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CA Intermediate · Corporate and Other Laws

Declaration and Payment of Dividend: Section 123 Rules and Timelines

Dividend is the share of profits a company distributes to its shareholders. To solve a question, identify the permitted source under section 123, check conditions such as depreciation and past losses, apply the timelines (deposit within five days, unpaid account after thirty days, IEPF after seven years), then state the consequence or penalty.

What this chapter covers

This chapter in Paper 2, Part I (Company Law) covers how a company may distribute profits. It tells you from which funds a dividend can be paid, who can declare it, how it must be paid, what happens when shareholders do not claim it, and how bonus shares differ from dividend.

The chapter is built mainly on four sections of the Companies Act, 2013: section 123 (declaration of dividend), section 124 (Unpaid Dividend Account and IEPF), section 126 (dividend and bonus held back when a transfer is pending) and section 63 (bonus shares). The questions are usually fact-based. You get a company, a set of figures and dates, and you must decide whether the action is legal.

The chapter connects to other parts of the paper. Share capital and reserves decide what counts as free reserves. Accounts and Schedule II decide the profit figure after depreciation. Board powers and general meeting approvals link to the meetings chapters. Deposit defaults (sections 73 and 74) can block a dividend. Learn it as one connected chain: source, condition, payment, unclaimed money, penalty.

Dividend questions are short, rule-based and predictable, so they reward careful preparation. They suit MCQs because one number or one condition decides the answer: five days, thirty days, seven years, twelve per cent. The same rules also appear in written case-study answers, where you earn marks by stating the provision, applying the facts and giving a clear conclusion. The chapter is compact, so a student who learns the timelines and conditions can score reliably here, which can offset weaker chapters in the paper.

Declaration and Payment of Dividend: topics in the order to study them

  1. 1Meaning and Provisions of Dividend under Companies ActStart here to fix the basic idea of dividend and who can declare it before you learn the rules.
  2. 2Sources of Dividend and Conditions for DeclarationSection 123(1) is the core of the chapter: current profits, undistributed past profits, government money, and the conditions on each.
  3. 3Interim Dividend and Dividend Payment RulesIt builds on the sources, adding section 123(3) to (6): interim dividend, the five-day deposit and the mode of payment.
  4. 4Unpaid and Unclaimed Dividend Account and IEPFOnce you know how dividend is paid, learn what happens when it is not claimed: section 124 timelines, section 126 and the IEPF.
  5. 5Bonus Shares and Penalties for DefaultBonus shares under section 63 are a contrast to dividend, and penalties are best learned last when all duties are clear.

How to prepare Declaration and Payment of Dividend

This chapter is about sources, conditions and timelines. Learn the logic first, then fix the numbers by repeating them.

  1. Read sections 123, 124, 126 and 63 once in the Act's plain wording. Mark every number: days, years, rate and fine amounts.
  2. Make a timeline for unpaid dividend: declaration, then the thirty-day window (counted from the date of declaration) in which dividend can be paid or claimed, seven more days to move the unpaid amount to the Unpaid Dividend Account, ninety days for the website statement, seven years to the IEPF. Keep the separate five-day bank deposit from declaration on its own line.
  3. Write the section 123(1) sources as a short list and add the provisos in your own words: transfer to reserves before dividend, accumulated profits transferred to free reserves only under the prescribed rules when profits are inadequate or absent, no dividend from reserves other than free reserves, and set off earlier losses and unprovided depreciation first.
  4. Compare interim dividend with final dividend in a two-column note: who declares, from which profits, and the limit when the company has a loss in the current year up to the quarter before declaration.
  5. Learn bonus shares as a separate checklist: permitted sources, the conditions in section 63(2), the ban on using revaluation reserves, and the rule that bonus shares cannot be issued in lieu of dividend.
  6. Solve MCQs on each rule. For a descriptive case, write in this order: provision, facts, conclusion, and mention the penalty if there is a default.
  7. In the last week, redo only the timelines and the list of conditions. Test yourself by covering the numbers and recalling them.

Common mistakes in Declaration and Payment of Dividend

  • Treating revaluation gains as distributable profit

    Fix: Remember that unrealised gains, revaluation of assets and fair-value changes are excluded when computing profits for dividend. Revaluation reserve also cannot be capitalised for bonus shares.

  • Mixing up the timelines in section 124

    Fix: Draw the timeline and attach each number to its event. Thirty days is the window for payment or claim, seven days is for the transfer, ninety days is for the website statement, and seven years is for the IEPF.

  • Ignoring past losses and unprovided depreciation

    Fix: Always ask first whether earlier losses or depreciation not provided are set off against this year's profit. If they are not, the company cannot declare dividend.

  • Confusing the five-day deposit with the thirty-day unpaid or unclaimed window

    Fix: Section 123(4) requires deposit in a separate scheduled-bank account within five days of declaration. Under section 124(1), the thirty days also run from the date of declaration, not from the deposit. It is not a payment deadline. It is the window in which dividend can be paid or claimed before the unpaid amount must be transferred to the Unpaid Dividend Account.

  • Forgetting that a pending transfer holds back dividend and bonus

    Fix: If a transfer instrument is delivered but not registered, the dividend goes to the Unpaid Dividend Account, unless the registered holder authorises payment to the transferee in writing. Rights and bonus issues are kept in abeyance.

  • Writing case answers with only a conclusion

    Fix: Write the rule, link it to the figures or dates in the question, then conclude. State the penalty or consequence when the facts show a default.

Last-day revision: Declaration and Payment of Dividend

  • 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.

Declaration and Payment of Dividend practice questions

Declaration and Payment of Dividend in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Declaration and Payment of Dividend: frequently asked questions

Can a company pay dividend out of reserves?

Only out of free reserves, and no dividend may be paid from reserves other than free reserves. If profits are inadequate or absent and the company wants to use accumulated profits transferred to free reserves, it must follow the prescribed rules. Check those rules in the study material.

What happens to dividend that no shareholder claims?

After thirty days the company moves the unpaid amount into the Unpaid Dividend Account within seven more days. If it stays unclaimed for seven years from the transfer, it goes to the IEPF along with accrued interest. Shares may also be transferred to the IEPF when dividend is not paid or claimed for seven consecutive years.

Can bonus shares be issued instead of dividend?

No. Section 63(3) says bonus shares shall not be issued in lieu of dividend. They can be issued out of free reserves, securities premium or capital redemption reserve, but not by capitalising revaluation reserve, and only when the conditions in section 63(2) are met.

What is the penalty for not following section 124?

The company is liable to a fine of at least ₹5,00,000 which may extend to ₹25,00,000. Every officer in default is liable to a fine of at least ₹1,00,000 which may extend to ₹5,00,000. Separately, delay in transferring the unpaid amount carries interest at twelve per cent a year.

How should I write a descriptive answer from this chapter?

Use provision, facts and conclusion. Quote the section in plain words, apply the dates, amounts or conditions given in the question, and end with a clear decision. This format earns step marks even if your conclusion is partly off.