DECLARATION OF DIVIDENT OUT OF RESERVES

[Mr. M. GOVINDARAJAN]

                                  The shareholders are the owners of the company.   All the shareholders are not actually participating in the day to day activities of the business.   Then for what purposes the investors are investing in shares of the company.  It is quite common that anybody who invests in some one really wants some return from the investment.   Dividend is the return on the investment of shareholders in companies.   The better the dividend the more will be the inducement and to save interest.  Dividend should be distributed only out of profits.   A shareholder cannot claim dividend as a matter of right.  Right to claim dividend will only arise after a dividend is declared by the company in general meeting.  The usual practice is for the Board of Directors to recommend, and the annual general meeting to declare the dividend, and unless the articles contain a provision like Regulation 85 of Table A of the Act, the annual general meeting will have the power subject to the provisions of the Act, to determine the amount of dividend to be distributed. Before distributing dividend the company has to comply with some conditions.   The depreciation and loss of previous years must be made up before distributing the dividends. 

                        Sec.2 (14A) defines the term ‘dividend’ as includes ‘interim dividend’.   In ‘Kantilal Manilal V Commissioner of Income Tax’ – AIR 1956 Bom 381 it was held that the expression ‘dividend’ has two meanings.   As applied to a company which is going concern, it ordinarily means of the portion of the profits of the company which is allocated to the holders of shares in the company.  In the case of winding up it means a division of the realized assets among the creditors and contributories according to their respective rights.   Sec.2 (14A) has no application with regard to the latter category of dividend. 

                        Sec. 205 of the Companies Act, 1956 deals with the distribution of dividend.   Dividend should be paid out of profits. Sec. 205(2) provides that the Board of Directors may declare interim dividend and the amount dividend including interim dividend should be deposited in a separate bank account within five days from the declaration of the dividend.   Dividend shall be paid only in cash but not in any other form.   Any dividend payable in cash may be paid by cheque or warrant sent through post directed to the registered address of the shareholder entitled to the payment of dividend. 

                        The second source out of which dividend can be paid is the ‘reserve funds’ of the company created out of the profits of the company for any previous financial year or years arrived at after providing for depreciation as required and remaining undistributed.  This source can be used subject to the restriction contained in Companies (Declaration of Dividend out of Reserves) Rules, 1975.  Thus when a company acquires loss in a particular year the dividend can be distributed out of such reserves subject to conditions enumerated in the Companies (Declaration of Dividend out of Reserves) Rules, 1975. 

                        Sec.205A(3) of the Act provides that where, owing to inadequacy or absence of profits in any year, any company proposes to declare dividend out of the accumulated profits earned by the company, in previous years and transferred by it to the reserves, such declaration of dividend shall be made except in accordance with such rules as may be made by the Central Government in this behalf and where any such declaration is not in accordance with such rules, such declaration shall not be made except with the previous approval of the Central Government. 

 

                        According to the Companies (Declaration of Dividend Out of Reserves) Rules, 1975 the dividend can be declared by the company out of the accumulated profits subject to the following conditions: 

• The rate of dividend declared does 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;
• The total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves does not exceed an amount equal to 1/10^th of the sum of its paid up capital and free reserves and the amount to drawn must be utilized to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared;
• The balance of reserves after such drawal does not fall below 15% of its paid up share capital. 

For the purposes of this rule ‘profits earned by a company in previous year and transferred by it to the reserves’ shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared, and in computing the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve shall be included and all items of Capital Reserves including reserves created by revaluation of assets shall be excluded. 

                        The forms prescribed in these rules may be filed through the electronic media or through any other computer readable media as referred under Section 610A of the Companies Act, 1956   the electronic form shall be authenticated by the authorized signatories using digital signatures, as defined under the Information Technology Act, 2000.   The forms prescribed in these rules, when filed in physical form may be authenticated by authorized signatory by affixing his signature manually.