Dividend and Interest
The exam tests the sources from which dividend may be paid, the statutory timelines, and the difference between dividend and debenture interest.
Dividend
- Dividend (Sec 2(35)) is paid on paid-up capital and is declared by members at the AGM on the Board's recommendation; the Board may declare an interim dividend (Sec 123(3)).
- Sources: profits of the current year, undistributed profits of earlier years, or money provided by government or statutory bodies. Where profits are inadequate, up to 10% of paid-up capital plus free reserves may be used with prior approval by ordinary resolution.
- No dividend on calls in arrears; interest on calls in advance is paid at the rate in the articles, not exceeding 12% per annum.
- Payment within 30 days of declaration. Unpaid amounts go into the Unpaid Dividend Account within 5 days of the expiry of those 30 days, and to the IEPF after 7 years.
- Section 127: failure to pay attracts a fine of ₹1,000 per day up to ₹1 lakh on the company, and imprisonment up to 2 years plus a similar fine on every officer in default.
Interest on debentures
Interest is a charge on profit, payable even in a loss year, with TDS at 10% above ₹5,000 (Sec 193). Debenture Redemption Reserve requirements depend on the class of company under Rule 18.
Worked example
Paid-up equity is ₹40,00,000 in 4,00,000 shares; 12% preference capital is ₹10,00,000; profit is ₹8,00,000. Preference dividend is ₹1,20,000. If equity dividend is declared at 10%, it is ₹4,00,000, total ₹5,20,000, well within profit. The preference holder is paid first.
Traps
- Paying dividend out of capital.
- Confusing the 30-day payment rule, the 5-day deposit rule and the 7-year IEPF rule.
- Forgetting that preference dividend is paid before equity dividend.