Declaration and Payment of Dividend Rules

Rule 2. Definitions.

(1).

• In these rules, unless the context otherwise specifies:

• (a). Act means the Companies Act, 2013.

• (b). Section means a section of the Companies Act, 2013.

(2).

• If any word or expression appears in these rules but is not defined here, but is defined in either:

  1. The Companies Act,

  2. The Companies (Specification of Definitions Details) Rules, 2014, then:

• That word or expression will carry the same meaning as given in the Act or those Rules.

Rule 3. Declaration of dividend out of reserves.

• A company may declare a dividend out of free reserves when there is inadequate or no profit.

• A company must meet all the following conditions if they are declaring dividends out of free reserves:

(1).

• The rate of dividend declared must not exceed the average dividend rate declared in the three immediately preceding financial years.

• Exception: This rule does not apply if the company did not declare any dividend in all three of those previous years.

(2).

• The total amount withdrawn from accumulated free reserves must not exceed 10% of the company’s paid-up share capital + free reserves, as shown in the latest audited financial statements.

  1. If a company’s paid-up share capital is ₹100 crore and its free reserves are ₹50 crore, the total is ₹150 crore.

  2. The maximum amount that can be withdrawn from free reserves is 10% of ₹150 crore, which is ₹15 cror

(3).

• The amount withdrawn from reserves must first be used to set off the losses of the current financial year before paying any dividend on equity shares.

(4).

• After withdrawing money from reserves for the dividend, the remaining balance of reserves must not fall below 15% of the company’s paid-up share capital, as per the latest audited financial statement.

  1. Suppose a company has a paid-up share capital of ₹100 crore.

  2. Its free reserves (as per the latest audited balance sheet) are ₹30 crore.

  3. The company decides to withdraw ₹10 crore from free reserves to pay dividends.

  4. After withdrawal:

     1. Remaining free reserves = ₹30 crore – ₹10 crore = ₹20 crore.

     2. 15% of paid-up share capital = 15% of ₹100 crore = ₹15 crore.

     3. Since the remaining reserves (₹20 crore) are greater than ₹15 crore, the company complies with the law. If the remaining reserves had fallen below ₹15 crore, the withdrawal would not have been allowed.