Declaring and paying dividends is a significant aspect of a company’s interaction with its shareholders. In India, the procedure of dividend declaration and payment is governed by the Companies Act, 2013. Below is a step-by-step guide on how to declare and payment dividends for companies operating under this act.
Step 1: Ascertain Profit Availability
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Before declaring any dividend, the board of directors must ensure that there are sufficient profits. As per the Companies Act, dividends can be paid out of:
- Current financial year’s profits
- Profits from previous financial years after providing for depreciation
- Money provided by the government for dividend payment in government companies
Ensure that adequate provisions are made for all unpaid dues, depreciation, and contingencies.
Step 2: Hold Board Meeting
A meeting of the Board of Directors should be convened by giving notice to all the directors of the company as per Section 173 of the Act. In this meeting, the board should:
- Consider the profit and loss accounts
- Decide the quantum of dividends
- Fix the date for Annual General Meeting (AGM)
Record the minutes of the meeting as per Section 118 of the Act.
Step 3: Declare Dividend at AGM
The shareholders of the company must approve the dividend at the Annual General Meeting:
- The board’s recommended dividend is put forward to the members in the AGM
- The declaration is subject to the approval of shareholders
- The dividend declared should not exceed the amount recommended by the Board
Step 4: Deposit Dividend Amount
Within 5 days of the declaration, the company must deposit the total amount of dividend in a separate bank account as per Section 123 of the Act.
Step 5: Dividend Payment
- The company should pay or dispatch the dividends within 30 days from the declaration date to the entitled shareholders
- Electronic modes of payment are preferred
- Ensure proper documentation and record-keeping of the payment
Step 6: Transfer to Unpaid Dividend Account
Any dividend amount that remains unpaid or unclaimed after 30 days of its declaration should be transferred to the ‘Unpaid Dividend Account’ as per Section 124 of the Act. The company should also inform the shareholders about this transfer.
Step 7: Transfer to Investor Education and Protection Fund (IEPF)
If any amount in the ‘Unpaid Dividend Account’ remains unclaimed or unpaid for a period of 7 years, the company shall transfer it to the Investor Education and Protection Fund established under Section 125 of the Companies Act.
Step 8: Maintain Statutory Registers and Records
The company must maintain the prescribed registers and records, including:
- The register of dividends (Form SH-7)
- Any documentation related to unpaid dividends
Step 9: Compliance and Reporting
- File the necessary forms with the Registrar of Companies (RoC) within the prescribed timelines.
- Ensure compliance with tax laws regarding dividend distribution tax (DDT), as applicable.
Step 10: Address Discrepancies and Grievances
The company should setup a mechanism to address any discrepancies and grievances that shareholders might have regarding dividend payments.
Following these steps in accordance with the Companies Act of 2013 helps ensure legal compliance and good corporate governance practices. It protects the interests of the shareholders and maintains the company’s reputation in the corporate ecosystem.
For additional information on dividend declaration and payment compliance, always refer to the latest version of the Companies Act and consult with legal professionals.
Note: As of the writing of this article, the Corporate Laws in India are subject to changes, and as such, the process outlined above might have been updated. Please ensure to check the latest provisions in the Companies Act, 2013, and amendments thereafter.
