Dividend Out of Reserves in a Loss Year at Blue Ridge Ceramics
Blue Ridge Ceramics Limited has paid-up equity capital of ₹20 crore, comprising 2 crore shares of ₹10 each. For the year ended 31 March 2024 it incurred a loss of ₹1.2 crore after providing depreciation. Its general reserve stands at ₹9 crore. There is also a revaluation reserve of ₹4 crore, created when the land was revalued in 2019. Dividends declared in the three immediately preceding years were 10%, 12% and 14%. Shareholders are pressing for a 12% dividend this year. The CFO has prepared a note showing that the company can pay it out of reserves, and points out that after paying ₹2.4 crore the reserves will still stand at ₹10.6 crore including the revaluation reserve, well above 15% of capital. The audit committee wants the computation re-checked, and asks what the company must do if ₹2 crore of dividend declared in earlier years has remained unclaimed for eight years.
1. Recompute the maximum dividend the company can lawfully declare out of reserves and state whether 12% is permissible.
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Route. Section 123(1) restricts dividend to profits of the year, undistributed profits of earlier years, or money provided by the Government. With a loss of ₹1.2 crore and no profit of the year, the only route is declaration out of accumulated profits under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014. All four conditions must be met.
Condition 1 - rate. The rate cannot exceed the average of the three preceding years: (10 + 12 + 14) ÷ 3 = 12%. Twelve per cent passes this test.
Condition 2 - ceiling on withdrawal. The amount drawn from reserves cannot exceed one-tenth of paid-up capital plus free reserves. The revaluation reserve of ₹4 crore is not a free reserve; it is unrealised and unavailable for distribution. So: 1/10 × (₹20 crore + ₹9 crore) = ₹2.9 crore. The CFO's ₹10.6 crore figure wrongly includes the ₹4 crore revaluation reserve.
Condition 3 - loss first. The amount drawn must first set off the loss of the year, ₹1.2 crore. Declaring 12% needs ₹2.4 crore for shareholders plus ₹1.2 crore to absorb the loss = a withdrawal of ₹3.6 crore, which exceeds ₹2.9 crore and is not permissible.
Maximum. Drawing the full ₹2.9 crore leaves ₹1.7 crore for distribution, i.e. 8.5% (₹1.7 crore on ₹20 crore). Condition 4 is also satisfied: after withdrawing ₹2.9 crore, reserves of ₹6.1 crore exceed 15% of capital (₹3 crore). The Board should recommend no more than 8.5%.
2. What must the company do with the ₹2 crore of dividend that has remained unclaimed for eight years, and what happens to unpaid amounts generally?
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Two separate obligations are involved.
Unpaid Dividend Account. Under Section 124(1), any dividend declared but not paid or claimed within 30 days of declaration must be transferred within that period to a special account called the Unpaid Dividend Account, opened with a scheduled bank. If the transfer is not made in time, the company must pay interest at 12% per annum from the date the 30 days expire.
Transfer to the IEPF. Under Section 124(2), money lying in the Unpaid Dividend Account which remains unclaimed for seven years from the date of transfer must be transferred to the Investor Education and Protection Fund, together with a statement in the prescribed form (Form IEPF-2) within 30 days of the expiry of the seven-year period. The ₹2 crore, having been unclaimed for eight years, has therefore crossed the deadline and should be credited to the Fund immediately, with the delay regularised and the statement filed.
Consequential duties. The company must display on its website the names of persons whose unpaid dividend has been transferred, and must transfer to the IEPF all shares on which dividend has remained unpaid or unclaimed for seven consecutive years, under Section 124(6).
Effect on the shareholder. Once the amount is credited to the Fund, the company is discharged under Section 124(5); the shareholder's remedy is to claim from the IEPF Authority under Section 125, using Form IEPF-5. The company's liability is not revived by a late claim.