Dividend: The word, Dividend has two meanings, in case of a going concern it means the portion of profits of the

Company which is allocated to holders in the Company; in case of a winding up company it means the division of the realized assets among the creditors and contributions according to their respective rights. Section 205 of the Companies act relates to the former category of dividend. History behind enactment: The evolution began with Lee v, Neuchatel Asphalte Co., (1886-90) All ER Rep 947 where the courts laid down even beyond the expectation of accounts that the reduction in wasting assets need not be taken care for working out divisible profits. In order, however, to appease the commercial world the courts recognized a distinction between fixed and circulating assets and insisted that while fixed capital may be lost or wasted, the circulating capital must be maintained out of revenue. With this should be contrasted the judicial latitude that fixed assets may be revalued on a fair and reasonable basis and the surplus may thus be distributed as Dividend. Now the provisions governing declaration and payment of dividend by a company are provided in the Companies Act, 1956 (referred to as Act) and the Rules made there under including the Companies (Transfer of Profits to Reserve) Rules, 1975, Companies (Declaration of Dividend out of Reserves) Rules, 1975. Determination and Declaration of Dividend: Section 205 of the Act only prescribes that dividend shall be paid out of profits of the company. Further, it has become obligatory for a company to provide for depreciation as required by Section 205(2) of the Act. Depreciation has to be provided for the current year as well as for arrears of depreciation if any. It further states that the depreciation must be provided to the extent specified in the Section 350 of the Act. If we refer this Section, it states that the depreciation is to be calculated at the rate specified in Schedule XIV of the Act. Further, it is to be noted that if the Act makes no provision for a particular kind of asset, then its depreciation may be worked out on a basis approved by the Central Government in this regard. A company has got two choice to arrive at depreciation i.e. either to adopt the above said procedure or to work out depreciation by dividing ninety five percent of the original cost of the depreciable asset by the specified period in respect of such asset.The previous years losses, if any must also be set off against the profits of any subsequent year or years before any dividend can be paid. A company cannot declare dividend in the following circumstances:a) When a Company is not having profit i.e. is a loss making company. b) When a Company fails to redeem its preference shares as per the provisions of Section 80A of the Companies Act. (Sub Section 2B) Further, a Company cannot declare a dividend without the prior approval of Financial Institution, in case if the covenants of the loan agreement stipulates in this regard. Section 205(3) stipulates that no dividend shall be payable except in cash. Dividends cannot be declared out of the Securities Premium Account or the Capital Redemption Reserve Account or Revaluation Reserve or Amalgamation Reserve or out of the Profit on re-issue of forfeited shares or out of profit earned prior to the incorporation of the Company. Compulsory Reserves

Section 205 (2A) of the Act prescribes that before any dividend is declared or paid, certain percentage of profits as may be prescribed by the Central Government, but not exceeding 10% will have to be transferred to the reserves of the Company. The company may, however, voluntarily create more than the prescribed percentage and transfer to the reserves of the Company. If in a particular year, on account of inadequacy of profit, the company has to pay dividends out of the previous years reserves, it should follow such rules as may be made by the Central Government. In case of any deviation from such rules, then the company can do so only with the previous approval of the Central Government. The term Reserve meant in the said Rules means Free Reserves i.e . reserve which are not created or set apart or intended for any special purpose. For e.g. Development Rebate Reserve, Capital Reserve or Special Reserve will not come under the category of free reserves for the purposes of this rule. According to the Companies ( Transfer of Profits to Reserves) Rules 1975, before declaration or payment of dividend, profits shall be compulsorily transferred to reserves at the following rates:Rate of proposed dividend Amount to be transferred to Reserves Not exceeding 10% Exceeding 10% but not exceeding 12.5% Exceeding 12.5% but not exceeding 15% Exceeding 15% but not exceeding 20% Exceeding 20% Nil 2.5% of current profits 5% of current profits 7.5% of current profits 10% of current profits.

Declaration of dividend out of profits earned by earlier years Section 205 of the Act, provides that a company can declare dividend out of the profits of the previous years. It stipulates that if owing to inadequacy or absence of profits in any Financial Year, the Company proposes to declare dividend out of the profits of the previous financial year or years and transferred to its reserves, such declaration shall be passed by a resolution at the Board Meeting with the consent of all the directors and approval of the financial institution whose term loans are subsisting and also to be passed by the shareholders by a special resolution at the Annual General Meeting. The Ministry has received suggestions, stating that the resolution passed by the Board should be approved by all the directors present at the Board Meeting and not by with the consent of all the directors of the company.

Interim Dividend Dividends can be declared only by a resolution of the shareholders in accordance with the Directors recommendation at a general meeting. But, if so permitted by the Articles of Association of the company, the Directors can declare an interim dividend between two Annual General Meetings. Thus, the shareholders do not get any vested right under a Directors resolution declaring an interim dividend. Section 207 of the Companies Act which applies to interim dividend also, stipulates penalty for failure to distribute dividend to the shareholders within 30 days of its declaration. The penalty prescribed under the Act is that the directors shall be punishable with simple imprisonment of three years along with a fine of Rs.1000 for every day during which such default continues and the company shall be liable to pay simple interest at the rate of 18% p.a. during the period for which such default continues. Further, since the penalty prescribed is by way of both fine and imprisonment, the offence is also not compoundable under Section 621A of the Companies Act. Thus, going by the principle, in law one cannot take advantage of his own default, the Board of Directors have got power to rescind th th the payment of dividend only upto the 29 day of its declaration and not thereafter. It is because, after the 30 day, it becomes a statutory default.

When dividend need not be paid

In the following cases, a company need not pay dividend within 30 days from the date of declaration:a) a) Where dividend could not be paid by reason of the operation of any law. b) b) Where a shareholder has given directions to the company regarding payment of dividend and those directions cannot be complied with. c) c) Where there exists a dispute regarding the right to receive the dividend. d) d) Where dividend is lawfully adjusted by the company against any sum due to its from the shareholder. e) e) Where the non-payment of dividend is not due to any default of the company. Disqualification for directors:As per Section 274 (1)(g) of the Companies Act, 1956, if a public company fails to pay dividend and such failure continues for one year or more, then any person who is a director of the company at the time when default is made, shall not be eligible to the appointed a director of any other public company for a period of 5 years. Conclusion The payment of dividend will instil confidence to the shareholders of the company, after all a company can declare and pay dividend only if it makes profit. Further, payment of dividend consistently over a period of time would enhance the image of the company. The company would also stand to benefit as whenever it requires additional funds for expansion, it can very easily tap the capital markets (as investors would be ready and willing to invest) without resorting to huge borrowings from Banks and Financial Institutions. The shareholders can be rewarded by other means i.e. declaring bonus shares, rights shares etc. but since dividend is paid in cash it is considered one of the best reward a company can do to its shareholders for enhancing their wealth. The shareholders also enjoy additional benefit since the dividend which they receive is tax free and need not pay any tax on dividend and the company would be liable to pay Dividend Distribution Tax. Thus, a consistent dividend paying company is considered to be a good investment option to the investors.