Dividends
7. Payments of Dividends. 6

8. a. Dividend Warrants. 7

b. Payment of Dividend out of Capital.

9. Payment of Interest out of Capital under 8
section 208.
10. Investors Education and Protection Fund 9
under Section 205 C..
11. Conclusion. 10

Bibliography and Webliography

 INTRODUCTION

The word "dividend" comes from the Latin word "dividendum" meaning "the thing which is to
be divided among all"

Dividends are payments made by a corporation to its shareholder members. It is the portion of
corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that
money can be put to two uses: it can either be re-invested in the business (called retained
earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion
of their earnings and pay the remainder as a dividend.

For a joint stock company, a dividend is allocated as a fixed amount per share. Therefore, a
shareholder receives a dividend in proportion to their shareholding. For the joint stock company,
paying dividends is not an expense; rather, it is the division of after tax profits among
shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in
the shareholder equity section in the company´s balance sheet - the same as its issued share
capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend
at any time, sometimes called a special dividend to distinguish it from a regular one.

Cooperatives, on the other hand, allocate dividends according to members' activity, so their
dividends are often considered to be a pre-tax expense.

Dividends are usually settled on a cash basis, store credits (common among retail consumers'
cooperatives) and shares in the company (either newly created shares or existing shares bought in
the market.) Further, many public companies offer dividend reinvestment plans, which
automatically use the cash dividend to purchase additional shares for the shareholder.
 LEGAL PROVISIONS AS REGARDS DIVIDEND

1. Right to Dividend : The dividend on preference shares is fixed and cannot be

increased, however large the company’s profit may be unless the preference shares carry
the right to participate in surplus profits. Equity shareholders are entitled to be paid a
dividend on shares only after all preference dividends have been paid to date.

2. Sources out of which Dividends may be paid : Section 205 provides that dividends
may be declared out of following three sources :

(a) Current Profits.

(b) Past reserves created out of profits or credit balance in the profit and loss account
brought forward.

(c) Out of money provided by the Government, if any.

Dividends may be declared out of the profits of the company for the current year after
providing for depreciation. However, the Central Government may, if it thinks necessary so
to do in the public interest, allow any company to declare or pay dividend for financial year
out of the profits of the company for that year or any previous financial years without
providing for depreciation.

Further, Section 205 provides that a company must transfer a prescribed percentage of its
profits (usually not exceeding 10%) to its reserves before declaring dividends. In this regard
rules have been framed by the Central Government- requiring a company to transfer a
minimum from its profits for that year to its reserves before declaring dividends. The rates
are :

Percentage rate dividend proposed Minimum Percentage of Profits to be

transferred to reserves

10% to 12.5% 2.5%

12.5% to 15% 5%

15% to 20% 7.5%

20% and above 10%

Section 205 A(3) provides that dividends can be declared out of reserves only in accordance
with the rules framed by the Central Government in this behalf. However, where a company
wishes to declare a dividend otherwise than as per these rules, it may do so with the
previous approval of the Central Government.

In the event of absence or inadequacy of profits in any year, dividend may be declared by
company out of accumulated past profit provided the following conditions are satisfied :

1. The rate of dividend declared shall not exceed the average of the rates at which dividend
was declared by the company in the five year immediately preceding that year or 10% of
its paid up capital, whichever is less.

2. The total amount to be drawn from the accumulated profits earned in previous year nd
transferred to the reserves shall not exceed an amount equal to 1/10th of the sum of its
paid up capital and free reserves.

3. The amount so drawn from general reserve, shall first be utilized to set off the loss
incurred in the financial year before any dividend in respect of preference or equity
share s is declared.

4. The balance of reserves after such withdrawal shall not be below 15% of its paid up share
capital.

Lastly, a company can also declares dividends out of the money provided by the Central
Government or a State Government for payment of such dividend in pursuance of guarantee
given by that Government.
3. Provision for Depreciation : Depreciation on assets of the company must be provided
before any dividend can be declared out of profits of any financial year.

A provision for depreciation is the amount written off for the wearing out of fixed assets.

There are two basic aspects of the provision for depreciation to remember,

1. A charge (provision) is made in the profit and loss account in each accounting period for
every depreciate asset.

Nearly all assets are depreciate, the most important exceptions being freehold land and
long term investments.

2. The total accumulated depreciation builds up as the asset gets older. Unlike a provision
for doubtful debts, therefore, the total provision for depreciation is always getting larger,
until the fixed asset is fully depreciated.

The similarly in the accounting treatment of the provision for doubtful debts and the
provision may become apparent.

The ledger accounting entries for the provision for depreciation are as follows.

1. There is a provision account for each separate category of assets, for example land and
building, furniture and fittings.
2. The depreciation charge for an accounting period is a charge against profit. It is an
increase in the provision for depreciation and is accounted as follows, with the
depreciation charge for the period.
3. The balance on the provision for depreciation account is the total accumulated
depreciation. This is always a credit balance brought forward in the ledger account for
depreciation.
4. The fixed asset accounts are unaffected by depreciation. They are recorded in these
accounts at cost or at their reevaluated amount.
5. In the balance sheet of the business, the total balance on the provision for depreciation
account is set against the value of asset accounts to derive the net book value of the fixed
assets.
4. Declaration of Dividend : The rate of dividend on equity shares is recommended by the
BOD and is declared by the shareholders in the AGM. The shareholder cannot insist on
either declaration of dividend or on increasing the rate recommended by the BOD.

Section 173 requires that the declaration of dividend should be shown as an ordinary
business at an AGM of company. Further section 217 provides that, Directors should
mention in their report to the shareholders the amounts, if any, which they recommend
should be paid by way of dividend.

From the above provisions, it is clear that dividend is declared at an AGM of the
company. However, a company which could not declare dividend at an AGM may do so
at a subsequent general meeting.

Further, a dividend once declared cannot be revoked, except with the consent of the
shareholders, for a declaration of dividend creates a debt to the shareholders in whose
favour it is declared. However, where a dividend has been illegally declared, or where
events like war, imposition of fresh taxes etc., intervene after the declaration, and
business expediency so dictates, the BOD will be justified in revoking the declaration of
dividend.

5. Interim Dividend : A part of profits may be distributed before the accounts are presented
and dividends declared at the annual general meeting. Such dividend are called ‘interim
dividend’. Section 205 empowers the BOD of a company to declare interim dividend.
However, the board should seek the opinion of auditors before declaring any interim
dividend, as it must amount to payment of dividends out of capital, which is not allowed.
6. Payment of Dividends : Section 206 provides that no dividends shall be paid by a
company in respect of any share therein except: (a) to the registered holder of such share
or to his order or to his bankers; or (b) in case a share warrant has been issued in respect
of share in pursuance of section 114, to the bearer of such warrant or to his bankers.

Thus, if a shareholder has issued a mandate for payment of dividends on his shares to a
bank, the company paying the dividend to the bank accordingly, would get a good
discharge for the payment so made and the dividend shall be deemed to have been paid to
the shareholder in cash as contemplated under section 205.

Section 207 casts an obligation on the company to pay dividend, which is declared to the
shareholder entitled therein 30 days from its declaration. The term payment implies the
act of posting of dividend warrant or cheque as provided under the law, irrespective of
the fact whether the shareholder concerned receives it or not.

However, the section provides for certain circumstances where the default shall be
excusable. These circumstances are :

a. Where the dividend could not be paid by reason of the operation of any law.

b. Where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with.

c. Where there is a dispute regarding the right to receive the dividend.,

d. Where the dividend has been lawfully adjusted by the company against any sum due
to it from the shareholder.

e. Where, for any other reason, the failure to pay the dividend(or to post the dividend
warrant) within 30 days was not due to any default on the part of the company.
7. Dividend Warrants : We have mentioned above that section 205 specifically provides
that any dividend payable in cash may be paid by cheque or warrant, and it shall be
deemed to have been paid when the cheque or warrant therefore is posted to the
registered address of the shareholder entitled to the payment of dividend.

The dividend warrant is an order by the company to its banker to pay the amount
specified therein to the shareholder whose name is written therein. The warrant is crossed
as payee accounts only and therefore, the banker makes the payment to the shareholder
not in cash but by crediting it in his bank account.

Further, the section proves also that any money transferred to the unpaid dividend
account of any company which remains unpaid or unclaimed for a period of 7 years from
the date of such transfer must be transferred by the company to fund set up by the central
government under section 205 C.

8. Payment of Dividend out of Capital :

(a) Dividends can only be declared or paid out of (i) the current profits of the
company, (ii) the past accumulated profits and (iii) moneys provided by the government
for the payment of dividends in pursuance of a guarantee given by that government. No
dividend can be paid out of capital. (Sec. 205 (i)). director who is responsible for
payment of dividend out of capital shall be personally liable to take good such amount to
the company.

(b) Companies are not entitled to pay any dividend unless present or arrears of
depreciation have been provided for out of the profits and an amount of 10 % or reports
has been transferred to reserve. However, central government may allow any company to
declare or pay dividends out of profits before providing for any depreciation.

(c) Capital Profits may also be utilised for the declarations of dividend provided (i)
there is nothing in the Article prohibiting the distribution of dividend out of capital
profits; (ii) they have been reallied in cash: and (iii) they ave been realised in cash and
(iii) they remain as profits after revaluation of all assets and liabilities.

(d) Dividend cannot be paid out of accumulated profits unless current losses are
made good.
9. Payment of Inerest out of Capital Under Section 208 :

(a) For the purpose of raising money to defray the expenses of the construction of any
work or building, or the provision of any plant, which cannot be made profitable for a
lengthy period, the company may:

(i) pay interest on so much of that share capital as is for the time being paid up, for the
period and subject to certain conditions and restrictions

(ii) charge the sum so paid by way of interest, to capital as part of the cost of construction
of the work or building, or the provision of the plant.

(b) No such payment shall be made unless it is authorised by the articles or by a special
resolution.

(c) No such payment, whether authorised by the articles or by special resolution, shall be
made without the previous sanction of the Central Government.

(d) Before sanctioning any such payment, the Central Government may, at the expense of
the company, appoint a person to inquire into, and report to the Central Government on,
the circumstances of the case; and may, before making the appointment, require the
company to give security for the payment of the costs of the inquiry.

(e) The payment of interest shall be made only for such period as may be determined by
the Central Government; and that period shall in no case extend beyond the close of the
half-year next after the half-year during which the work or building has been actually
completed or the plant provided.

(f) The rate of interest shall, in no case, exceed four per cent per annum or such other rate
as the Central Government may, by notification in the Official Gazette, direct.

(g) The payment of the interest shall not operate as a reduction of the amount paid up on
the shares in respect of which it is paid.
10. Investor Education and Protection Fund Under Section 205 C :

1 (1) The Central Government shall establish a fund to be called the Investor Education
. and Protection Fund (hereafter in this section referred to as the “Fund”).

2
(2) There shall be credited to the Fund the following amounts, namely:-
.

(a) amounts in the unpaid dividend accounts of companies;

(b the application moneys received by companies for allotment of any
) securities and due for refund;
(c) matured deposits with companies;
(d
matured debentures with companies;
)
(e) the interest accrued on the amounts referred to in clauses (a) to (d);
(f) grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the
Fund;and
(g the interest or other income received out of the investments made from
) the Fund;

3 (3) The Fund shall be utilized for promotion of investors’ awareness and protection of
. the interests of investors in accordance with such rules as may be prescribed.

4 (4) The Central Government shall, by notification in the Official Gazette, specify an
. authority or committee, with such members as the Central Government may
appoint, to administer the Fund, and maintain separate accounts and other relevant
records in relation to the Fund in such form as may be prescribed in consultation
with the Comptroller and Auditor-General of India.

5 (5) It shall be competent for the authority or Committee appointed under sub-section
. (4) to spend moneys out of the Fund for carrying out the objects for which the
Fund has been established.
 CONCLUSION

Management and the board may believe that the money is best re-invested into the company:
research and development, capital investment, expansion, etc. Proponents of this view (and thus
critics of dividends per se) suggest that an eagerness to return profits to shareholders may
indicate having run out of good ideas for the future of the company. Some studies, however,
have demonstrated that companies that pay dividends have higher earnings growth, suggesting
that dividend payments may be evidence of confidence in earnings growth and sufficient
profitability to fund future expansion. When dividends are paid, individual shareholders in
many countries suffer from double taxation of those dividends: the company pays income tax to
the government when it earns any income, and then when the dividend is paid, the individual
shareholder pays income tax on the dividend payment; in many countries, the tax rate on
dividend income is lower than for other forms of income to compensate for tax paid at the
corporate level. Taxation of dividends is often used as justification for retaining earnings, or for
performing a stock buyback, in which the company buys back stock, thereby increasing the
value of the stock left outstanding. In contrast, corporate shareholders often do not pay tax on
dividends because the tax regime is designed to tax corporate income (as opposed to individual
income) only once. The shareholder will pay a tax on capital gains (which is often taxed at a
lower rate than ordinary income) only when the shareholder chooses to sell the stock. If a holder
of the stock chooses to not participate in the buyback, the price of the holder's shares should
rise, but the tax on these gains is delayed until the actual sale of the shares. Certain types of
specialized investment companies (such as a REIT in the U.S.) allow the shareholder to partially
or fully avoid double taxation of dividends. Shareholders in companies which pay little or no
cash dividends can reap the benefit of the company's profits when they sell their shareholding,
or when a company is wound down and all assets liquidated and distributed amongst
shareholders. This, in effect, delegates the dividend policy from the board to the individual
shareholder. Payment of a dividend can increase the borrowing requirement, or leverage, of a
company.
 BIBLIOGRAPHY & WEBLIOGRAPHY

1. Company Law by S.S.GULSHAN.

2. Company Law by H.K.SAHARAY.
3. Company Law by Avtaar Singh.
4. Company Law by R.K.BANGIA.

1. lawandotherthings.blogspot.com.
2. books.google.co.in.