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CA Intermediate · Corporate and Other Laws · Declaration and Payment of Dividend

Vikram Auto Ltd. has a paid-up capital of Rs 100 crore and free reserves of Rs 40 crore. It incurred a loss in the current year and proposes to declare a dividend out of free reserves accumulated in earlier years. Its Board proposes a dividend rate of 14%, while the average dividend rate of the last three years was 10%. Which condition is correct under the Companies (Declaration and Payment of Dividend) Rules, 2014?

When a company declares dividend out of free reserves despite inadequate or no profits, the rate cannot exceed the average rate declared in the three immediately preceding years. Since the average is 10%, a 14% dividend is not permitted, although payment from free reserves is allowed.

  1. ADividend rate cannot exceed the average rate of the three preceding years, i.e. 10%Correct
  2. BDividend rate may be up to 15% of paid-up capital without restriction
  3. CThe dividend can be declared at 14% if the Board certifies adequate cash
  4. DDividend out of free reserves is prohibited in a year of loss

Explanation

In case of inadequacy or absence of profits, the dividend rate declared cannot exceed the average of the rates declared in the three immediately preceding years. Here the average is 10%, so 14% is not permitted. The dividend is permitted out of free reserves, subject to this cap and other conditions such as the post-dividend reserve balance.

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