Declaration and Payment of Dividends
Section 123. Declaration of dividend.
123(1).
A company can declare or pay a dividend for any financial year only in the following cases:
(a). Out of profits:
From the profits of the current financial year, after providing for depreciation as required under 123(2).
From the profits of any previous financial year(s), again after providing for depreciation.
From a combination of both current and previous profits.
While calculating profits, the company must exclude any unrealised or notional gains.
This includes those arising from revaluation of assets, fair value changes, or other unrealised adjustments.
(b). Out of government-provided funds:
If the Central or State Government gives funds under a guarantee specifically for paying dividends, such money can be used for that purpose.
Before declaring a dividend, the company may transfer a certain portion of profits from that financial year to its reserves, if it chooses to do so.
If the company has no or inadequate profits in a financial year and wishes to declare a dividend out of accumulated profits it can do so only in accordance with the prescribed rules.
A company cannot declare or pay any dividend out of reserves other than free reserves.
A company cannot declare any dividend unless all previous losses and unprovided depreciation from earlier years are first set off against current year’s profits.
123(2).
For the purpose of clause (a) above, depreciation must be provided in accordance with the method and rates prescribed in Schedule II of the Companies Act.
123(3).
The Board of Directors may declare an interim dividend:
During any financial year.
Between the end of the financial year and the Annual General Meeting (AGM).
Such dividend can be declared out of:
The surplus in the profit and loss account.
The profits of the current financial year.
The profits earned up to the quarter preceding the declaration date.
If the company has incurred a loss during the current financial year up to that quarter, the interim dividend rate cannot exceed the average rate of dividend declared during the preceding three financial years.
123(4)
Once a dividend is declared, the company must transfer the total amount of the dividend to a separate bank account in a scheduled bank within five days from the date of declaration.
This dividend also includes interim dividend.
123(5).
Dividends can be paid only in cash and only to:
The registered shareholder.
His order.
His banker.
This rule does not prevent the company from capitalising profits or reserves to:
Issue fully paid-up bonus shares.
Pay unpaid amounts on shares held by members.
Cash dividends may be paid through:
Cheque.
Dividend warrant.
Electronic modes such as NEFT, ECS, etc.
123(6).
A company that has not complied with the Sections 73 and 74 cannot declare or pay any dividend on its equity shares until such non-compliance is rectified.
Section 73 and 74 are regarding acceptance and repayment of deposits.
Section 124. Unpaid Dividend Account.
124(1).
When a company declares a dividend, but it is not paid or claimed by any shareholder within 30 days from the date of declaration, the company must:
Within 7 days after the expiry of that 30-day period, transfer the total unpaid or unclaimed dividend amount to a special account.
This Special account will be called the Unpaid Dividend Account.
The Unpaid Dividend account must be opened in a scheduled bank.
124(2).
Within 90 days of transferring the amount to the Unpaid Dividend Account, the company must:
Prepare a statement containing:
The names of shareholders,
Their last known addresses, and
The amount of unpaid dividend due to each.
This statement must be:
Placed on the company’s own website (if available), and
Uploaded on a website approved by the Central Government, in the prescribed form and manner.
124(3).
If the company fails to transfer the unpaid dividend amount (or any part of it) to the Unpaid Dividend Account within the prescribed time:
It must pay interest at 12% per annum on the amount not transferred.
Such interest shall be calculated from the date of default.
The interest earned shall benefit the shareholders, distributed in proportion to the amount unpaid to them.
124(4).
Any shareholder entitled to any amount that has been transferred to the Unpaid Dividend Account may apply to the company for payment of that amount.
This allows shareholders to claim their unpaid dividends directly from the company, even after the money has been moved to the special account.
124(5).
If the amount lying in the Unpaid Dividend Account remains unclaimed or unpaid for 7 years from the date of transfer, the company must:
Transfer the entire amount, along with any interest accrued, to the Investor Education and Protection Fund (IEPF) established under Section 125(1).
Send to the IEPF Authority a statement containing details of the transfer in the prescribed form.
The IEPF Authority will then issue a receipt as proof of the transfer.
124(6).
All shares in respect of which dividends have not been paid or claimed for 7 consecutive years or more must also be:
Transferred by the company to the Investor Education and Protection Fund, along with a statement of prescribed details.
However, if any claimant of such shares later appears, they are entitled to claim the shares back from the IEPF.
This can be done by following the prescribed process and submitting the required documents.
If dividend is paid or claimed even once during the seven-year period, those shares will not be transferred to the IEPF.
124(7).
If a company fails to comply with any provision of this section:
The company shall be liable to a penalty of ₹1,00,000.
In case of continuing failure, ₹500 per day after the first day, subject to a maximum of ₹10,00,000.
Every officer in default shall be liable to a penalty of ₹25,000.
In case of continuing failure, ₹100 per day after the first day, subject to a maximum of ₹2,00,000.
Section 125. Investor Education and Protection Fund.
125(1).
The Central Government shall establish a special fund called the Investor Education and Protection Fund (IEPF) to safeguard investors’ interests and manage unclaimed financial amounts.
125(2).
The following amounts shall be credited to the Fund:
(a). Grants from the Central Government, approved by Parliament.
(b). Donations from the Central or State Governments, companies, or other institutions.
(c). Amounts transferred from the Unpaid Dividend Account after 7 years (under Section 124(5)).
(d). Unclaimed amounts that were transferred to the general revenue account under the old Companies Act, 1956.
(e). Balances already lying in the earlier IEPF under Section 205C of the 1956 Act.
(f). Interest or income earned from the Fund’s investments.
(g). Amounts received under Section 38(4) (related to fraudulent share allotments).
(h). Application money received by companies for allotment of securities that remains unclaimed.
(i). Matured deposits with companies (other than banking companies) that remain unclaimed.
(j). Matured debentures with companies that remain unpaid.
(k). Interest accrued on the above unclaimed amounts (from h to j).
(l). Sale proceeds of fractional shares from bonus issues, mergers, or amalgamations that remain unclaimed for 7 years or more.
(m). Unclaimed redemption amounts of preference shares for 7 years or more.
(n). Any other amount as may be prescribed.
The Amounts under clauses (h) to (j) will be transferred to the Fund only if they remain unclaimed and unpaid for 7 years from the due date.
125(3).
The Fund shall be utilised for the following purposes:
Refund of unclaimed dividends, matured deposits, debentures, and application money, including interest thereon.
Promotion of investor education, awareness, and protection.
Distribution of disgorged amounts to eligible shareholders or depositors who suffered losses due to wrongful acts.
Reimbursement of legal expenses to members, debenture-holders, or depositors who file class action suits under Sections 37 or 245.
This reimbursement is done only if approved by the Tribunal.
Any other purpose related to the above, as prescribed.
Any person whose unclaimed amounts were transferred to the IEPF under the Old CA Act can apply for a refund from the Fund as per the prescribed rules.
Disgorged amount means money recovered or disposed of through court-ordered disgorgement.
125(4).
Any person entitled to receive any amount credited to the Fund may apply to the IEPF Authority for refund or repayment of such amount.
125(5).
The Central Government shall, by notification, constitute an authority to administer the Fund.
It will consist of the following people who will be appointed by the Central Government.
A Chairperson.
Up to seven members.
A Chief Executive Officer (CEO).
125(6).
The rules will specify the manner of administration, appointment process, and conduct of meetings of the authority.
125(7).
The Central Government will provide the authority with the required offices, staff, officers, and other resources as per the prescribed rules.
125(8).
The authority shall administer the Fund and maintain separate accounts and records in the prescribed form.
This is done after consultation with the Comptroller and Auditor-General of India (CAG).
125(9).
The authority is empowered to spend money from the Fund to carry out the purposes mentioned in 125(3).
This includes spending money on investor education or refund of unclaimed amounts.
125(10).
The CAG shall audit the accounts of the Fund at specified intervals.
The audited accounts and report shall be forwarded annually by the authority to the Central Government.
125(11).
The authority shall prepare an annual report each financial year, showing all its activities.
The report and the CAG’s audit report shall be submitted to the Central Government, which shall lay them before both Houses of Parliament.
Section 126. Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares.
When a share transfer is in process and the transfer instrument has been submitted to the company but the transfer has not yet been registered in the company’s record then the following rules apply:
126(a).
The dividend on such shares cannot be directly paid to either the transferor (seller) or transferee (buyer) while the transfer is pending.
The company must transfer that dividend amount to the Unpaid Dividend Account under Section 124.
This ensures that the dividend is safely kept until the ownership is officially updated.
However, if the registered shareholder (whose name is still on record) gives a written authorisation, the company may pay the dividend directly to the transferee.
126(b).
The company must keep in abeyance (put on hold) the following rights related to such shares until the transfer is registered:
Any rights issue offered under Section 62(1)(a) (where existing shareholders are offered new shares).
Any bonus shares issued under the first proviso to Section 123(5).
Therefore , until the share transfer is formally recorded, the new buyer cannot claim dividends, rights shares, or bonus shares, and the company must temporarily suspend these entitlements to avoid disputes between the transferor and transferee.
Section 127. Punishment for failure to distribute dividends.
127.
If a company declares a dividend but fails to pay it or post the dividend warrant (payment instrument) within 30 days from the date of declaration, the following consequences arise:
Every director who is knowingly a party to the default (aware of and responsible for the failure) shall be:
Punishable with imprisonment up to two years, and
Liable to pay a fine of not less than ₹1,000 per day for every day during which the default continues.
The company itself shall also be liable to pay simple interest at 18% per annum on the amount of unpaid dividend, calculated for the period of default.
Exception.
No offence is deemed to have been committed if the non-payment of dividend was due to any of the following valid reasons:
(a). The payment was prevented by the operation of law for example, due to a court order or government restriction.
(b). The shareholder gave specific directions for payment but the company was unable to comply and informed the shareholder about it.
(c). There is a dispute regarding the ownership of shares or the right to receive the dividend.
(d). The company lawfully adjusted the dividend against any amount owed by the shareholder to the company such as unpaid dues or calls.
(e). For any other valid reason, the dividend could not be paid or the warrant could not be posted within 30 days, & the failure was not due to the company’s fault.
