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Dividend Definition: Dividends are a share of a company's profits that is divided among shareholders.

People who own stocks, bonds, or mutual funds, may receive dividends from those investments. Dividend is an important fruit that you get from the tree called investments. The profit earned by the Company (after payment of Corporate Income-tax) can either be retained in the Company for its future financial needs or distributed to shareholders in the form of dividend. The dividend a corporation pays is the amount of money, normally a portion of the profits, a board of directors distributes to the ordinary shareholders of the corporation. Legal provision regarding dividends The power regarding appropriation of profits is given to the Board of directors,. However, they are governed by the provisions of Act. The directors are to follow table. A or the provisions of Articles a the provisions of the Companies Act 1950 in the regard. The following are the rules regarding declaration and payment of dividend:(1) Dividend on Paid up Capital. A company may, if so authorized by its Articles, pay dividend on the paid up value of shares under section 93 of the companies Act. (2) Provisions of Articles of Association. Rules 85 to 94 of Table A provide that(i) A company may declare dividend its general meeting provided it does not exceed the a mount recommenced by the board of directors. (ii) the board of directors may from the time pay to t members such interim dividends, as appears to it to be justified by the profits of the company. (iii) Notice of any dividend should be given to those who are entitled to receive it. (iv) The directors my transfer an amount they think p[roper to the reserve fund which may be utilised for any contingencies. (v) When a dividend has been declared, it becomes a liability of the company to the shareholders from the date of its declaration but no interest can be claimed on it. 3. Dividends only of Profits. (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. (4) Payment of dividend only in Cash [ Sec. 205 (iii)]. Dividends are to be paid in cash only except in the following circumstances(a) by capitalizing the profits by issue of fully paid bonus shares, if Articles so permit, provided all legal formalities have been satisfied in respect of issue of bonus shares. (b) by paying up any unpaid amount on partly paid up shares. (5) Payment of Dividend to Specified Persons (Sec. 206). Dividend shall be paid only to those whose names appear on the Register of member son the date of declaration of dividend or to the holders of dividend warrant, if issued by the company. (6) Payment of Dividend within 42 days (Sec. 207) Dividend must be paid within 42 days of its declarations except in the following circumstance:(i) by operation of law of insolvency; (ii) in compliance of the directions of the shareholders; (iii) where right to receive dividend is pending decision; (iv) where it is not due to the default of the company. (v) if company lawfully adjusts the amount against any debt due form the shareholder. (7) Payment of Interim dividend. The directors of a company can pay interim dividend subject to the provisions of Articles. Interim dividend can be paid at any time between the two annual general meetings taking into full year depreciation on fixed assets. (8) Transfer of Unpaid dividend to a Special Bank Account (Sec. 205 A) According to section 205 A, newly inserted by the Companies (Amendment) Act 1974, where a company has declared a dividend but has not posted the dividend warrant in respect therefor within 42 days to the shareholders entitled to it, such unpaid dividends shall be transferred to a special account to be opened by the company in that behalf in any Scheduled Bank to be called Unpaid Dividend Account of ......Co. Ltd/Co. (Pvt) Ltd.' If the unpaid dividend are not so transferred, the company shall pay an interest at 12 % p.a. Any unpaid amount of dividend declared before the commencement of this Amendment Act shall also be transferred to such special account within 6 months from the date of commencement of the Act. 9. Transfer Unclaimed Dividend to Central Government. Any amount transferred to the unpaid dividend account remains unpaid or unclaimed for 3 years from the date of such transfer shall be transfered to the 'General Revenue Account' by the company along with a statement giving full particulars in respect of the sums so transferred and the last known addresses of the persons entitled to receive it and such other particulars as may be prescribed. The company is entitled so a receipt for such transfer from the Reserve Bank of India.

If a company fails to comply the above said provisions (given in para 8 and 9 above), the company and every officer of the company who is in default shall be punishable with a fine which may extend to Rs. 500 for every day during which default continues.

DIVISIBLE PROFITS AND DIVIDEND 20.1 INTRODUCTION TO DIVIDEND [Sec. 2 (14A)] Dividend is the return on the investment of shareholders in a company. Only profits Meaning of dividend can be distributed as dividend Definition of dividend Dividend means the portion of the profits of the company which is distributed to the shareholders Dividend includes any interim dividend [Sec. 2(14A)]

Procedure for declaration of dividend

Ordinarily, the term interim dividend means the dividend declared between two AGMs Firstly, dividend is recommended by the Board (Sec. 217) Final dividend The members in the AGM may declare the dividend by passing OR. Declaration of dividend at an AGM is an item of ordinary business (Sec. 173) The members may reduce the rate or amount recommended by the Board, but they cannot increase it. Interim dividend is declared by the Board

Interim dividend

20.2 CONDITIONS DIVIDEND Source of dividend

FOR a) b) c)

DECLARATION Profits of current FY

OR

PAYMENT (Sec. 205)

OF

Undistributed profits of previous FY(s)

Provision of Depreciation

Money provided by Central Govt. or State Govt. in pursuance of a guarantee given by it. a) Profits for every FY shall be arrived at after providing for depreciation b) CG may allow a company to declare dividend for any FY without providing for depreciation

c) Set off of past losses

If in any previous FY, depreciation has not been provided, it shall be provided before declaring dividend Lowest of the following shall be set off against the profits of the current

year: a) The amount of past losses after providing depreciation

Transfer to reserves

Prohibition on declaration of dividend Mode of payment

b) The amount of depreciation provided for that year Companies (Transfer of Profits to Reserves) Rules, 1975. Before declaration or payment of dividend, profits shall be compulsorily transferred to reserves at the following rates: Rate of proposed dividend Amount to be transferred to reserves Not exceeding 10% Nil Exceeding 10% but not exceeding 2.5% of current profits 12.5% Exceeding 12.5% but not exceeding 5% of current profits 15% Exceeding 15% but not exceeding 7.5% of current profits 20% Exceeding 20% 10% of current profits A company which fails to redeem its irredeemable preference shares shall not, so long as such failure continues, declare any dividend on its equity shares No dividend shall be payable except in cash or by cheque However, issue of bonus shares or payment of a bonus call by capitalizing the profits or reserves is permissible. But, issue of bonus shares in lieu of dividend declared, is not permissible The dividend shall be deposited in a separate bank account within 5 days of declaration of dividend. The amount so deposited shall be used only for the purpose of payment of dividend (whether interim or final)

Deposit of dividend

20.3

UNPAID DIVIDEND AND INVESTOR EDUCATION AND PROTECTION FUND (Sec 205A to 205C) Any dividend declared but remaining unpaid or unclaimed for 30 days from the Dividend declared but date of its declaration shall be transferred to unpaid dividend account. remaining unpaid The transfer shall be made within 7 days to a special accounts in any scheduled bank to be called Unpaid Dividend Account of Company Limited/Company (Private) Limited. Interest at the rate of 12% p.a. is payable by the company for delay in making the above transfer Any money transferred to the unpaid dividend account Transfer to Investor of a company which remains unpaid for 7 years from Education and the date of such transfer shall be transferred by the Protection Fund company to the Fund When making a transfer to the Fund, the company shall Furnishing of details furnish to the authority appointed by CG, the following details;

Dividend remaining unpaid in unpaid dividend account-Consequences

All sums included in such transfer; Nature of the sums; Names and last known addresses of the persons entitled to receive the sum; The amount to which each person is entitled;

Investor Education and Protection Fund

Credits to the Fund

Such other particular as may be prescribed Following sums shall be credited to the Fund: Following sums remaining unpaid for 7 years from the due date: a) Amounts in the unpaid dividend accounts b) Application money received and due for refund c) Deposits matured but unpaid d) Debentures matures but unpaid Interest accrued on the amounts referred to in clauses (a) to (d) Grants and donations by CG or SG or any other institutions

Utilisation of Fund

Interest or other income received out of the investments For promotion of investor awareness; and

Administration of Fund

No payment from the Fund

a) b)

Protection of the interest of investors The authority appointed by CG shall administer the Fund and shall be competent to spend money for carrying out the objects No person shall be entitled to any money transferred to the Fund.

No claim shall lie against the company in respect of any amount transferred to the Fund, i.e., when any amount is transferred by the company to the Fund, the liability of the company comes to an end.

20.4 PAYMENT OF DIVIDEND TO WHOM? a) The registered shareholder b) The order of registered shareholder

(Sec. 206)

c) The bankers of registered shareholder (the bankers need not make a separate application) d) The bearer of share warrant

20.5 DIVIDEND ETC. TO BE HELD IN ABEYANCE (Sec. 206A) Where the instrument of transfer of shares has not been registered by the company, it shall a) Transfer the dividend in relation to such shares to the Unpaid Dividend account, unless the registered shareholder consents to payment of such dividend to the transferee.

b) Keep in abeyance in relation to such shares any offer to right shares on bonus shares

20.6 FAILURE TO DISTRIBUTE DIVIDENDS WITHIN 30 DAYS (Sec. 207) The dividend shall be paid within 30 days from the date of declaration Time limit for payment of dividend a) Where dividend could not be paid by reason of the operation of any law Exceptions b) Where a shareholder has given directions to the company regarding payment of dividend and those directions cannot be complied with c) Where dividend is lawfully adjusted by the company against any sum due to its from the shareholder. d) Where there is a dispute regarding the right to receive the dividend e) Where the non payment of dividend is not due to any default of the company

20.7 REVOCATION OF DIVIDEND Sec 207 requires payment of dividend within 30 days of declaration. Sec 207 also covers certain No revocation circumstances in which dividend need not be paid. Revocation of dividend is not a ground for of dividend non-payment of dividend. Thus, ordinarily a dividend once declared cannot be revoked Where a dividend has been illegally declared, the members can revoke the dividend. However, if Exceptions illegally declared dividend is paid, then the directors shall be responsible and accountable to the company personally Where the company ceases to be a going concern, declared dividend may be revoked.

20.8 PAYMENT OF INTEREST OUT OF CAPITAL-CONDITIONS (Sec. 208) Shares are issued to raise money to defray the cost of works or building or plant which When is payment of cannot be made profitable for a long period interest out of capital permissible? Conditions for payment Authorization Authorisation is required by the articles or by SR

of interest on paid up share capital

Sanction Time period

Previous sanction of CG is required (i) The payment of interest shall be made only for such period as may be determined by CG (ii) Such period shall in no case extend beyond the close of the half year next after the half year during which the work of building has been actually completed or the plant provided (i.e., upto the end of next half year) 4% p.a. or a rate notified by CG

Inquiry by CG

Rate of interest Before sanctioning any such payment, CG maya)

Appoint a person to inquire into and report to the CG.

b) Require the company to given security for the payment of the costs of the inquiry Charge the interest paid a) The interest paid on capital shall be charged to capital as part of the cost of works or building or plant (i.e., the interest shall be capitalised). to cost of works etc. b) The payment of interest shall be operate as a reduction of paid up share capital

20.9 INTERIM DIVIDEND [Sec. 2(14A), 205(1C)] Dividend includes any interim dividend [Sec. 2(14A) Definition In other words, interim dividend is a part of dividend. Therefore, all the provisions applicable to final dividend shall apply to interim dividend. The put the things beyond doubt, it has been provided u/s 205(1C) that the provisions of Sec. 205, 205A, 205C, 206, 206A and 207 shall, as far as may be, also apply to any interim dividend. Dividend declared between two AGMs is called as interim dividend The Board may, from time to time, pay such interim dividend as may appear to it to be justified by the profits of the company No specific power in the articles is required Interim dividend once declared, like final dividend, is a debt due from the company, and thus is not revocable except under the same circumstances in which the final dividend can be revoked. While declaring interim dividend the Board should carefully assess the adequacy of profits. Therefore, the opinion of auditors should be obtained. In the event of absence or inadequacy of profits, the distribution shall amount to unauthorized reduction of capital

Meaning

Power to declare interim dividend Revocation of interim dividend Consequence if profits are inadequate

20.10 CONSEQUENCES OF PAYMENT OF DIVIDEND OUT OF CAPITAL Personal liability of The directors shall be held personally liable to make good to the company the amount distributed as dividend [Re, Oxford Benefit Building & Investment Society]. directors Directors have a right of indemnity against the members who received dividends knowing Directors right of that they were being paid up dividends out of capital. indemnity Where dividends improperly paid out of capital have been made good out of subsequent No liability of

directors

profits, liability ceases to attach to the directors

Bonus Shares
Bonus Share When the additional shares are allotted to the existing shareholders without receiving any additional payment from them, it is known as issue of bonus shares. Bonus shares are allotted by capitalizing the reserves and surplus. Issue of bonus shares results in the conversion of the company's profits into share capital. Therefore it is termed as capitalization of company's profits. Since such shares are issued to the equity shareholders in proportion to their holdings of equity share capital of the company, a shareholder continues to retain his / her proportionate ownership of the company. Issue of bonus shares does not affect the total capital structure of the company. It is simply a capitalization of that portion of shareholders' equity which is represented by reserves and surpluses. It also does not affect the total earnings of the shareholders. Issue of Bonus Shares is more or less a financial gimmick without any real impact on the wealth of the shareholders. Still firms issue bonus shares and shareholders look forward to issue of bonus shares.

Reasons for issuing Bonus Shares 1. The bonus issue tends to bring the market price per share within a more reasonable range. 2. It increases the number of outstanding shares. This promotes more active trading. 3. The nominal rate of dividend tends to decline. This may dispel the impression of profiteering. 4. Share capital base increases and the company may achieve a more spectacular size in the eyes of the investing company. 5. Shareholders regard a bonus issue as a strong indication that the prospects of the company have brightened and they can reasonably look for an increase in total dividend. 6. It improves the prospects of raising additional funds.

Regulation of Bonus Issues

Important regulatory provisions governing issue of bonus shares are: 1. The bonus issue is made out of free reserves built out of the profits or share premium collected in cash only. 2. The residual reserves after the proposed capitalization shall be at least 40% of the increased paid up capital.

Stock Splits In a stock split the face value per share is reduced and the number of shares is increased proportionately. A stock split is similar to a bonus issue from economic point of view. But there are some differences from the accounting point of view.

Difference between Bonus Issue and Stock Split


Bonus Issue 1. The par value of share is unchanged. 2. A part of the reserves is capitalized. Stock Split 1. The par value of share is reduced. 2. There is no capitalization of reserves.

Advantages of issue of bonus shares to the company 1. Conservation of Cash: Issue of bonus shares does not involve cash outflow. The company can retain earnings as well as satisfy the desire of the shareholders to receive dividend.

2. Keeps the EPS at a reasonable level: A company having high EPS may face problems both from employees and consumers. Employees may feel that they are underpaid. Consumers may feel that they are being charged too high for the company's products. Issue of bonus shares increases the number of shares and reduces the earning per share. 3. Increases the marketability of company's shares: Issue of bonus shares reduces the market price per share. The price of the share may come within the reach of ordinary investors. This increases the marketability of shares. 4. Enhances prestige of the company: By issuing bonus shares, the company increases its credit standing and its borrowing capacity. It reflects financial strength of the company. 5. It helps in financing its projects: By issuing bonus shares, the expansion and modernization programmes of a company

can be easily financed. The company need not depend on outside agencies for finances. 6. Retention of managerial control: Any new issue of shares has a danger of dilution of managerial control over the company. Since bonus shares are issued to the existing shareholders in proportion to their current holdings, there is no threat of dilution of managerial control over the company.

Advantages to the shareholders 1. Tax benefits: When a shareholder receives dividend in cash, it adds to his total income and is taxed at usual income tax rates. From this point of view the bonus shares increase the wealth of shareholders. In case the shareholder requires cash he can sell his additional shares. 2. Indication of higher future profits: Issue of bonus shares is generally an indication of higher future profits. This is because a company declares a bonus issue only when its earnings are expected to increase. 3. Increase in future dividend: The shareholder will get more dividends in the future even it the company continues to offer existing cash dividend per share. 4. High psychological value: Issue of bonus shares is usually perceived positively by the market. This tends to create greater demand for the company's shares. In fact, always the share prices rise at the declaration of bonus shares.

Limitations of Bonus Issues Disadvantages for the company: 1. Issue of bonus shares leads to an increase in the capitalization of the company. The increased capitalization can be justified only if there is increase in the earning capacity of the company. 2. After the issue of the bonus shares the shareholders expect the existing rate of dividend per share to continue. It is really a challenging task for the company to retain the existing rate of dividend per share. 3. Issue of bonus shares prevents new investors from becoming the shareholders of the company (no doubt they can buy the shares in the secondary market). Disadvantages to the shareholders: 1. Some shareholders may prefer cash dividend to stock dividend, such shareholders

may feel disappointed (no doubt they can very well sell their bonus shares and get their money).