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					                                    DIVISIBLE PROFITS AND DIVIDEND

20.1  INTRODUCTION TO DIVIDEND                              [Sec. 2 (14A)]
Meaning of dividend      Dividend is the return on the investment of shareholders in
                           a company. Only profits can be distributed as dividend
                         Dividend means the portion of the profits of the company
                           which is distributed to the shareholders

Definition of dividend         Dividend includes any interim dividend [Sec. 2(14A)]
                               Ordinarily, the term interim dividend means the dividend
                                declared between two AGMs

Procedure for declaration   Final dividend         Firstly, dividend is recommended by
of dividend                                         the Board (Sec. 217)
                                                   The members in the AGM may declare
                                                    the dividend by passing OR.
                                                    Declaration of dividend at an AGM is
                                                    an item of ordinary business (Sec.
                                                    173)
                                                   The members may reduce the rate or
                                                    amount recommended by the Board,
                                                    but they cannot increase it.

                            Interim dividend      Interim dividend is declared by the Board




20.2   CONDITIONS FOR DECLARATION OR PAYMENT OF DIVIDEND
                                                        (Sec. 205)
Source of dividend      a) Profits of current FY
                        b) Undistributed profits of previous FY(s)
                        c) Money provided by CG or SG in pursuance of a guarantee
                           given by it.

Provision of Depreciation   a) Profits for every FY shall be arrived at after providing for
                               depreciation
                            b) CG may allow a company to declare dividend for any FY
                               without providing for depreciation
                            c) If in any previous FY, depreciation has not been provided, it
                               shall be provided before declaring dividend

Set off of past losses      Lowest of the following shall be set off against the profits of the
                            current year:

                            a) The amount of past losses after providing depreciation
                            b) The amount of depreciation provided for that year

Transfer to reserves        Companies (Transfer of Profits to Reserves) Rules, 1975.
                            Before declaration or payment of dividend, profits shall be
                            compulsorily transferred to reserves at the following rates:
                             Rate of proposed dividend        Amount to be transferred to
                                                                         reserves
                                 Not exceeding 10%                           Nil
                               Exceeding 10% but not              2.5% of current profits
                                  exceeding 12.5%
                              Exceeding 12.5% but not              5% of current profits
                                     exceeding 15%
                                  Exceeding 15% but not             7.5% of current profits
                                     exceeding 20%
                                     Exceeding 20%                  10% of current profits
Prohibition on declaration    A company which fails to redeem its irredeemable preference
of dividend                   shares shall not, so long as such failure continues, declare any
                              dividend on its equity shares
Mode of payment                No dividend shall be payable except in cash or by cheque
                               However, issue of bonus shares or payment of a bonus call
                                 by capitalizing the profits or reserves is permissible. But,
                                 issue of bonus shares in lieu of dividend declared, is not
                                 permissible

Deposit of dividend            The dividend shall be deposited in a separate bank account
                                within 5 days of declaration of dividend.
                               The amount so deposited shall be used only for the purpose
                                of payment of dividend (whether interim or final)




20.3   UNPAID DIVIDEND AND INVESTOR EDUCATION AND PROTECTION FUND
                                                (Sec 205A to 205C)
Dividend declared but     Any dividend declared but remaining unpaid or unclaimed for
remaining unpaid           30 days from the date of its declaration shall be transferred to
                           unpaid dividend account.
                          The transfer shall be made within 7 days to a special
                           accounts in any scheduled bank to be called „Unpaid
                           Dividend Account of … Company Limited/Company (Private)
                           Limited‟.
                          Interest at the rate of 12% p.a. is payable by the company for
                           delay in making the above transfer

Dividend remaining unpaid     Transfer to ‘Investor       Any money transferred to the
in ‘unpaid dividend           Education and               unpaid dividend account of a
account’-Consequences         Protection Fund’            company which remains unpaid for
                                                          7 years from the date of such
                                                          transfer shall be transferred by the
                                                          company to the Fund
                              Furnishing of details       When making a transfer to the
                                                          Fund, the company shall furnish to
                                                          the authority appointed by CG, the
                                                          following details;

                                                           All sums included in such
                                                            transfer;
                                                           Nature of the sums;
                                                           Names        and     last  known
                                                            addresses of the persons
                                                            entitled to receive the sum;
                                                           The amount to which each
                                                            person is entitled;
                                                           Such other particular as may be
                                                            prescribed

‘Investor Education and       Credits to the Fund         Following sums shall be credited to
Protection Fund’                                          the Fund:

                                                           Following sums remaining unpaid
                                                            for 7 years from the due date:
                                                            a) Amounts in the unpaid
                                                                dividend accounts
                                                            b) Application money received
                                                                and due for refund
                                                              c) Deposits matured but unpaid
                                                              d) Debentures       matures       but
                                                                  unpaid
                                                             Interest accrued on the amounts
                                                              referred to in clauses (a) to (d)
                                                             Grants and donations by CG or
                                                              SG or any other institutions
                                                             Interest or other income received
                                                              out of the investments

                                Utilisation of Fund          For    promotion of   investor
                                                              awareness; and
                                                             Protection of the interest of
                                                              investors

                                Administration of Fund      The authority appointed by CG
                                                            shall administer the Fund and shall
                                                            be competent to spend money for
                                                            carrying out the objects
No payment from the Fund        a) No person shall be entitled to any money transferred to the
                                   Fund.
                                b) No claim shall lie against the company in respect of any
                                   amount transferred to the Fund, i.e., when any amount is
                                   transferred by the company to the Fund, the liability of the
                                   company comes to an end.




20.4   PAYMENT OF DIVIDEND TO WHOM?                                     (Sec. 206)
a) The registered shareholder
b) The order of registered shareholder
c) The bankers of registered shareholder (the bankers need not make a separate application)
d) The bearer of share warrant




20.5   DIVIDEND ETC. TO BE HELD IN ABEYANCE                             (Sec. 206A)
Where the instrument of transfer of shares has not been registered by the company, it shall

a) Transfer the dividend in relation to such shares to the Unpaid Dividend account, unless the
   registered shareholder consents to payment of such dividend to the transferee.
b) Keep in abeyance in relation to such shares any offer to right shares on bonus shares




20.6    FAILURE TO DISTRIBUTE DIVIDENDS WITHIN 30 DAYS           (Sec. 207)
Time limit for payment  The dividend shall be paid within 30 days from the date of
of dividend             declaration
Exceptions             a) Where dividend could not be paid by reason of the operation of
                          any law
                       b) Where a shareholder has given directions to the company
                          regarding payment of dividend and those directions cannot be
                          complied with
                       c) Where dividend is lawfully adjusted by the company against any
                          sum due to its from the shareholder.
                       d) Where there is a dispute regarding the right to receive the
                          dividend
                       e) Where the non payment of dividend is not due to any default of
                               the company




20.7   REVOCATION OF DIVIDEND
No revocation of       Sec 207 requires payment of dividend within 30 days of declaration.
dividend               Sec 207 also covers certain circumstances in which dividend need
                       not be paid. Revocation of dividend is not a ground for non-payment
                       of dividend. Thus, ordinarily a dividend once declared cannot be
                       revoked
Exceptions            Where a dividend has been illegally declared, the members can
                         revoke the dividend. However, if illegally declared dividend is paid,
                         then the directors shall be responsible and accountable to the
                         company personally
                      Where the company ceases to be a going concern, declared
                         dividend may be revoked.




20.8    PAYMENT OF INTEREST OUT OF CAPITAL-CONDITIONS (Sec. 208)
When is payment of        Shares are issued to raise money to defray the cost of works or
interest out of capital   building or plant which cannot be made profitable for a long
permissible?              period
Conditions for payment of Authorization       Authorisation is required by the articles or
interest on paid up share                     by SR
capital                   Sanction            Previous sanction of CG is required
                          Time period        (i) The payment of interest shall be made
                                                  only for such period as may be
                                                  determined by CG
                                             (ii) Such period shall in no case extend
                                                  beyond the close of the half year next
                                                  after the half year during which the work
                                                  of building has been actually completed
                                                  or the plant provided (i.e., upto the end of
                                                  next half year)

                                Rate of interest    4% p.a. or a rate notified by CG
Inquiry by CG                   Before sanctioning any such payment, CG may-

                               a) Appoint a person to inquire into and report to the CG.
                               b) Require the company to given security for the payment of the
                                  costs of the inquiry

Charge the interest paid to a) The interest paid on capital shall be charged to capital as part
cost of works etc.             of the cost of works or building or plant (i.e., the interest shall
                               be capitalised).
                            b) The payment of interest shall be operate as a reduction of
                               paid up share capital




20.9    INTERIM DIVIDEND                                [Sec. 2(14A), 205(1C)]
Definition                Dividend includes any interim dividend [Sec. 2(14A)
                          In other words, interim dividend is a part of dividend. Therefore,
                             all the provisions applicable to final dividend shall apply to
                             interim dividend.
                          The put the things beyond doubt, it has been provided u/s
                             205(1C) that the provisions of Sec. 205, 205A, 205C, 206,
                             206A and 207 shall, as far as may be, also apply to any interim
                                  dividend.

 Meaning                        Dividend declared between two AGMs is called as interim
                                  dividend
                                The Board may, from time to time, pay such interim dividend as
                                  may appear to it to be justified by the profits of the company

 Power to declare interim       No specific power in the articles is required
 dividend
 Revocation of interim          Interim dividend once declared, like final dividend, is a debt due
 dividend                       from the company, and thus is not revocable except under the
                                same circumstances in which the final dividend can be revoked.
 Consequence if profits are     While declaring interim dividend the Board should carefully
 inadequate                     assess the adequacy of profits. Therefore, the opinion of auditors
                                should be obtained. In the event of absence or inadequacy of
                                profits, the distribution shall amount to unauthorized reduction of
                                capital




 20.10 CONSEQUENCES OF PAYMENT OF DIVIDEND OUT OF CAPITAL
 Personal liability of     The directors shall be held personally liable to make good to the
 directors                 company the amount distributed as dividend [Re, Oxford
                           Benefit Building & Investment Society].
 Directors’ right of       Directors have a right of indemnity against the members who
 indemnity                 received dividends knowing that they were being paid up
                           dividends out of capital.
 No liability of directors Where dividends improperly paid out of capital have been made
                           good out of subsequent profits, liability ceases to attach to the
                           directors




                                                 Practical Problems

Nov. 2004        Time limit for payment of interim dividend and legal requirements w.r.t.
                 payment of unpaid dividend
                                          [Sec. 2(14A)]

 P1. The Board of Directors of M/s Optimistic Company Ltd. propose to pay interim dividend of Rs. 2 per equity share
 of Rs. 10 each. Advise the Board regarding:

 (i)    The time limit for payment of interim dividend to the shareholders; and
 (ii)   Steps to be taken in case any dividend amount remains unpaid in the books of the company

 Ans.

 Interim dividend must be         -   Within 30 days of declaration of interim dividend;
 paid                             -   Since all the provisions applicable to final dividend also
                                      apply to interim dividend, because as per Sec. 2(14A),
                                      dividend includes interim dividend.

 Dividend remaining unpaid        -   To the “Unpaid Dividend Account of …. Company
 within 30 days must be               Limited/Company (Private) Limited” within next 7 days
 transferred