Skip to content

CS Executive · Company Law and Practice

Distribution of Profits for CS Executive Company Law

Distribution of Profits covers how a company lawfully pays dividend, deals with unpaid dividend, and capitalises reserves into bonus shares. Learn the sources allowed under Section 123, the seven-year IEPF rule under Section 124, and the Section 63 bonus conditions. In answers, state the provision, apply it to the facts, then conclude.

What this chapter covers

This chapter in Paper 2 (Company Law and Practice) answers one question: how can a company return value to its members, and what limits does the Companies Act, 2013 put on it? There are two routes. One is dividend, paid in cash out of permitted sources. The other is capitalisation of profits, where reserves are turned into fully paid-up bonus shares.

The core sections are Section 123 (declaration and payment of dividend), Section 124 (Unpaid Dividend Account and transfer to the Investor Education and Protection Fund), Section 126 (dividend and bonus held in abeyance when a transfer is pending) and Section 63 (bonus shares). Section 55 matters too, because the Capital Redemption Reserve can be used to pay up bonus shares. The chapter also lists Section 320 (distribution of property of company). That section has been omitted from the Act with effect from 15 November 2016, so you only need to know that it is no longer law.

The chapter links to other parts of the paper. Share capital and reserves (securities premium, free reserves) decide what you can distribute. Board and general meeting procedure decides who declares or recommends. Financial statements and Schedule II depreciation decide what counts as profit. Master this chapter and those links become easier too.

This chapter is rule-heavy and well suited to written answers. Examiners can test a sentence-level condition (five days, thirty days, seven years, twelve per cent) or a short problem on whether a dividend or bonus issue is lawful. The rules are short and fixed, so careful study gives reliable marks. It also pays off elsewhere, because the same ideas on reserves, free reserves and defaults appear in share capital, accounts and meetings.

Distribution of Profits: topics in the order to study them

  1. 1Dividend: Meaning, Types and Legal FrameworkStart here to learn what dividend is, how final and interim dividend differ, and which sections govern the chapter.
  2. 2Declaration and Payment of DividendThis is the core of Section 123. Learn it before anything else, because the later topics depend on it.
  3. 3Unpaid and Unclaimed Dividend and IEPFIt starts where payment fails, so it follows declaration and payment. It has many time limits, which need separate revision.
  4. 4Capitalisation of Profits and Bonus SharesThis is the other way to distribute profits. Learn it after dividend so you can contrast the two and see why bonus cannot replace dividend.
  5. 5Distribution of Property of Company (Section 320)Study this last and briefly. The section is omitted from the Act with effect from 15 November 2016, so it is a short note and carries no live rule.

How to prepare Distribution of Profits

Treat this as a chapter of conditions and time limits. Build a one-page sheet and keep adding to it. Here is a plan that works on a phone between work hours.

  1. Read Section 123 in the Act itself. List the permitted sources of dividend: current-year profit after depreciation, undistributed profit of earlier years, both, or money provided by Government under a guarantee. Note that unrealised and notional gains and revaluation gains are excluded.
  2. Write the conditions around Section 123 in your own words: transfer to reserves before declaration is optional, dividend cannot come from reserves other than free reserves, and carried-over losses and unprovided depreciation must be set off first.
  3. Learn interim dividend and payment mechanics together. 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. The amount goes into a separate account in a scheduled bank within five days of declaration. Payment is to the registered shareholder, by cash, cheque, warrant or electronic mode.
  4. Draw a timeline for Section 124: 30 days after declaration, 7 days to transfer to the Unpaid Dividend Account, 90 days to publish the statement, 7 years to the IEPF. Add 12% interest on default and the penalty range.
  5. Compare dividend and bonus side by side. Note the sources for bonus (free reserves, securities premium account, capital redemption reserve), the bar on capitalising revaluation reserves, the six conditions in Section 63(2), and the rule that bonus cannot be issued in lieu of dividend.
  6. Practise three or four short answers in ICSI style: state the provision, apply it to the facts, then give a clear conclusion that cites the section. Use facts like a company with accumulated losses or a defaulted fixed deposit.
  7. Spend five minutes on Section 320. Note that it is omitted and revise it only as a one-line fact.

Common mistakes in Distribution of Profits

  • Treating revaluation or fair-value gains 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. Bonus shares also cannot capitalise reserves created by revaluation.

  • Mixing up the time limits in Sections 123 and 124.

    Fix: Keep a timeline. Five days is for depositing the declared amount in a separate bank account. Thirty days is the waiting period for payment or claim. Seven days is for transfer to the Unpaid Dividend Account after that period. Ninety days is for the statement on the website. Seven years is for the IEPF.

  • Forgetting that dividend can only be paid to the registered shareholder or on his order.

    Fix: Link Section 123(5) with Section 126. 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. Bonus and rights offers are held in abeyance.

  • Writing that bonus shares can be issued in lieu of dividend or without checking conditions.

    Fix: Quote Section 63(3). Then check Section 63(2): articles authorise it, the general meeting authorises it on the Board's recommendation, no default on deposits, debt securities or employee statutory dues, partly paid shares made fully paid, and prescribed conditions met.

  • Treating Section 320 as a live provision and writing rules for it.

    Fix: State only that Section 320 is omitted with effect from 15 November 2016. Check the current ICSI study material for how it treats the topic.

  • Giving a bare conclusion with no section number or analysis.

    Fix: Use the ICSI answer structure every time: the provision (with section), the facts applied to it, then a clear conclusion.

Last-day revision: Distribution of Profits

  • 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.

Distribution of Profits practice questions

Distribution of Profits in other exams

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

Distribution of Profits: frequently asked questions

Which sections matter most in the Distribution of Profits chapter?

Section 123 (declaration and payment of dividend), Section 124 (Unpaid Dividend Account and IEPF) and Section 63 (bonus shares) carry most of the weight. Learn Section 126 and the use of the capital redemption reserve under Section 55 as supporting rules.

Can a company declare dividend if it has made a loss this year?

Dividend can be paid out of undistributed profits of earlier years, but only profits arrived at after providing for depreciation. Under Section 123(1), the prescribed rules must be followed when dividend comes from accumulated profits transferred to free reserves. Carried-over losses and unprovided depreciation must also be set off first.

When do shares get transferred to the IEPF?

Under Section 124(6), shares go to the IEPF when dividend on them has not been paid or claimed for seven consecutive years or more. If dividend is paid or claimed in any one of those years, the shares are not transferred. A claimant can later claim the shares back from the IEPF following the prescribed procedure.

Do I need to study Section 320 for the exam?

Section 320 is omitted from the Companies Act, 2013 with effect from 15 November 2016. Know that fact and do not spend more than a few minutes on it. Check the latest ICSI study material to see how it treats the topic.

Is Distribution of Profits a theory or a numerical chapter?

In Paper 2 it is mainly theory and short application problems. Paper 2 is a written paper, so you must explain the rule and apply it to given facts. Numbers are limited to time limits, interest and penalty figures.