CS Executive · Company Law and Practice

Distribution of Profits: formula sheet

Full chapter guide

Key formulas

Sources of dividend (section 123(1)): Dividend only out of: (a) current year profits after depreciation; (b) undistributed profits of previous years after depreciation; (c) both; or (d) money provided by Government under a guarantee; Depreciation is provided as per Schedule II. Unrealised, notional and fair-value gains are excluded when computing profits.
Transfer to reserves: Company may transfer any percentage of profits it considers appropriate to reserves before declaring dividend; This is optional under the first proviso. It is not a fixed percentage.
Dividend out of accumulated profits: If profits are inadequate or absent, dividend out of accumulated profits transferred to free reserves only as per prescribed rules; No dividend may be paid from reserves other than free reserves.
Set-off of losses: No dividend unless carried-over previous losses and depreciation not provided in earlier years are set off against current year profit; Often missed in answers.
Interim dividend (section 123(3)): Declared by the Board out of surplus in P&L account, profits of the year, or profits up to the quarter before declaration; If there is a loss up to the preceding quarter, the rate cannot exceed the average dividend of the preceding three financial years.
Deposit and payment: Deposit in a separate scheduled bank account within 5 days of declaration; pay only to registered holder, in cash (cheque, warrant or electronic mode); Applies to interim dividend also.
Bar on default: A company failing to comply with sections 73 and 74 cannot declare dividend on equity shares while the failure continues; Sections 73 and 74 deal with deposits.
Preference shareholder voting: Dividend unpaid for 2 years or more on a class: that class can vote on all resolutions (section 47(2) second proviso); Otherwise voting is limited to matters affecting their rights, winding up, and repayment or reduction of share capital.
Permitted sources of dividend (Section 123(1)): Current year profit (after depreciation) OR undistributed past profits (after depreciation) OR both OR government guarantee money; Depreciation is provided as per Schedule II. Unrealised gains, notional gains and revaluation gains are excluded from profits.
Transfer to reserves: Transfer of any percentage of profit the company considers appropriate, before declaring dividend; This is optional. The first proviso to Section 123(1) leaves the percentage to the company.
Dividend out of reserves: Only from free reserves; and only as per prescribed rules where profits are inadequate or absent; Dividend cannot be declared from reserves other than free reserves.
Set-off condition: Past losses and unprovided depreciation must be set off against current year profit before declaring dividend; This is the last proviso to Section 123(1).
Interim dividend (Section 123(3)): Board may declare out of: surplus in profit and loss account, OR profits of the year for which it is sought, OR profits generated till the quarter preceding the declaration date; Can be declared during the year or between year-end and the AGM.
Loss-making interim dividend limit: Rate ≤ average dividend rate of the immediately preceding three financial years; Applies if the company has incurred loss up to the end of the quarter preceding the declaration date.
Payment rules: Deposit in a scheduled bank in a separate account within 5 days of declaration; pay only to registered shareholder or his order or banker; Payable in cash, by cheque, warrant or electronic mode. Bonus shares capitalisation is not prohibited by this rule.
Section 73 and 74 default: No dividend on equity shares while the company fails to comply with Sections 73 and 74; The bar lasts as long as the failure continues.
Transfer to Unpaid Dividend Account (Section 124(1)): Declaration + 30 days (unpaid or unclaimed) → transfer within 7 days after those 30 days; The whole unpaid amount goes to a special account in a scheduled bank called the Unpaid Dividend Account.
Statement of unpaid dividend (Section 124(2)): Within 90 days of transfer: names, last known addresses, amount due → company website and approved website; The Central Government approves the other website.
Interest on default (Section 124(3)): 12% per annum from the date of default on the amount not transferred; The interest benefits the members in proportion to the amount unpaid to them. It is not paid to the Government.
Transfer of money to IEPF (Section 124(5)): Unpaid or unclaimed for 7 years from the date of transfer to the account → transfer to IEPF with interest, if any; The company sends a statement in the prescribed form, and the authority issues a receipt.
Transfer of shares to IEPF (Section 124(6)): Dividend not paid or claimed for 7 consecutive years or more → shares transferred in the name of IEPF; If dividend is paid or claimed in any year in the period, the shares are not transferred.
Penalty (Section 124(7)): Company: ₹5,00,000 to ₹25,00,000. Each officer in default: ₹1,00,000 to ₹5,00,000; Both are fines, with a minimum and a maximum.
Liquidation account (Section 352): Unpaid for 6 months in a winding up → Company Liquidation Dividend and Undistributed Assets Account; unclaimed 15 years → general revenue account; A separate rule for companies being wound up. The Registrar settles a claim within 60 days.
Permitted sources (Section 63(1)): Free reserves | Securities premium account | Capital redemption reserve account; Bonus shares must be fully paid-up. Reserves created by revaluation of assets cannot be capitalised.
Conditions for capitalisation (Section 63(2)): (a) Articles authorise; (b) Board recommends and general meeting authorises; (c) no default on interest or principal on fixed deposits or debt securities; (d) no default on employees' statutory dues (PF, gratuity, bonus); (e) partly paid shares made fully paid; (f) prescribed conditions complied with; All conditions must be met together. Failing any one blocks the issue.
No bonus in lieu of dividend (Section 63(3)): Bonus shares shall not be issued in lieu of dividend; Bonus issue cannot replace a dividend payment.
Accounting effect: Reserves reduced by the amount capitalised = Share capital increased by the same amount; Net worth is unchanged. Use this to check journal entries.
Bonus amount: Bonus shares issued = Existing shares × Bonus ratio; For a 1:2 bonus (one for every two held), new shares = existing shares ÷ 2. Amount capitalised = new shares × face value.
Other statutory links: Section 52(2)(a): securities premium may be used for fully paid bonus shares; Section 55(4): CRR may be used for fully paid bonus shares; Section 126: bonus shares kept in abeyance where a transfer is pending registration; Section 378ZJ separately lets a Producer Company issue bonus shares from general reserves.
Status of section 320: Section 320 = Omitted w.e.f. 15-11-2016 (section 255 and the Eleventh Schedule); The section has no operative text. Do not quote any rule from it.
Liquidator's power to sell property: Section 290(1)(c): sell immovable and movable property and actionable claims by public auction or private contract, or in parcels; Section 290(1)(d) allows sale of the whole undertaking as a going concern.
Liquidator's power to distribute: Section 290(1)(g): invite and settle claims, then distribute sale proceeds as per priorities under the Act; Distribution under this clause is of sale proceeds, in order of priority. Section 290(1)(m)(ii) also refers to actions for distribution of assets.
Control of the Tribunal: Section 290(2): powers are subject to the overall control of the Tribunal; Section 290(1)(n) lets the Liquidator apply to the Tribunal for orders or directions.
Who may petition for winding up: Section 272(1): company; contributory; Registrar; person authorised by Central Government; Central or State Government in a section 271(b) case; Section 272(1)(c) also covers all or any of the persons in clauses (a) and (b) together.
Contributory's right to petition: Section 272(2): the shares were originally allotted to the contributory, OR were held and registered in his name for at least six months during the eighteen months before commencement of winding up, OR devolved on him through the death of a former holder; The six-month holding test applies only to shares held and registered in his name. A holder of fully paid-up shares can petition, even if the company has no assets.

Quick revision

Dividend only out of current-year profit after depreciation, undistributed earlier profit, both, or Government money under a guarantee (Section 123(1)).
Unrealised gains, notional gains and revaluation gains are excluded when computing profits for dividend.
No dividend from reserves other than free reserves. Previous losses and unprovided depreciation must be set off first.
Interim dividend is declared by the Board. If there is a loss up to the preceding quarter, the rate cannot exceed the average of the last three years' dividends.
Dividend amount goes to a separate scheduled bank account within five days of declaration (Section 123(4)).
Dividend is paid to the registered shareholder or on his order, and can be by cash, cheque, warrant or electronic mode.
A company in default under Sections 73 and 74 cannot declare dividend on its equity shares while the default continues.
Unpaid for 30 days: transfer to the Unpaid Dividend Account within 7 days. Statement on the website within 90 days. Interest on default is 12% a year.
Unpaid for 7 years: money goes to the IEPF. Shares go to the IEPF when dividend is unpaid or unclaimed for 7 consecutive years. A claim in any of those years stops the transfer.
Penalty under Section 124: company ₹5 lakh to ₹25 lakh. Each officer in default ₹1 lakh to ₹5 lakh.
Bonus shares come from free reserves, securities premium or the capital redemption reserve. Never from revaluation reserves, and never in lieu of dividend.
Section 320 is omitted with effect from 15 November 2016.

Common mistakes

Saying dividend can be paid out of capital if the company wishes. Fix: Dividend can come only from the sources listed in section 123(1). Capital is not one of them.
Ignoring depreciation when computing distributable profit. Fix: Profits must be arrived at after providing depreciation under Schedule II. Write this every time.
Treating revaluation surplus as distributable profit. Fix: Remember the proviso to Section 123(1)(a): unrealised gains, notional gains and revaluation of assets are excluded when computing profits.
Saying dividend can be paid out of any reserve. Fix: State that dividend cannot be paid from reserves other than free reserves, and only as per the prescribed rules when profits are inadequate or absent.
Saying the dividend must be transferred within 30 days of declaration. Fix: Remember that 30 days is the time to pay or claim. The company then has 7 days after that period expires to transfer.
Counting the 7 years for IEPF from the date of declaration. Fix: For money, the 7 years run from the date of transfer to the Unpaid Dividend Account. Only the first 30 days run from declaration.
Treating revaluation reserve as a valid source of bonus shares. Fix: Remember the proviso to Section 63(1): reserves created by revaluation of assets cannot be capitalised.
Saying only the Board decides to issue bonus shares. Fix: Write both: the articles must authorise, and the general meeting must authorise on the Board's recommendation.
Treating section 320 as a live provision and quoting rules from it. Fix: Always state that it is omitted w.e.f. 15-11-2016 and move to section 290.
Saying members can claim the company's assets in kind under section 320. Fix: Write that section 320 gives no basis for the claim. The Liquidator ordinarily sells property and distributes sale proceeds by the Act's priorities, under the Tribunal's control. Mention that section 290(1)(m)(ii) refers to distribution of assets.

Exam tips

Begin every answer with the definition and cite section 123, then move to facts.
Learn the difference between interim and final dividend as a table-style list in your mind: who declares, when, and source. Write it as points.
In problem questions, check the loss set-off and free reserves conditions before concluding.
Remember the five-day deposit rule and payment mode. Examiners like precise details.
Use the exact words of the Act, such as 'free reserves' and 'registered shareholder'.
Begin every answer with Section 123(1) and list the four permitted sources. Examiners reward the correct provision first.
For case problems, show the adjustment of profit line by line. Marks are given for the working even if the final figure is slightly off.
Always mention that revaluation and other unrealised gains are excluded. This is a favourite point.