Dividends: formula sheet

Key formulas

Sources of dividend (Section 123(1))

Dividend = out of current-year profits (after depreciation) OR undistributed profits of earlier years (after depreciation) OR both OR Government money under a guarantee

Unrealised, notional and fair-value gains and revaluation gains are excluded when computing profits.

Interim dividend (Section 123(3))

Declared by the Board: during the year, or from year-end till the AGM

Paid out of surplus in the profit and loss account, profits of the year, or profits till the quarter preceding the declaration date.

Interim dividend cap when loss to date

Rate ≤ average dividend rate of the immediately preceding three financial years

Applies if the company has a loss up to the end of the quarter immediately preceding the declaration date.

Deposit of dividend (Section 123(4))

Separate account in a scheduled bank within 5 days of declaration

Applies to interim dividend too.

Mode and recipient (Section 123(5))

Paid to registered shareholder, his order or his banker; in cash (cheque, warrant or electronic mode)

Bonus shares by capitalising profits or reserves are allowed and are not a dividend payment in cash.

No dividend from other reserves

Reserves other than free reserves cannot be used

Previous losses and unprovided depreciation must be set off against current-year profit before declaring.

Permitted sources (s.123(1))

Current year profit (after depreciation) | undistributed past profit (after depreciation) | both | government money under guarantee

Depreciation must be provided as per Schedule II. Exclude unrealised, notional and revaluation gains and fair-value changes.

Loss set-off condition

Dividend allowed only after previous losses and unprovided depreciation are set off against current profit

This is the fourth proviso to s.123(1).

Reserves rule

Transfer to reserves: any % the company considers appropriate | Dividend from reserves: free reserves only

Dividend from accumulated profits transferred to free reserves when profits are inadequate must follow the prescribed rules.

Interim dividend sources (s.123(3))

Surplus in P&L account | profits of the year for which it is declared | profits generated till the quarter preceding the date of declaration

Declared by the Board, during the year or between year-end and the AGM.

Interim dividend rate limit

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

The cap applies only where the company has incurred a loss in the current year up to the end of the quarter immediately preceding the declaration date.

Deposit and payment

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

Pay only to the registered shareholder, his order or banker; payable in cash, which includes cheque, warrant or electronic mode.

Default bar (s.123(6))

Failure to comply with sections 73 and 74 → no dividend on equity shares while the failure continues

Sections 73 and 74 deal with deposits.

Rule of Section 51

Dividend per share = Rate of dividend × Amount paid up per share

Applies only if the articles authorise dividend in proportion to paid-up amount. The section says a company 'may' do so.

Total dividend on a class of shares

Total dividend = Number of shares × Paid-up amount per share × Dividend rate

Use the paid-up amount, not the face value, for partly paid shares.

Time-weighted dividend (if articles provide)

Dividend = Paid-up amount × Rate × (Months paid up ÷ 12)

Use only when the question or articles say dividend runs from the date of payment.

Advance money

Calls in advance earn dividend only if the articles say so

Section 51 speaks of the amount paid up. Treatment of advance money depends on the articles.

Time to pay or claim

30 days from the date of declaration

After this, dividend that is unpaid or unclaimed must be transferred.

Transfer to Unpaid Dividend Account

Within 7 days after the 30 days expire

Section 124(1). The account is opened in any scheduled bank.

Statement on website

Within 90 days of the transfer to the Unpaid Dividend Account

Names, last known addresses and amounts, on the company website (if any) and the Government-approved website.

Interest on default in transfer

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

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

Transfer of money to IEPF

Unclaimed for 7 years from the date of transfer to the Unpaid Dividend Account

Section 124(5). Sent along with accrued interest, if any.

Transfer of shares to IEPF

Dividend unpaid or unclaimed for 7 consecutive years or more

Section 124(6). Not transferred if dividend was paid or claimed in any year of the period.

Penalty for non-compliance

Company: ₹5 lakh to ₹25 lakh. Officer in default: ₹1 lakh to ₹5 lakh

Section 124(7). Fine, with a minimum and a maximum.

Deposit of declared dividend

Separate scheduled bank account within 5 days of declaration

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

Time limit

Payment or posting of warrant within 30 days from the date of declaration

Counted from declaration, not from the AGM end or the record date.

Director's punishment

Imprisonment up to 2 years AND fine of at least ₹1,000 for every day of default

Applies only to a director who is knowingly a party to the default.

Interest payable by company

Simple interest = Dividend × 18% × (days of default ÷ 365)

Simple, not compound. Runs for the period the default continues. The days ÷ 365 form is a working convention for calculation.

Exceptions (no offence deemed)

(a) law prevents payment; (b) shareholder's directions cannot be complied with and this was communicated; (c) dispute on right to receive; (d) lawful adjustment against sum due from shareholder; (e) any other reason not due to company's default

Remember them as a list of five. Each removes the offence, not just the penalty.

Administration (Section 24)

Listed or to-be-listed companies: SEBI. Other cases: Central Government

Relates to non-payment of dividend under Section 127.

Quick revision

• Dividend can be declared only out of the sources listed in Section 123(1), such as current profits or undistributed past profits, after providing depreciation under Schedule II.
• Unrealised gains, notional gains, revaluation of assets and fair-value changes are excluded when computing profit for dividend.
• A company cannot declare dividend unless carried over previous losses and unprovided depreciation are set off against current year profit.
• No dividend can be paid from reserves other than free reserves.
• Interim dividend is declared by the Board, and if there is a loss up to the preceding quarter its rate cannot exceed the average of the last three financial years.
• Declared dividend must be deposited in a separate scheduled bank account within five days of declaration.
• Dividend is paid only to the registered shareholder or his order or banker, and may be paid by cheque, warrant or electronic mode. Bonus shares are not barred.
• A company in default under Sections 73 and 74 cannot declare dividend on equity shares while the default continues.
• Section 51: if the articles authorise, dividend can be paid in proportion to the amount paid up on each share.
• Section 124: unpaid or unclaimed for 30 days, transfer within 7 more days to the Unpaid Dividend Account; unpaid for seven years goes to the IEPF; shares go to the IEPF after seven consecutive years of non-payment or non-claim.
• Section 127: dividend not paid or warrant not posted within 30 days makes directors who knowingly default punishable, with simple interest at 18% per annum payable by the company.
• Section 352 is different: it applies in winding up, with a six-month trigger and a 15-year period before transfer to the Central Government.

Common mistakes

• Treating bonus shares as a cash dividend. Fix: Remember Section 123(5): dividend is paid in cash. Bonus shares come by capitalising profits or reserves and are permitted separately.
• Saying shareholders declare an interim dividend. Fix: Section 123(3) gives the power to the Board of Directors. Members declare only the final dividend.
• Including revaluation gain in profit available for dividend. Fix: Remember the proviso: unrealised, notional and revaluation gains and fair-value changes are excluded.
• Forgetting depreciation before computing distributable profit. Fix: Check whether depreciation under Schedule II has been provided. Deduct it if not.
• Applying the dividend rate to face value of partly paid shares. Fix: Always take the paid-up amount per share as the base when the articles follow Section 51.
• Saying Section 51 compels every company to pay dividend by paid-up amount. Fix: State that the company may do so, and only if authorised by its articles.
• Saying the transfer must happen within 30 days of declaration. Fix: Remember it as 30 days to pay, then 7 more days to transfer. The transfer deadline is 37 days from declaration.
• Counting the 7 years for IEPF money 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 punishable automatically. Fix: Add the condition: only if he is knowingly a party to the default.
• Writing compound interest or a wrong rate such as 12%. Fix: Section 127 interest is 18% per annum, simple.

Exam tips

• Write the section number 123 with the sub-section: (3) for interim, (4) for deposit, (5) for recipient and mode.
• In MCQs, watch for the traps: Board versus members, cash versus bonus shares, registered versus beneficial owner.
• In case questions, check the profit source first. Revaluation gains and non-free reserves are the usual hidden issues.
• Always mention the three-year average cap when a case says the company has a loss during the year.
• Quote section 123(1), 123(3) or 123(4) by number when you are sure. Examiners reward a precise reference.
• In numerical cases, present a short working: profit, depreciation, exclusions, loss set-off, result.
• Learn the proviso conditions word for word. MCQs often test the three-year average rule and free reserves.
• Always state who declares: the Board for interim dividend.