DIVIDENDS UNDER COMPANIES ACT, 2013 (TYPES AND PAYMENT PROCEDURES)

Gaurav Shanker    |   

The term “Dividend” has been defined under the Companies Act 2013 [1]as “any interim dividend”. It is an inclusive and not an exhaustive definition. As, per the generally accepted definition “dividend” means the profit of a company which is not retained in the business and is distributed among the shareholders in proportion to the amount paid up on the shares held by them. Dividends are generally payable in a financial year when the accounts have been prepared and there is availability of distributable profits. Dividends are payable only if it declared by the company at its annual general meeting on recommendation of board of directors. Sometimes dividends are also paid between two annual general meetings and not annually. Such a dividend is termed as “Interim Dividend”.

It is to be noted that certain companies having incorporated under of the Companies Act, 2013 are prohibited from paying dividends to its members and rather apply the profits earned by it during a financial year in promotion of its objects[2]. There are various methods of payment of dividends[3]:

  1. From the profits of the current year after providing for depreciation ;or
  2. From the profits of any previous financial year or years after providing for depreciation for those years ;or
  3. Out of the money provided by the Central or State government for payment of dividend, in pursuance of guarantee given by the company, if any.

 

Provisions for declaration of dividend under the Companies Act 2013:

The Companies Act 2013 permits companies to pay dividends proportionately in accordance to amount paid up on each share by each shareholder[4]. The board of directors may decide to pay dividends on pro rata basis if the equity shares are not equally paid up. However, in case of preference shares, dividends are paid at a fixed rate. An interim dividend is declared by the board of directors whereas annual dividends are declared by the members of the company at its annual general meeting only if the same is recommended by the board of directors. No dividend shall be declared or paid by a company except out of the profits of the company arrived at after providing for depreciation in accordance with Schedule II to the Companies Act 2013.

A company if it so desires may transfer such percentage of profits as it thinks fit to its reserves before declaration of any dividend. In case there is any inadequacy or absence of profits in any year financial year, a company may declare dividends out of profits accumulated in any previous financial years and transferred to reserves subject to accompanying Companies (Declaration and Payment of Dividend) Rules 2014.

 

Procedure for declaration and payment of dividends in case of Unlisted Companies:

  1. In case of unlisted companies a notice is to be issued for holding a meeting of the board of directors to consider the matter. The notice to be issued must state the time, date, venue of the meeting and the business to be transacted and the same must be sent to all the directors for the time being in India at their usual address.
  2. A board meeting is also to be held for passing the resolution as regards approval of final accounts of the company for the year ending. In the board meeting, quantum of final dividend to be declared at the next annual general meeting is to be recommended and the source of payment thereof. Such amount may be transferred from the current profits to the reserves as the board may deem fit.
  3. The date, time, venue for holding the annual general meeting for declaring final dividend is also to be discussed at the board meeting. The notice is to be approved as regards holding of annual general meeting and the company secretary is authorised to issue notice regarding the same to all members, directors and other persons on behalf of the board of directors.
  4. At the annual general meeting, an ordinary resolution is to be passed for declaring the payment of dividend to the shareholders as per board recommendation. The shareholders cannot declare the dividend at a rate higher than the one recommended by the board, however they can declare a dividend at a lower rate.
  5. Once a dividend is declared at the annual general meeting, a company cannot declare further dividend at the subsequent extraordinary general meeting in the same financial year.
  6. The amount of dividend (final as well as interim) shall have to be deposited in a separate bank account within 5 days from the date of its declaration.
  7. The dividend so declared has to be paid within 30 days from the date of declaration.

In case where dividend declared is not paid or claimed within the specified period from the date of its declaration, the total amount of unclaimed or unpaid dividend is to be deposited in a separate bank account called “Unpaid Dividend Account” opened in a scheduled bank within 7 days from the date of expiry of 30 days. The unclaimed amounts is to be identified separately and a statement is to be furnished and uploaded on company’s own website or any other website as may be specified by the Government in such form as may be prescribed containing the following[5]:

(a) names and last known addresses of the persons entitled to receive the sum;

(b) nature of amount;

(c) amount to which each person is entitled;

The company shall have to prepare the above statement within a period of 90 days of making any transfer to unpaid dividend account.

  1. Any amount transferred to unpaid dividend account if remains unpaid or unclaimed for a period of 7 years from the date of transfer, shall be transferred by the company to Investor Education and Protection Fund. The appropriate authority shall issue a receipt to the company validating such transfer. In case where a credit is made of the unpaid or unclaimed dividend to the IEPF, the company shall also transfer all the shares in the name of IEPF, in respect of which unpaid amount has already been transferred and any lawful claimant to such shares/dividends shall be entitled to claim transfer of such shares/dividends from IEPF in accordance with the procedure prescribed by the Central Government.

It is to be noted that where a company defaults in payment of dividend within 30 days from the date of declaration, any director who is knowingly a party to the default, shall be punishable with an imprisonment which may extend to 2 years and a fine of Rs 1000/- for every day during which the default continues and the company in default shall be liable to pay interest @18%p.a during the period for which default continues[6].

Subsequently, if the company delays in transferring the unclaimed and unpaid amount to the unpaid dividend account, it shall pay an interest @ 12%p.a for the period till the amount is transferred in the respective account and the interest accruing on such amount shall ensure benefit to the members in proportion to the amount remaining unpaid to them[7]. It is also to be ensured that dividend tax is paid to the tax authorities within the prescribed time. A dividend is either payable in cash or cheque or through post directed to the registered office of the shareholder who is entitled to receive dividends or to his order or in any electronic mode sent to his banker[8].

In the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus reserves, provided the rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. However, this condition shall not apply to a company, which has not declared any dividend in each of the three preceding financial years. A notice is to be given to all the directors of the company for holding a board meeting. In the meeting, decision is to be taken to declare dividend out of company’s reserves because of inadequacy or absence of profits and also fix the date, time and place of the annual general meeting[9]. The company secretary or any competent person is to be authorised if company does not have a company secretary to issue the notice of the annual general meeting on behalf of the board of directors of the company to all the members, directors and auditors of the company and other persons entitled to receive the same at their usual address.

 

Declaration of Interim Dividend and the procedural formalities.

Before declaring interim dividend it is to be verified from the company’s Articles of Association, whether it authorises directors to declare interim dividend, if not the Articles of Association has to be altered accordingly. The notice to hold the board meeting is to be given and the notice must state the date, time and venue for holding the meeting and must be sent to all the directors for the time being in India[10]. At the board meeting, the directors before declaring any interim dividend must consider in details the financial position of the company and satisfy themselves that the company is in a position to declare interim dividend out of its surplus profits. It is to be noted that in case where a company has incurred loss in a financial year up to the end of quarter immediately preceding the date of declaration of dividend, the rate of interim dividend shall be not higher than the average of dividends declared by the company in the immediately preceding three financial years.[11]

The directors of a company may be held personally liable in the event of wrong declaration of an interim dividend. Therefore, it is prudent on the part of the directors to have a pro-forma profit and loss account and balance sheet of the company prepared up to the latest possible date of the financial year in respect of which interim dividend is proposed to be declared and provision must be made for all the working expenses and depreciation for the whole year.

 

Interim Dividend on Preference shares

Dividend on preference shares is generally paid annually at a certain rate, however such a dividend can be paid more than once in a year in proportion to the period of completion of current financial year over the whole financial year, by declaring it as an interim dividend. The interim dividend on preference shares is to be paid to the registered shareholders whose names appear in the register as on the commencement of closure of share transfer books by passing a suitable resolution. The interim dividend so declared is to be rounded off to a nearest rupee and if such amount contains a part which is more than fifty paise it should be rounded off to a rupee and if it is less than fifty paise it should be ignored.

An “Interim Dividend Account” is to be opened with the bank as resolved by the board and the amount of interim dividend payable is to be deposited in the respective account within five days(5) of the date of declaration of the same.

 

Procedure for transfer of shares in respect of which Unclaimed or Unpaid Dividend has been transferred to IEPF       :

The Companies Act 2013 provides that all shares in respect of which unpaid or unclaimed dividend has been transferred to Investor Education and Protection Fund (IEPF), shall also be transferred by the company to the IEPF Suspense account (name of the company) with one of the depository participants as may be notified by the Fund within a period of 30 days of such shares becoming due to be transferred to fund[12] .

For the purpose of affecting the transfer where the shares are held in physical form:

  1. The company secretary or the person authorised by the board shall make an application on behalf of the concerned shareholders, to the company, for the issue of duplicate share certificates.
  2. On receipt of the application, a duplicate certificate for each such shareholder shall be issued and it shall be stated on the face of it and be recorded in the Register maintained for the purpose, that the duplicate certificate is “Issued in lieu of share certificate No..... for purpose of transfer to IEPF”. Further, the word “duplicate” shall be stamped or punched in bold letters across the face of the share certificate.
  3. After issue of the duplicate share certificates, the company secretary or the person authorised by the board, shall sign the necessary securities transfer form in prescribed form, for transferring the shares in favour of the Fund.
  4. The voting rights on shares transferred to the Fund shall remain frozen until the rightful owner claims the shares.
  5. All benefits accruing on such shares e.g bonus shares, split etc. shall also be credited to IEPF suspense account (name of the company).
  6. In case where company is getting delisted, Investor Education and Protection Fund (IEPF) shall surrender shares on behalf of the shareholders in accordance with the SEBI(Delisting of equity share regulations, 2009) and the proceeds realised shall be credited to the account of the shareholder.
  7. Any further dividend received by IEPF on such shares shall be credited to respective accounts of the shareholders maintained by IEPF.

 

Claiming of Unpaid/Unclaimed Dividend:

The claimant is required to make an application in prescribed form under his own signature or through a person holding a valid power of attorney granted by him. The application is to be accompanied by the following documents:

  1. Indemnity bond in prescribed format.
  2. An appropriate authority may on its satisfaction about the title to the money, allow the claim of up to 5000/- rupees without Indemnity Bond.
  3. Documents in support of the claim i.e. dividend warrant / letter issued by the company etc.
  4. A stamped advance receipt bearing the signature of the claimant and two witnesses.
  5. Proof of Identity and Proof of Address.
  6. In case of deceased person, legal representative shall furnish a succession certificate/probate/letter of administration.

On receipt of the application the authority shall verify and certify whether the claimant is entitled to the money claimed by him. After certification of the title of the claimant to the amount claimed, the authority shall issue a payment order and deliver the cheque in favour of the claimant.

 

Claim for shares transferred to IEPF.

The Act provides that shares transferred in the name of IEPF(Investor Education and Protection Fund) can be claimed back by the lawful claimant, by following the below mentioned procedure[13]:

  1. The claimant should file his/her claim before the Fund.
  2. The Fund shall refer the claim to the respective company for verification of details of the     claim including the identity of claimant and verification of numbers of shares.
  3. After the verification, the Fund shall either credit the shares which are lying with depository participant in IEPF suspense account to the demat account of the claimant to the extent of his entitlement and pay the unpaid dividend or in case of physical certificate, transfer the shares in favour of the claimant by issuing a share certificate and pay the unpaid dividend.

 

Procedure for issue of Dividends in case of listed companies:

In case of listed companies, the relevant stock exchange where the securities of the company are listed is to be notified at least two working days in advance of the date of meeting of its board of directors at which the recommendation of final dividend is to be considered and immediately after the board meeting (within 15 minutes) intimation is to be given to the stock exchanges where the securities of the company are listed as regards declaration of the final dividend either by phone, fax , telegram or email. A board meeting is to be held for approval of final accounts of the company for the year ended. The quantum of final dividend to be declared at the annual general meeting is also to be ascertained.

The date of closure of the register of members and share transfer register of the company as per the requirements of listing agreements signed by the company with the stock exchanges where the securities are listed is to be determined. In the case of listed companies, the date of commencement

of closure of the transfer books should not be on a day following a holiday.The date so fixed should not clash with the clearance programme in the stock exchanges. It is always advisable to consult in advance the regional stock exchange and then fix the date for closure of books. The required percentage of profits as decided by the board is to be transferred to company’s reserves.

In case of listed companies, a notice of book closure is to be published in a newspaper circulating in a district in which the registered office of the company is situated at least seven days (7) before the date of commencement of book closure.

 

Further:

  1. The copies of the notice stating the date of closure of the register of transfers or record date and specifying the purpose for which the register is closed or the record date is fixed, is to be send to other recognised stock exchanges.
  2. Time gap between book closure and record date should be at least 30 days.
  3. The dividend is to be declared and disclosed on per share basis only.
  4. The amount of dividend as recommended by the board of directors should be shown in the director’s report.  
  5. A board meeting for approving registration of transfer/ transmission of the shares of the company is to be held. In compliance with the board resolution, transfer/transmission of shares lodged with the company prior to the date of commencement of the closure of the register of members shall be done and the share certificates of the transferees after endorsing the shares in their names shall be mailed to them as prescribed.
  6. In case where the company is listed, then for payment of dividend it has to mandatorily use, either directly or through its Registrars to an Issue and Share Transfer Agents (RTI & STA), any Reserve Bank of India approved electronic mode of payment such as Electronic Clearing Services (ECS), National Electronic Fund Transfer (NEFT), etc. In order to enable the usage of electronic payment instruments, the company (or its Registrar & Share Transfer Agent) shall maintain requisite bank details of its investors as under:
  1. For investors that hold securities in demat mode, company or its RTI & STA shall seek relevant bank details from the depositories.
  2. For investors that hold physical share/debenture certificates, company shall take necessary steps to maintain updated bank details of the investors at its end.
  3. In cases where either the bank details such as MICR, IFSC etc     that are required for making electronic payment is not available or the electronic payment instructions have failed or have been rejected by the bank, the company may use physical payment instruments for making cash payments to the investors. The company shall mandatorily print the bank details of the investors on such payment instruments. 

 

Tax Implications on Dividends:

Taxation on dividend income under the Income Tax Act 1961 is charged under the head “Income from other sources” and so far has been a fascinating journey with constant twists and turns. The taxation on dividends has been subjected to various amendments brought by different Finance Act’s over the years.

The Income tax 1961 has levied tax on both the recipient of the dividend and on the company distributing the dividend over the years:

 

Tax levied at the hands of the recipient/shareholders.

As per the Finance Act 2016, a new section has been inserted under the Income Tax Act 1961 for the purpose of levy of tax on the dividend received by the shareholders. This section states that in case where the amount of dividend received(even if it is declared or distributed by any domestic company or companies) by an assessee being an individual, HUF or a firm resident in India in any financial year exceeds rupees ten lacs, such dividend income shall be taxed at the rate of ten(10) per cent [14]. However, it is to be noted that no deduction in respect of any expenditure or allowance or set off of losses shall be allowed to the assessee under any of the provisions of this Act for computing the income by way of dividend.

 

Tax levied at the hands of the Company distributing the Dividend.

The Income Tax Act 1961, provides that where an amount is declared, distributed or paid by way of dividends by a domestic company, whether out of current or accumulated profits, such an amount of dividend shall be taxed at a flat rate of 15% plus 10% surcharge (irrespective of the amount ) plus EC and SHEC. Hence, the total rate of effective tax 16.995%.Such tax shall be required to be paid within 14 days from the date of declaration or payment or distribution of dividend (whichever is earlier). The dividend mentioned above includes interim dividend as well. [15]

It is to be noted that distributed profits tax or corporate dividend tax (CDT) shall not be an allowable expenditure under IT Act 1961 and dividend tax paid cannot be claimed as credit/deduction by the company or any other person. In case, where a dividend is received by a holding company from a subsidiary company (which is a domestic company) and such subsidiary has paid dividend tax , then in such case the amount of  such dividend shall be allowed as deduction.

 

Tax on dividends received from Foreign Company.

Dividend received from a foreign company is charged to tax in India as well as in the country to which the foreign company belongs. Normally, the dividend received from a foreign company by a resident tax payer (Indian Company) is chargeable at the rate of 30% (plus surcharge and cess as applicable). However, the Income Tax Act provides a concessional rate of tax in case of dividend received by an Indian company from a foreign company in which such Indian company holds 26% or more in the nominal value of equity share capital @15% (plus surcharge and cess as applicable). It is to be noted that no deduction on account of any expenditure or allowance is allowable from the dividend covered under this section. Hence, the gross amount of dividend (without any deductions) is chargeable at the rate of 15%. [16]

 

Consequences of Non payment of Dividend Tax.

  1. Interest @ 1% per month or part thereof is levied for the period commencing from the date immediately after the specified date on which the tax was payable, upto the date of actual payment under the Income Tax Act 1961[17].
  2. Penalty under the Act equal to the amount of tax which a person fails to pay[18].
  3. Rigorous imprisonment of three months which may be extended to seven years and fine imposable under[19].
  4. In case a Company fails to pay the tax, it shall be treated as an assessee in default and provisions for collection and recovery shall apply.
  5. However, where the Company proves that there was reasonable cause for such failure or default, no penalty is leviable.

[1] Section 2(35) of the Companies Act 2013.

[2] Section 8 of the Companies Act 2013.

[3] Section 123(1)(a) of the Companies Act 2013.

[4] Section 51 of the Act 2013.

[5] Section 124(1) of the Act 2013

[6] Section 127 of the Act 2013

[7] Section 124(3) of the Act 2013

[8] Section 123(5) of the Act 2013

[9] Section 173 of the Companies  Act 2013.

[10] Section 173 of the Companies Act 2013.

[11] Section 123(3) of the Companies Act 2013.

[12] Section 124(6) of the Act 2013.

[13] Section 124 of the Act 2013.

[14] Section 115BBDA of the Income Tax Act 1961

[15] Section 115-O of the Income Tax Act 1961.

[16] Section 115BBD of the Income Tax Act 1961.

[17] Section 115-P of the Income Tax Act 1961.

[18] Section 271C of the Income Tax Act 1961.

[19] Section 276B of the Income Tax Act 1961.

 

 

 

 

              

       

 

 

 

 

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