Declaration and Payment of Dividend: formula sheet

Key formulas

Definition of dividend

Dividend includes any interim dividend (Section 2(35))

Use this line when a question asks whether interim dividend is also a dividend. Yes, it is.

Permitted sources of dividend (Section 123)

Current-year profit after depreciation | accumulated profit of earlier years after depreciation | both | Government money provided under a guarantee. Exception: free reserves (previous years' profits), only under the proviso and the Rules

Capital and securities premium are not lawful sources. Previous losses and unprovided depreciation are set off against current profit first. Reserves can be used only when the proviso conditions are met.

Who declares

Final dividend: members at the general meeting, on Board's recommendation | Interim dividend: Board

Members can reduce the recommended final dividend but cannot increase it. The Board may declare interim dividend during any financial year or at any time from the close of the financial year till the AGM, out of the surplus in the profit and loss account and out of the profits of the financial year for which it is sought to be declared.

Declaring dividend out of reserves (previous years' profits) when there is no profit or inadequate profit: conditions

Rate ≤ average of the rates in the 3 preceding years | Amount drawn ≤ 10% of (paid-up capital + free reserves) | Reserves left ≥ 15% of paid-up capital

These come from the Companies (Declaration and Payment of Dividend) Rules, 2014. The maximum drawal is the lower of 10% of (paid-up capital + free reserves) and the amount that leaves reserves at 15% of paid-up capital. The amount drawn from reserves must first be utilised to set off the loss of the current financial year, so the amount available for dividend is the drawal less that loss. All figures are as per the latest audited balance sheet.

Interim dividend when the company has losses

If the company has incurred a loss in the current financial year up to the end of the quarter immediately preceding the date of declaration of the interim dividend, the interim dividend rate ≤ average dividend rate of the last 3 financial years

Check the loss position up to the last completed quarter before the Board declares an interim dividend.

Payment timeline

Pay within 30 days of declaration | Dividend amount (including interim dividend) deposited in a separate account in a scheduled bank within 5 days of declaration (Section 123(4))

Unpaid or unclaimed amounts go to the Unpaid Dividend Account within 7 days after the 30 days end (Section 124).

Permitted sources (Section 123(1))

Dividend only out of: (a) current year profit after depreciation, or (b) undistributed profit of previous years after depreciation, or (c) both, or (d) Government money under a guarantee

Depreciation must be provided as per Schedule II, as Section 123(2) states.

Exclusion from profit

Exclude unrealised gains, notional gains, revaluation of assets and fair value changes in carrying amount of assets or liabilities

This is the proviso to Section 123(1)(a). Such items cannot support dividend.

Transfer to reserves

Transfer of such percentage of current profit to reserves as the company considers appropriate, before declaring dividend

This is optional and no percentage is fixed in the section.

Reserves other than free reserves

No dividend out of reserves other than free reserves

Section 123 itself only bars dividend from reserves other than free reserves. The definition of free reserves is in Section 2(43). The point that reserves created by revaluation of assets are not free reserves comes from that definition, not from Section 123. Always check the type of reserve against the definition.

Loss and depreciation set-off

No dividend unless carried over previous losses and depreciation not provided in earlier years are set off against current year profit

This is why accumulated losses block dividend. In a numerical, 'carried over losses' means only losses not already absorbed or set off elsewhere. Set off only that amount against current profit.

Dividend from accumulated profits when profits are inadequate

Allowed out of accumulated profits transferred to free reserves, only as per prescribed rules

Section 123 says the declaration must be made in accordance with the prescribed rules (Companies (Declaration and Payment of Dividend) Rules, 2014). Do not state their limits unless you know them.

Default in deposits

No dividend on equity shares while the company fails to comply with Sections 73 and 74 (deposits)

Section 123(6). It applies only for so long as the failure continues.

Interim dividend power

Board of Directors may declare interim dividend during the financial year, or between year-end and the AGM

Section 123(3). It is the Board's power, so no general meeting resolution is needed. The final dividend, by contrast, is declared at the AGM on the Board's recommendation.

Sources of interim dividend

Surplus in P&L account OR profits of the financial year OR profits till the quarter preceding the date of declaration

Any of the three. Unrealised gains, notional gains and revaluation gains are excluded from profits under the proviso to section 123(1).

Loss-making company limit

If loss up to the preceding quarter end: interim dividend rate ≤ average dividend rate of the immediately preceding 3 financial years

This is a cap on the rate, not a ban.

Deposit of dividend

Deposit in a separate account in a scheduled bank within 5 days of declaration

Section 123(4). Applies to final and interim dividend.

Who receives and how

Registered shareholder, or his order, or his banker; in cash (cheque, warrant or electronic mode)

Section 123(5). Bonus shares by capitalisation of profits are permitted by the proviso.

Payment deadline and penalty

Pay or post within 30 days of declaration. Default: directors knowingly party – imprisonment up to 2 years and fine ≥ ₹1,000 per day; company – simple interest at 18% p.a.

Section 127. Five exceptions, such as legal prohibition, dispute over the right to receive, or lawful set-off against sums due from the shareholder.

Transfer pending registration

Transfer delivered but not registered: dividend goes to the Unpaid Dividend Account, unless registered holder authorises transferee in writing

Section 126. Rights shares and bonus shares are also held in abeyance.

Transfer to Unpaid Dividend Account

Not paid or claimed within 30 days of declaration → transfer within 7 days after expiry of the 30 days

Transfer the total unpaid amount to a special account in a scheduled bank, called the Unpaid Dividend Account. Section 124(1).

Statement of unpaid dividend

Within 90 days of the transfer → prepare statement and place on website

Statement gives names, last known addresses and amount due to each person. Section 124(2).

Interest on default

12% per annum on the amount not transferred, from the date of default

The interest benefits the members in proportion to the amount unpaid to them. Section 124(3).

Money to IEPF

Unpaid or unclaimed for 7 years from the date of transfer → transfer to IEPF with interest accrued, if any

Section 124(5). The company sends a statement to the Fund's authority, which issues a receipt.

Shares to IEPF

Dividend not paid or claimed for 7 consecutive years or more → shares transferred in the name of IEPF

Section 124(6). If dividend is paid or claimed in any one of the 7 years, the shares are not transferred.

Penalty for non-compliance

Company: ₹5,00,000 to ₹25,00,000. Every officer in default: ₹1,00,000 to ₹5,00,000

Section 124(7). Fine is not less than the lower figure and may extend to the higher.

Pending share transfer

Transfer instrument delivered but not registered → dividend to Unpaid Dividend Account

Exception: registered holder authorises payment to the transferee in writing. Rights and bonus offers are held in abeyance. Section 126.

Liquidation account

Unpaid for 6 months in winding up → deposit in Company Liquidation Dividend and Undistributed Assets Account

Section 352. Unclaimed for 15 years, the money goes to the Central Government's general revenue account, but claims can still be made.

Time limit for paying dividend (section 127)

Pay dividend or post warrant within 30 days from the date of declaration

Applies to every shareholder entitled to the dividend.

Interest on default (section 127)

Interest = Unpaid dividend × 18% × (days of default ÷ 365)

It is simple interest, payable by the company for the period the default continues. The days ÷ 365 form is a working method for calculation questions.

Punishment of directors (section 127)

Imprisonment up to 2 years AND fine not less than ₹1,000 per day of default

Only a director who is knowingly a party to the default is liable.

Exceptions to the offence (section 127 proviso)

No offence if: law prevents payment | directions cannot be complied with and this was communicated | dispute on right | lawful adjustment against dues | failure not due to company's default

Five cases, (a) to (e). Match the facts to the right clause.

Sources of bonus shares (section 63(1))

Free reserves | Securities premium account | Capital redemption reserve account

Reserves created by revaluation of assets cannot be capitalised.

Conditions for bonus issue (section 63(2))

Authorised by articles + Board recommendation and general meeting authorisation + no default on deposit/debt interest or principal + no default on employees' statutory dues + partly paid shares made fully paid + prescribed conditions complied

All conditions must be met.

Bonus in lieu of dividend (section 63(3))

Bonus shares shall not be issued in lieu of dividend

Bonus shares are not a substitute for a declared dividend.

Deposit of dividend (section 123(4))

Deposit dividend in a separate account in a scheduled bank within 5 days from declaration

Related rule that works alongside the 30-day limit.

Quick revision

• Under section 123(1), dividend can be paid out of current-year profits after depreciation, undistributed past profits after depreciation, both, or government money given under a guarantee. When profits are inadequate or absent, dividend may also be declared out of accumulated profits transferred to free reserves, in accordance with the prescribed rules.
• In computing profits, unrealised gains, notional gains, revaluation of assets and fair-value changes in carrying amounts are excluded.
• A company may transfer any percentage of profits it considers appropriate to reserves before declaring dividend.
• No dividend may be declared or paid from reserves other than free reserves.
• Earlier losses and depreciation not provided in previous years must be set off against the current year's profit before declaring dividend.
• Depreciation is provided as per Schedule II.
• The Board may declare interim dividend at any time during the financial year or between year end and the AGM. It may be paid only out of the surplus in the profit and loss account, the profits of the financial year for which it is declared, or profits generated in the financial year up to the quarter preceding the date of declaration. If the company has incurred a loss in the current financial year up to the end of the quarter immediately preceding the declaration date, the rate cannot be higher than the average dividends declared in the immediately preceding three financial years.
• Dividend must be deposited in a separate account in a scheduled bank within five days of declaration. It is paid only to the registered shareholder, or to his order or his banker, in cash, or by cheque, warrant or electronic mode.
• Dividend not paid or claimed within thirty days from the date of declaration must be moved to the Unpaid Dividend Account within seven days after that period. Interest on delay is twelve per cent a year.
• A statement of unpaid amounts goes on the website within ninety days of the transfer. Money unclaimed for seven years goes to the IEPF under section 125.
• Shares on which dividend is not paid or claimed for seven consecutive years are transferred to the IEPF. If dividend is claimed in any one of those years, the shares are not transferred.
• Penalty under section 124: company ₹5,00,000 to ₹25,00,000; each officer in default ₹1,00,000 to ₹5,00,000.
• Bonus shares may come from free reserves, securities premium or capital redemption reserve, never from revaluation reserve, and never in lieu of dividend.

Common mistakes

• Saying interim dividend is not a dividend because the members did not declare it. Fix: Quote Section 2(35): dividend includes any interim dividend. The Board declares it, but it is still a dividend.
• Paying dividend out of capital or securities premium. Fix: Remember the sources under Section 123: current-year profit, accumulated profit, both, and Government money under a guarantee. Reserves can be used only as an exception under the proviso and the Rules. Capital and securities premium are not among the sources.
• Treating revaluation surplus as distributable profit. Fix: Remember the proviso: revaluation of assets and notional or unrealised gains are excluded when computing profit for dividend.
• Ignoring depreciation when computing profit for dividend. Fix: Always deduct depreciation as per Schedule II first. Dividend profit must be after depreciation.
• Saying shareholders must approve an interim dividend at a general meeting. Fix: Remember that section 123(3) gives the power to the Board of Directors. The final dividend is declared at the AGM on the Board's recommendation.
• Confusing the 5-day and 30-day periods. Fix: Link 5 days with depositing the amount in a separate scheduled bank account. Link 30 days with paying the shareholder or posting the warrant.
• Counting the 7-day transfer period from the declaration date. Fix: Count 30 days from declaration first. The 7 days begin only after those 30 days expire.
• Counting the 7-year IEPF period from the declaration date. Fix: For money, the 7 years run from the date of transfer to the Unpaid Dividend Account.
• Saying every director is jailed for non-payment of dividend. Fix: Write that only a director who is knowingly a party to the default is punishable.
• Counting the 30 days from the date of the AGM resolution being communicated or from the book closure date. Fix: Count 30 days from the date of declaration, as the section states.

Exam tips

• In theory answers, begin with Section 2(35) and Section 123 in one line. Then give the facts and conclusion.
• Learn the three conditions for paying dividend out of reserves as a set: rate, 10% cap, 15% floor. Numerical questions on them are common. Remember to deduct any current-year loss from the drawal.
• For interim vs final dividend, write the answer as a two-column comparison in points: who declares, when, and the limit on the amount.
• Do not skip small details like the mode of payment and registered holders. Many MCQs test them as a trap.
• In MCQs there is no negative marking, so attempt every question. Eliminate any option that uses capital or securities premium as a source.
• In MCQs, options mentioning revaluation reserve, unrealised gains or capital as a source are almost always wrong.
• In scenario questions, compute profit after depreciation as a visible first step. Then deduct earlier losses.
• Use the three-part format: provision, facts, conclusion. Mention Section 123 by number.