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LAW ON CAPITAL
MARKETS

CERTIFICATE COURSE

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MODULE - 4

INTRODUCTION TO DIVIDEND

4.1 WHAT IS DIVIDEND? the amount they have paid-up on the shares held by
them.i Thus, dividend is the return that a shareholder
The word dividend is derived from the Latin word gets on the paid-up share capital. Section 2(35) of the
dividendum, which means ‘something to be divided.’ Companies Act, 2013 defines dividend to include any
It is a part of the profit of a company that is interim dividend.
distributed among the shareholders in proportion of
4.2 MEANING AND NATURE
DID YOU KNOW?
In simple terms, dividend is a share of the profits of a
The payment of dividends primarily governed by company given to its shareholder. It is usually paid
two fundamental principles. after the final accounts of the company have been
prepared and the amount of profit that can be
i. Dividend should never be paid out of distributed is available. It is pertinent to note that
capital. dividend can be paid only out of the profits of the
company. It can be paid on both equity and
ii. Dividend should only be paid out of profits. preference shares. Dividend on preference shares is
The Companies Act, 2013 permits dividend to be paid before the dividend on equity shares due to the
paid out of the following sources: former’s nature. Dividend may be paid in the form of
cash or non-cash. Generally, dividends are paid in
i. Profits of the company in question for the cash. But in the event that a company does not pay
year for which dividends are to be paid. dividend in cash, it issues bonus shares to the existing
shareholders.
ii. Undistributed profits of the previous
financial years. The manner of declaration of dividend can be found
in the Companies Act, 2013 and the Articles of
iii. Money provided by the Central or State
Government for the payment of dividend in
pursuance of a guarantee by the
Government concerned. (Section 123).

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Association of the company. Shareholders cannot DID YOU KNOW?
claim dividend from the company as a matter of right
provided the company has not declared dividend in The provisions of the Companies Act, 1956, in
its general meeting. However, if the company has relation to transfer of specified percentage of profits
declared so, only then can shareholders raise a claim. to reserves have been dispensed with. Instead, as
per the Companies Act, 2013, companies are free to
4.3 RESERVE FUND transfer such amounts to reserves as it may deem
fit.
Article 82 of Table F of the Companies Act, 2013
empowers directors before recommending any In case of inadequacy of profits in a particular year,
dividend, to set aside out of the profits any sum as the company may declare dividend out of the free
“reserve fund”. Such fund is applicable at the reserves (subject to fulfilment of certain
discretion of directors for any purposes to which conditions).
profits may be applied. Such reserve fund may be
used to equalize dividends, or it can be invested in In case, any company incurs any loss during the
business or it can be held in the form of other current financial year up to the end of the quarter
investments. immediately preceding the date of the interim
dividend declaration, it cannot pay interim dividend
Even if there is no express provision of such kind in at a rate higher than the average dividends declared
the Articles of Association of the Company, a reserve during the immediately preceding three financial
fund can be created. Thus “reserve fund” would mean years.
such reserves which as per the latest audited balance
sheet are available for distribution as dividend. different from dividend in various ways. While
interest is the amount paid by a company on
4.4 DIFFERENCE BETWEEN DIVIDEND AND borrowed funds, dividend is part of the profits made
INTEREST by a company that is distributed among the
shareholders. In case of interest, it is irrelevant if the
Interest is the amount of money that is paid to a company has incurred profit or not. Interest has to be
lender at regular intervals for utilising the money that mandatorily paid. On the other hand, declaration of
the lender given to the company. It is charged at a
particular rate known as the rate of interest. It is

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dividend depends upon the amount of profit made by issues scrip dividend. These are notes that
a company and is voluntary. Interest is essentially a promise to pay the dividend at a later date.
debt. Dividend becomes a debt only after it has been ▪ Bond dividend: It is similar to scrip dividend.
declared by the Board of Directors of the company. Here, a company issues bonds with a promise
The interest rate remains fixed. The rate of dividend, to pay the dividend at a future date. The main
though fixed for preference shares, varies in case of difference between a scrip dividend and a
equity shares. bond dividend is that the latter is issued for a
longer period of time and thus has a later
4.5 TYPES OF DIVIDEND maturity date. Bond dividend carries an
interest. Such type of dividend is not popular
Conceptually, dividend may be divided into the in India.
following types: ▪ Property dividend: In this case, a company
pays the dividend in the form of superfluous
▪ Cash dividend: It is the most popular type of assets-these may be the company’s products
dividend where shareholders receive or securities of its wholly owned subsidiaries.
cheques for a certain amount that is due to Like bond dividend, this kind of dividend is not
them. issued in India.

▪ Stock dividend: in this case, the company While the above types are conceptual, the statutory
issues bonus shares to the shareholders in types of dividend given under the Companies Act,
proportion to the number of shares held by 2013 include final dividend and interim dividend.
them. Issue of such bonus shares does not
affect their total shareholding. It only results ▪ Final dividend: Final dividend is declared at
in shareholders holding an increased number the annual general meeting of the company.
of shares. Issue of such dividend is done Once declared, it becomes a debt of the
according to the procedure prescribed for company and can be enforced against it. The
issuing bonus shares and the relevant rules Board of Directors takes the decision to
and regulations. declare final dividend. If it decides to declare
such dividend, it has to be recorded in the
▪ Scrip dividend: Such dividend is issued in the Board’s report as per section 134 of the
form of a scrip or promissory note. When a
company is unable to issue dividend in cash, it

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Companies Act, 2013. It should mention the 123(1) states that dividend can be declared and paid
amount recommended by the Board to be only out of the profits of the company or out of money
paid as dividend.ii provided by the Central or state government for the
▪ Interim dividend: This dividend is declared payment of dividend in pursuance of a guarantee
between two annual general meetings of the given by that government. The clause reads thus:
company. The Board of Directors is
empowered under section 123(3) of the “(1) No dividend shall be declared or paid by a
Companies Act, 2013 to declare interim company for any financial year except—
dividend. The relevant clause of the section (a) out of the profits of the company for that
states: year arrived at after providing for depreciation
in accordance with the provisions of sub-
“S 123(3)- The Board of Directors of a company section (2), or out of the profits of the company
may declare interim dividend during any for any previous financial year or years arrived
financial year out of the surplus in the profit at after providing for depreciation in
and loss account and out of profits of the accordance with the provisions of that sub-
financial year in which such interim dividend is section and remaining undistributed, or out of
sought to be declared: both; or
(b) out of money provided by the Central
Provided that in case the company has incurred Government or a State Government for the
loss during the current financial year up to the payment of dividend by the company in
end of the quarter immediately preceding the pursuance of a guarantee given by that
date of declaration of interim dividend, such Government.”
interim dividend shall not be declared at a rate
higher than the average dividends declared by Since dividend is given out of the company’s profit,
the company during the immediately preceding before declaring dividend in a financial year, a
three financial years.“ company may transfer a certain percentage of its
profits of that year to its reserves for meeting the
4.6 SOURCES OF DIVIDEND requirement of paying dividend.iii In case there are
inadequate or no profits made in that financial year,
Chapter VIII of the Companies Act, 2013 discusses the company may choose to declare dividend out of
about declaration and payment of dividend. Section

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the accumulated profits of previous years and The dividend, including interim dividend, has to be
transfer them to its reserves. However, this must be deposited in a scheduled bank in a separate account
done according to the rules prescribed for the same. within a period of five days from the date of
These are the Companies (Declaration and Payment declaration of the dividend. It may be paid by cheque
of Dividend) Rules, 2014. Rule 3 of these rules or warrant or electronic mode to the shareholders
prescribes the conditions that need to be fulfilled if a that are entitled to it. Section 124 of the Companies
company wishes to pay dividend out of its surplus Act, 2013 states that in case the dividend is not paid
profits of previous years. These are given below: or claimed within thirty days, the company shall
transfer the dividend to an ‘unpaid dividend account’
“(1) The rate of dividend declared shall not in a scheduled bank within seven days. If this dividend
exceed the average of the rates at which remains unpaid or unclaimed for seven years from the
dividend was declared by it in the three years date of such transfer, it shall be transferred by the
immediately preceding that year: company to the Investor Education and Protection
Provided that this sub-rule shall not apply to a Fund established by the Central Government.
company, which has not declared any dividend
in each of the three preceding financial year. DID YOU KNOW?
(2) The total amount to be drawn from such
accumulated profits shall not exceed one-tenth Wherein any instrument of transfer of shares has
of the sum of its paid-up share capital and free been delivered to the company for registration,
reserves as appearing in the latest audited the company in question has, pending
financial statement. registration, to transfer the dividend on such
(3) The amount so drawn shall first be utilised shares to the Unpaid Dividend Account unless
to set off the losses incurred in the financial the company has been authorized to do so by the
year in which dividend is declared before any registered holder in writing to pay such dividend
dividend in respect of equity shares is declared. to the transferee specified in the instrument.
(4) The balance of reserves after such Concurrently, any offer of right shares and bonus
withdrawal shall not fall below fifteen per cent shares has to be kept in abeyance.
of its paid up share capital as appearing in the
latest audited financial statement.”

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4.7 OFFENCES AND PENALTIES punishable with imprisonment which may extend to
two years and will also be liable to a fine which shall
If a company fails to comply with the provisions of be a minimum of one thousand rupees for every day
section 124, it shall be liable to a minimum fine of five during which the default occurs. The company shall
lakh rupees, which may extend to twenty-five lakh be liable to pay simple interest at the rate of eighteen
rupees. Every officer of the company who is percent per annum during the period for which the
contravenes these provisions shall be liable to a default continues. However, there are certain
minimum fine of one lakh rupees, which may extend exceptions to the offence. These are:
to five lakh rupees.
“(a) where the dividend could not be paid by
DID YOU KNOW? reason of the operation of any law;
(b) where a shareholder has given directions to
Dividend has to be paid in cash. Payment in respect the company regarding the payment of the
of any share should be made to the registered dividend and those directions cannot be
holder or to his order or to his banker. complied with and the same has been
communicated to him;
The rate at which the dividend is to be paid maybe (c) where there is a dispute regarding the right
regulated, if the Articles of Association (AoA) of to receive the dividend;
the company permit so, according to the amount (d) where the dividend has been lawfully
paid up on each share where more amount has been adjusted by the company against any sum due
paid up on some shares than on others. to it from
the shareholder; or
The penalty for failure to pay dividend is given under
section 127. If a company has declared dividend but (e) where, for any other reason, the failure to
fails to pay it within thirty days from such declaration, pay the dividend or to post the warrant within
then every director of the company who knowingly the period under this section was not due to any
defaults on the payment of dividend will be default on the part of the company.”

i Companies Act, 2013, s 51. iii Ibid, s 123(1), proviso.
ii Ibid, s 134(3)(k).

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