Corporate and Economic Laws · Dividends

Punishment for Failure to Distribute Dividend under Section 127

Updated 11 October 2026 · Fact-checked

Section 127 punishes a company that declares a dividend but does not pay it, or post the warrant, within 30 days of declaration. Directors who knowingly cause the default face imprisonment up to two years and fine of at least ₹1,000 a day. The company pays 18% simple interest. Five exceptions apply.

Understand Punishment for Failure to Distribute Dividend (Section 127)

Once a company declares a dividend, the amount becomes a debt owed to the shareholder. Section 127 makes sure the company does not sit on it. The law gives the company 30 days from the date of declaration to pay the dividend or post the warrant to every shareholder entitled to it.

If the company misses the 30 days, two things follow. First, the directors face criminal liability, but only a director who is knowingly a party to the default. A director who did not know and was not involved is not caught. Second, the company must pay simple interest at 18% per annum for as long as the default continues.

The punishment for such a director is imprisonment which may extend to two years, and a fine of not less than ₹1,000 for every day the default continues. Note the words: imprisonment is up to two years (a maximum), while the fine has a minimum per day and no upper limit stated.

The section also gives five situations where no offence is deemed committed. They cover cases where the failure is not the company's fault: a legal bar on payment, shareholder directions that cannot be followed, a dispute over who gets the dividend, a lawful set-off, and any other reason not due to the company's default.

For listed companies, Section 24 says that matters of non-payment of dividend under Section 127 are administered by SEBI through regulations. In other cases the Central Government administers it. This split is a favourite short-answer point.

Key rules to remember

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.

How to solve Punishment for Failure to Distribute Dividend (Section 127) questions

Use this order for any problem or case question on dividend default.

1Confirm a dividend was actually declared, and note the date of declaration.
2Count 30 days from that date. Check whether the dividend was paid or the warrant posted by then.
3If late, identify each shareholder who was not paid and the number of days of default.
4Check the five exceptions one by one against the facts. If one fits, no offence is deemed committed.
5If no exception applies, state the company's liability: 18% simple interest for the default period.
6Identify which directors are liable. Only those knowingly a party to the default are punishable.
7State the punishment: imprisonment up to two years and fine of at least ₹1,000 per day. Compute the minimum fine if days are given.
8Add the regulator point if the company is listed: SEBI administers it under Section 24.

Quickest way: 30-day, exception, director test

When to use it: Use for MCQs and short case scenarios where you must decide quickly whether an offence exists.

Declaration date plus 30 days: was payment or posting done?
Scan for the five exceptions. Words like dispute, law, set-off, shareholder direction are clues.
Ask: was the director knowingly involved?
If all three point to default, write: interest 18% simple, jail up to 2 years, fine at least ₹1,000 per day.

Common mistakes in Punishment for Failure to Distribute Dividend (Section 127)

Saying every director is punishable automatically.
Students read 'every director' and stop there.
Fix: Add the condition: only if he is knowingly a party to the default.
Writing compound interest or a wrong rate such as 12%.
12% appears in Section 352 for liquidators and gets mixed up.
Fix: Section 127 interest is 18% per annum, simple.
Saying the fine is up to ₹1,000 per day.
Confusing a minimum with a maximum.
Fix: The fine shall not be less than ₹1,000 for every day. ₹1,000 is the floor.
Counting 30 days from the AGM or the payment date.
Students link dividend to the meeting date.
Fix: Count from the date of declaration.
Treating a dispute over the right to dividend as an offence.
Students forget the exceptions list.
Fix: A dispute regarding the right to receive the dividend means no offence is deemed committed.
Writing that imprisonment is a minimum of two years.
Loose reading of 'two years'.
Fix: Imprisonment may extend to two years, so two years is the maximum.

Worked examples

Example 1

Ganga Textiles Ltd declared a final dividend of ₹10,00,000 on 1 September. Because of an oversight, the amount was paid to shareholders only on 11 October. Directors knew of the delay and took no action. Advise on the consequences under Section 127.

Show the solution

Time allowed is 30 days from declaration: 1 September plus 30 days is 1 October.
Payment on 11 October is after the limit, so there is a default.
None of the five exceptions fits: no legal bar, dispute or set-off. An oversight is the company's own default.
The company is liable to pay simple interest at 18% per annum for the period the default continues.
The directors who knowingly were parties to the default are punishable with imprisonment up to two years and fine of at least ₹1,000 for every day of default.

Answer: Ganga Textiles Ltd is in default under Section 127. The company must pay 18% simple interest for the default period, and the knowing directors face up to two years' imprisonment and a fine of not less than ₹1,000 per day.

Example 2

Mehta Industries Ltd declared a dividend on 5 March. A shareholder, Mr Rao, owes the company ₹40,000 for goods. The company adjusted this against his dividend and paid the balance after 45 days. Another shareholder's dividend was held back because two persons claimed to be entitled to the same shares. Is any offence committed?

Show the solution

Both payments were made or withheld beyond 30 days, so test the exceptions.
Mr Rao: the dividend was lawfully adjusted against a sum due to the company from the shareholder. This is exception (d).
Second shareholder: there is a dispute regarding the right to receive the dividend. This is exception (c).
Where an exception applies, no offence under Section 127 is deemed to have been committed.
So neither the directors' punishment nor the default consequences arise for these two amounts.

Answer: No offence is deemed committed for either amount. The set-off against Mr Rao falls under exception (d) and the disputed claim falls under exception (c).

Exam tips

Learn the numbers cold: 30 days, 2 years, ₹1,000 per day, 18% simple interest. MCQs test exactly these.
Write the five exceptions as a short list. A theory question often asks for them directly.
In case scenarios, always state the knowledge condition for directors before giving the punishment.
Use the word 'minimum' for the fine and 'maximum' for the imprisonment to avoid losing marks.
Mention Section 24 and SEBI when the case says the company is listed.

Practice questions from Dividends

Punishment for Failure to Distribute Dividend (Section 127): frequently asked questions

What is the time limit to pay dividend under Section 127?

The company must pay the dividend, or post the warrant, within 30 days from the date of declaration. This applies to every shareholder entitled to the dividend. Missing it is a default unless an exception applies.

Who is punished if a company fails to pay dividend?

Every director who is knowingly a party to the default is punishable. A director with no knowledge of it is not covered. The company also pays 18% simple interest during the default.

What is the penalty under Section 127?

Imprisonment may extend to two years, and the fine shall not be less than ₹1,000 for every day the default continues. The company separately pays simple interest at 18% per annum.

When is no offence committed under Section 127?

No offence is deemed committed in five cases: a law prevents payment, the shareholder's directions cannot be complied with and this was communicated, there is a dispute over the right to receive, the dividend was lawfully adjusted against a sum due from the shareholder, or the failure was not due to any default of the company.

Who administers Section 127 for listed companies?

Under Section 24, for listed companies or those intending to list, SEBI administers it by making regulations on non-payment of dividend. In any other case the Central Government administers it.