Chapter 8 - Declaration and Payment of Dividend
Q&A Format for Declaration and Payment of Dividend
Question 1: What is a Dividend?
Answer 1:
A dividend is a portion of a company's profit that is distributed to its
shareholders. It is usually paid in cash but may also be issued in the form of
additional shares. The Companies Act, 2013 defines dividend under
Section 2(35) as any payment made by a company to its shareholders out of its
profits or reserves. However, the payment of dividend must be authorized by the
Board of Directors and approved by shareholders.
Question 2: What are the provisions related to the
declaration of dividend under the Companies Act, 2013?
Answer 2:
The declaration of dividends is governed by Section 123 of the Companies
Act, 2013, which lays down the following key provisions:
- Profit
Availability: A company can declare a dividend only out of its current
year profits or accumulated profits from previous years,
provided it has adequate reserves.
- Solvency
Test: Before declaring a dividend, the Board of Directors must
ensure that the company will remain solvent after the dividend
distribution, i.e., it will be able to meet its liabilities.
- Restriction
on Dividend Payment: The company cannot declare a dividend unless it
has paid off its preferential dividend (if applicable) and has set
aside a certain percentage for debenture holders (if applicable).
- Payment
of Dividend: The dividend must be paid within 30 days from the
date of declaration, and the Board of Directors decides the mode of
payment (cash, stock dividend, etc.).
Question 3: What are the conditions under which a company
cannot declare a dividend under the Companies Act, 2013?
Answer 3:
The Companies Act, 2013 provides the following conditions where a company cannot
declare a dividend:
- Inadequate
Profits: A company cannot declare a dividend if it does not have
sufficient profits for the year or accumulated profits from the previous
years.
- Accumulated
Losses: If the company has accumulated losses, it cannot pay a
dividend unless it has reserves to cover the losses.
- Failure
to Pay Debts: If a company has outstanding debts or liabilities, it
must ensure the payment of debts before declaring a dividend.
- Non-Compliance
with Solvency Test: If the company fails the solvency test
(i.e., declaring the dividend will lead to the company being unable to
meet its liabilities), it cannot declare a dividend.
Question 4: What is the role of the Board of Directors in
declaring a dividend?
Answer 4:
Under the Companies Act, 2013, the Board of Directors plays a
critical role in the declaration of dividends. The Board is responsible for:
- Recommendation:
The Board recommends the amount of dividend to be paid to shareholders,
based on the company’s profits, available reserves, and solvency position.
- Approval:
After the Board’s recommendation, the shareholders must approve the
dividend in the Annual General Meeting (AGM).
- Compliance
with Legal Provisions: The Board ensures compliance with all
provisions under the Companies Act, such as the availability of profits,
payment of preference dividends, and solvency requirements before
declaring the dividend.
Question 5: What are the key conditions for the payment
of dividend to shareholders under the Companies Act, 2013?
Answer 5:
The following are key conditions for the payment of a dividend to shareholders:
- Declaration
by Shareholders: After the Board recommends a dividend, it must be
approved by the shareholders in a general meeting (usually AGM).
- Mode
of Payment: The dividend can be paid in cash, kind, or
as bonus shares.
- Time
Limit: Once declared, the dividend must be paid within 30 days
from the declaration date.
- Dividend
Distribution to Equity Shareholders: Dividends are distributed
proportionately to equity shareholders based on the number of
shares held by them, unless the company has a preference share capital.
- Compliance
with Payment of Dividend Rules: The company must follow the rules laid
down in the Companies Act and maintain the solvency and proper accounting
records for the payment process.
Question 6: What are the penalties for non-compliance in
the declaration and payment of dividends?
Answer 6:
Non-compliance with the provisions of dividend declaration and payment can lead
to various penalties under the Companies Act, 2013:
- Penalty
for Default: If a company defaults in paying the dividend as per the
provisions of the Act, it can be fined up to ₹1,00,000.
- Further
Penalty for Continuous Default: If the default continues, an
additional fine of up to ₹5,00,000 may be levied.
- Imprisonment
for Directors: If the directors knowingly authorize a wrongful
declaration of dividends, they may be subject to imprisonment for up to 6
months and/or a fine.
- Liability
for False Declaration: If the company declares a dividend without
proper authorization or financial backing, the company and its directors
may be held personally liable.
Question 7: How are dividends treated in case of a
preference share capital company?
Answer 7:
For a company with preference share capital, the payment of dividends is
subject to the following provisions:
- Preference
Shareholders: Preference shareholders are paid fixed dividends
before any dividend is paid to equity shareholders.
- Accumulation
of Dividend: If the preference dividend is not paid in a particular
year, it can accumulate and must be paid out in subsequent years before
equity dividends are paid.
- Priority
in Payment: In case of liquidation, preference shareholders are given
priority over equity shareholders in the distribution of remaining assets.
Conclusion:
In conclusion, the declaration and payment of dividends
under the Companies Act, 2013 involves several legal and financial
considerations, including profitability, availability of reserves, compliance
with solvency tests, and proper authorization from the Board and shareholders.
Non-compliance can attract penalties for both the company and its directors.
Proper management of profit distribution ensures that shareholders receive fair
returns while the financial health of the company is maintained.
Additional Tips for 10 Marks:
For a 10-mark answer, ensure you cover all aspects
comprehensively:
- Structure:
Start with a brief introduction, move to key provisions, roles,
conditions, and penalties.
- Use
Legal References: Refer to sections like Section 123, Section
2(35), and relevant penalties.
- Depth
and Examples: Include real-world examples where applicable (e.g.,
dividend payment practices of major companies).
- Case
Studies or Practical Insights: If time permits, mention real cases of
companies facing issues due to dividend non-compliance.
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