Ascertainment of amount available for payment/distribution as Dividend.
As per Companies Act
1.0 Out of profits
1.1 Dividend should be paid out of the profit of the company for the financial year or out of profit(s) for the previous financial year(s) which have not been transferred to reserves, or out of both, only after providing for depreciation for the year and arrears of depreciation, if any.
1.2 Loss of Previous year to be settled off:
Before declaring Dividend out of profit for the year, any loss for the previous year(s) or the amount of depreciation for the previous year(s), whichever is less, should be set off against such profit.
1.3 % of profit transferred to reserve
No Dividend should be declared unless the prescribed percentage of profit is transferred to reserves in accordance with the Companies (Transfer of Profits to Reserves) Rules, 1975.
1.4 Interim Dividend,
if declared, is payable out of estimated profit for the period for which Interim Dividend is to be declared, after taking into account depreciation for the full year and arrears of depreciation, Dividend at the contracted rate on preference shares, if any, appropriations and transfers to statutory reserves, taxation, and the provisions of the Companies (Transfer of Profits to Reserves) Rules, 1975.
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2.0 Out of Reserves
2.1 In a year in which the profits are inadequate or there are no profits, the company may declare and pay Dividend out of Free Reserves after making provision for depreciation and subject to the provisions of the Companies (Declaration of Dividend out of Reserves) Rules, 1975.
The Companies (Declaration of Dividend out of Reserves) Rules, 1975, specify the maximum amount which can be paid out of Free Reserves as Dividend on equity shares. The Act provides that if a company intends to declare a Dividend which is not in accordance with the aforesaid Rules, the company should seek prior approval of the Central Government.
2.2 The maximum rate of Dividend that may be declared from reserves in terms of the Companies Declaration of Dividend out of Reserves) Rules, 1975, is ten per cent of paid-up capital.
While the Companies (Transfer of Profits to Reserves) Rules, 1975 become applicable only in respect of declaration of Dividend at a rate exceeding ten per cent.
Hence, any company, which draws from its reserves to pay Dividend, will not be required to make any appropriation to reserves in terms of the Companies (Transfer of Profits to Reserves) Rules, 1975 since the Dividend declared by it from reserves cannot exceed ten per cent.
2.3 Interim Dividend should not be declared out of reserves. While final Dividend may be paid out of Free Reserves, no Interim Dividend should be paid, in the event of a loss or inadequacy of profits, by transfers out of any reserves.
3.0 Payment of Dividend
3.1 Dividend should be paid within 30 daysof declaration.
6.0 Unpaid Dividend
6.1 The amount of Dividend which remains unpaid or unclaimed after 30 days from the date of declaration should be transferred to a special Dividend account, to be called ‘Unpaid Dividend Account’ of the company, within seven days from the date of expiry of the thirty days period provided for payment of Dividend.
7. Revocation of Dividend
7.1 Dividend, once declared, becomes a debt and should not be revoked.
8.0 Companies (Transfer of Profits to Reserves) Rules, I975
Percentage of profits to be transferred to reserves
8.1 No dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Sub-section (2) of Section 205 of the Act, except after the transfer to the reserves of the company of a percentage of its profits for that year as specified below:
Dividend proposed | Amount to be transferred to the reserves |
exceeds 10 % but not 12.5 % of the paid-up capital | shall not be less than 2.5 % of the current profits |
exceeds 12.5 % but does not exceed 15 % of the paid-up | shall not to be less than 5 % of the current profits |
exceeds 15 % but does not exceed 20 % of the paid-up capital | shall not be less than 7.5 % of the current profits |
exceeds 20 % of the paid-up capital | shall not be less than 10 % of the current profits |
9.0 Companies (Declaration of Dividend out of Reserves) Rules, 1975
Declaration of dividend out of reserves
9.1 In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that—
i. The rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or 10% of its paid-up capital, whichever is less;
ii. The total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to one-tenth of the sum of its paid-up capital and free reserves; and
iii. The balance of reserves after such drawal shall not fall below 15% of its paid-up share capital