Dividends under the Companies Act for CMA Final

What this chapter covers

Dividends: topics in the order to study them

1. 1Meaning and Types of DividendYou need the basic idea of final and interim dividend before the sections make sense.
2. 2Declaration and Payment of Dividend (Section 123)This is the core section: sources of dividend, conditions, interim dividend and mode of payment.
3. 3Payment of Dividend in Proportion to Paid-up Amount (Section 51)It is short and builds on Section 123 by showing how the amount per share is worked out when shares are partly paid.
4. 4Unpaid and Unclaimed Dividend and IEPFIt follows naturally: once a dividend is declared but not paid, Section 124 tells you what the company must do and when.
5. 5Punishment for Failure to Distribute Dividend (Section 127)Study it last so you can compare its 30-day rule and exceptions with Section 124.

How to prepare Dividends

1. Read the text of Sections 123, 51, 124 and 127 once in plain words. Then close the book and say each rule aloud.
2. For Section 123, write the permitted sources of dividend: current year profits after depreciation, undistributed profits of earlier years after depreciation, both, or money provided by the Government under a guarantee. Note that unrealised and notional gains and fair-value changes are excluded from profit.
3. List the extra conditions: previous losses and depreciation not provided must be set off first, no dividend from reserves other than free reserves, and dividend out of accumulated profits transferred to free reserves only under prescribed rules.
4. Make a one-page table of numbers: 5 days to deposit in a separate bank account, 30 days to pay or post, 7 days to transfer to the Unpaid Dividend Account, 90 days for the website statement, 7 years for IEPF, and 12% and 18% interest. Revise it daily.
5. Learn interim dividend separately: who declares it (Board), the periods it can be declared in, the sources, and the restriction on the rate if the company has incurred a loss up to the preceding quarter.
6. Practise short scenarios: a company with losses, a partly paid share, a dispute over who owns a share. For each, name the section and state the result in two lines.
7. Finish with MCQs. For each wrong answer, note whether you mixed up a number, a section or a condition.

Common mistakes in Dividends

• Treating any reserve as a source of dividend.

  Fix: Remember the rule: no dividend from reserves other than free reserves, and accumulated profits dividends follow prescribed rules.

• Mixing the time limits in Sections 124 and 127.

  Fix: Section 127 is about the failure to pay or post within 30 days. Section 124 is the follow-up: transfer to the Unpaid Dividend Account within 7 days after those 30 days. Write the timeline on one line.

• Confusing the two interest rates.

  Fix: 18% simple interest is under Section 127 for non-payment. 12% is under Section 124(3) for default in transferring to the Unpaid Dividend Account.

• Forgetting the exceptions to Section 127.

  Fix: Learn the five situations where no offence is committed, such as dispute over the right to receive, lawful adjustment against dues, and law preventing payment.

• Ignoring the profit computation conditions in Section 123.

  Fix: Use a checklist when solving a scenario: depreciation provided, past losses set off, unrealised gains excluded, only free reserves used.

• Applying Section 352 to ordinary unpaid dividend.

  Fix: Section 124 is for a going concern. Section 352 is only when the company is being wound up and the liquidator holds the money.

Last-day revision: Dividends

• ✓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.

Dividends practice questions

• Under the Companies Act, 2013, a company limited by shares may pay dividends in proportion to the amount paid-up on each share, provided tha…
• Under Section 43, a class of share capital carries a fixed-rate preferential dividend and preferential repayment on winding up, and also par…
• Mehta Foods Ltd. declared a dividend. Shareholder Mr. Rao had given a direction for payment to a bank account which was closed, and the comp…
• Dividend declared by Kaveri Textiles Ltd. was not paid or the warrant posted to shareholder Mr. Rao within thirty days of declaration. Which…
• Dividend declared by Kaveri Textiles Ltd. has not been paid, nor the warrant posted, to a shareholder within the statutory period from the d…
• Under Section 127, a company that fails to pay a declared dividend within thirty days is liable to pay simple interest at which rate per ann…
• Which of the following is the interest liability of a company that defaults in paying a declared dividend, as per Section 127?
• Under the Companies Act, 2013, a company may pay dividends in proportion to the amount paid-up on each share if:

Dividends in other exams

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

• CS ExecutiveDistribution of Profits
• CA IntermediateDeclaration and Payment of Dividend
• ACCA Strategic ProfessionalCorporation tax: taxable total profits