CA > Inter > Paper 2 – Skim Notes

Chapter 8 :Declaration and Payment of Dividend

Overview

  • Understanding legal provisions for declaring and paying dividends based on the Companies Act, 2013.
  • Identifying conditions required for declaring dividends from accumulated reserves.
  • Managing unpaid and unclaimed dividends, including relevant accounts and penalties.
  • Exploring the Investor Education and Protection Fund (IEPF) and its functions.
  • Recognizing consequences of failure to distribute dividends.

Key Topics

Meaning of Dividend

  • Defined under Section 2(35) of the Companies Act, 2013 as a distribution of sums to members out of profits, including interim dividends.
  • Represents shareholders’ return on investment, part of distributable profits.
  • Dividends can be interim or final, depending on the timing of declaration.

Deep Dive

  • In-depth analysis of the difference between interim and final dividends, legal implications, and distribution timelines.
  • Case studies on how dividend payments influence shareholder perceptions and stock market performance.

Types of Dividend

  • Interim dividends are declared anytime between financial year closure and AGM, based on available profits.
  • Final dividends are declared during AGM in accordance with recommendations from the Board and approved by shareholders.
  • Preference shares guarantee fixed dividends, while equity dividends vary according to company policy.

Deep Dive

  • Historical trends on dividend payouts among companies of different sizes and sectors.
  • Analysis of dividend policies of major corporations and their effects on stockholder value.

Provisions for Declaring Dividend

  • Dividends can be declared from current year profits, past undistributed profits, or free reserves.
  • Depreciation must be accounted for before declaring dividends to prevent financial misstatement.
  • Transfer to reserves before declaring dividends is discretionary for companies.

Deep Dive

  • Examination of legal ramifications for declaring dividends without adequate profits or reserves based on recent court rulings.
  • Impact of financial crises on companies’ dividend declarations in certain industries.

Unpaid Dividend Account (UDA)

  • Unpaid dividends must be transferred to the UDA if not claimed within 30 days of declaration, in compliance with Section 124.
  • Companies are required to prepare statements detailing unpaid dividends and make them publicly available.
  • Interest of 12% will accrue on unpaid amounts not transferred to the UDA timely.

Deep Dive

  • Discussion on the implications of unclaimed dividends on company liquidity and cash flow management.
  • Case studies on how companies manage their unpaid dividend accounts and public relations with shareholders.

Investor Education and Protection Fund (IEPF)

  • Established by the Central Government to handle unclaimed and unpaid dividends and promote investor awareness.
  • Fund receives money from UDA, grants, donations, and other specified sources.
  • Resources utilized for refunds, investor education, and handling legal expenses related to class actions.

Deep Dive

  • Analysis of the effectiveness of IEPF programs in promoting investor understanding and engagement.
  • Impact of unclaimed amounts on the company’s financial health and corporate governance assessment.

Consequences for Failure to Distribute Dividend

  • Companies must pay declared dividends within 30 days to avoid penalties; failure may lead to fines and director liability.
  • Potential imprisonment for directors knowingly partaking in default for non-compliance with dividend distribution rules.
  • Exceptions to penalties include operational issues, direction compliance failures, and disputes.

Deep Dive

  • Recent legislative changes impacting dividend distribution laws and best practices for compliance.
  • Exploration of case law regarding directors’ responsibilities in dividend distributions and corporate accountability.

Right of Dividend, Rights Shares, and Bonus Shares

  • Section 126 mandates withholding dividends related to non-registered share transfers until resolved.
  • Companies must manage rights offers and bonus shares in alignment with registration of shareholder transfers.

Deep Dive

  • Comparative analysis of companies’ policies on handling unregistered share transfers and shareholder rights.
  • Study of challenges in shareholder communication and dividend distribution attributed to disputes.

Summary

This chapter comprehensively reviews the legal framework governing the declaration and payment of dividends as per the Companies Act, 2013. Key aspects include understanding what constitutes a dividend, the types of dividends, the necessary provisions for declaring dividends based on financial standings, handling unpaid dividends through the Unpaid Dividend Account, and ensuring compliance with the Investor Education and Protection Fund mandates. Additionally, it addresses the repercussions of failing to distribute dividends timely and the rights involved in share transactions, culminating in reflections on corporate governance and shareholder relationships.