DIVIDENDS – RULES REGARDING TRANSFER TO RESERVES.
Dividends here refer to dividends declared and paid to
1.] Equity Shareholders,
2.] Part of Dividend which preferential shareholders are entitled to receive after receiving their fixed Dividend.
Dividends can be distributed out of
1.] Current Year’s Profits or
2.] Past Profits.
2.] Past Profits.
1.] Dividends out of Current Year’s Profits:
Companies cannot declare or pay dividends for any financial year without transferring profits of that year to reserves as prescribed under Companies (Transfer of Profits to Reserves) Rules, 1976.
The Percentage of Profits required to transfer are as follows:
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Rate of dividend
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Percentage of Profit required to be transferred
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Upto 10%
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Nil
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Exceeding 10% but including 12.5%
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Minimum 2.5%
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Exceeding 12.5% but including 15%
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Minimum 5%
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Exceeding 15% but including 20%
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Minimum 7.5%
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Above 20%
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Not less than 10%
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Rate of Dividend= Rate of Proposed Dividend on paid up capital.
A company is free to transfer any amount above the prescribed slabs to reserves, provided the rate of transfer should not exceed 10%.
Transfer should be made to free reserves.
Free Reserves are all reserves excluding Capital Reserve, development Rebate Reserve and any reserve arising due to revaluation of assets and liabilities.
Determination of Profit available for Transfers:
Profit available for Transfers= Profit after Tax – Transfers made to Statutory Development Reserves.
Transfer to Reserves exceeding 10%
10% is the maximum ceiling on transfer to reserves for declaration of dividend. But in case a company wants to transfer more than 10%, it can do so by following the additional conditions laid down by the Companies (Transfer of Profits to reserves) Rules, 1976.
If Current Years PAT is less than or equal to 80% of average PAT for immediately preceding 2 years, there is no need to maintain the aforesaid conditions.
The Company can make transfers to reserve more than 10% without any restrictions.
2.] Dividends out of Past Profits:
In the event of inadequacy or absence of profits in any year, a company can declare dividend out of the accumulated profits earned in the previous years and transferred to reserves.
This can be done only in accordance with the rules prescribed by the Companies (Declaration of Dividends out of Reserves) Rules, 1975 which are as follows:
1.] Ceiling on withdrawal from Reserves:
The amount to be withdrawn from reserves must not exceed 10% of the Paid up Capital and Free Reserves. This amount should be first utilised for writing off losses of the Current Financial year only after which it will be available for declaration of dividend.
2.] Balance of Free Reserves:
Balance of Reserves after such withdrawal shall not fall below 15% of the Paid Up Capital.
For eg: If Balance of free Reserves is 150 Lakhs and Paid Up Capital is 200 Lakhs, the amount of withdrawal should not be more than 120 Lakhs. (200 Lakhs * 15% = 30 Lakhs.) To ensure that the balance in reserves is more than 30 Lakhs we can withdraw only 120 Lakhs.
3.] Rate of Dividend:
The rate of Dividend should be
(i) Average rate of Dividend declared by a company in immediately preceding 5 Financial years or
(ii) 10%
Whichever is lower.