1. LEGAL AND SOCIAL
ASPECTS OF
DIVIDENDS
EP JOHN
SEC B
11397044

2. A dividend is money paid directly to an
investor in a company's stock. Some publicly
owned companies offer a dividend with their
stock, while others do not.
 The choice of buying and owning a stock that
pays a dividend is up to the individual investor,
as there are both positive and negative
aspects to consider.
 A company that offers a dividend with its stock
is often a larger, more stable business in a
field with little growth or a slow, steady growth
potential.

3.  When a company offers a dividend to its stock
holders, it is taking money that could be reinvested
into the company, and distributing it to shareholders
as a benefit of investing in the company.
 Receiving a dividend is good for investors, because
they get a guaranteed return on their investment in
the form of the money from the dividend.
 A stock that returns a dividend is good as an
income investment or a long term growth
investment. This is because these stocks tend to
remain stable, and offer a tangible monetary benefit
to investors.

4. DETERMINANTS OF DIVIDEND
POLICY
•Legal: dividends must be paid out of
firm’s earnings/ current earnings
•Financial: a firm can pay dividend only to
the extent that it has cash to disburse
•Economic constraints
•Nature of business conducted by a
company
•Existence of the company: length of
existence of the company.

5. DETERMINANTS OF DIVIDEND
POLICY
•Type of company Organization:
Pvt. Or Public
•Financial needs of the company.
•Market conditions
•Financial arrangements
•Change in government policies

6. LEGAL ASPECTS OF
DIVIDENDS
1.Dividends to be paid only out of profits:
•It is necessary for a company to declare and
pay dividend only out of profits for that year
arrived at after providing for depreciation in
accordance with the provisions of section
205(2) of the act.

7. LEGAL ASPECTS OF
DIVIDENDS
•A dividend could be declared out of
profits of the company for any
previous financial year or years
arrived after providing for
depreciation in accordance with
those provisions and remaining
undistributed.

8. LEGAL ASPECTS OF
DIVIDENDS
•The dividend can also be declared
out of moneys provided by the
central govt. or a state govt. for the
payment of dividend in pursuance of
guarantee given by that govt.

9. LEGAL ASPECTS OF
DIVIDENDS
•The company is required to transfer
to the reserves such percentage of
its profits for that year not exceeding
10% in addition to providing for
depreciation as required under
section 205(2A) of the Act.

10. LEGAL ASPECTS OF
DIVIDENDS
• Unpaid dividend to be transferred to
special dividend account:
•Dividends are to be paid within 30 days
from the date of the declaration
•If they are not paid the company is
required to transfer the unpaid dividend to
unpaid account within 7 days of the expiry
of the period of 30 days.

11. LEGAL ASPECTS OF
DIVIDENDS
•The company is required to open this
account in any scheduled bank as
required under section 205-A of the
Companies Act, 1956
• Dividend is to be paid only to
registered shareholders or to their
order or their bankers

12. TRANSFER OF UNPAID/ UNCLAIMED
DIVIDEND TO INVESTOR EDUCATION
AND PROTECTION FUND
Any money transferred to the unpaid dividend
account of a company in pursuance of section
205A(5) which remains unpaid or unclaimed for
a period of 7 years from the date of such transfer
to unpaid dividend account, shall be transferred
by the company to the investor education and
protection fund established under sub-section (1)
of section 205C

13. TRANSFER OF UNPAID/ UNCLAIMED
DIVIDEND TO INVESTOR EDUCATION
AND PROTECTION FUND
Sub-section (1A) of section 205 stipulates
that the board of directors may declare
interim dividend and the amount of dividend
including interim dividend is to be such
deposited in a separate bank account within
5 days from the date of depreciation.

14. TRANSFER OF UNPAID/ UNCLAIMED
DIVIDEND TO INVESTOR EDUCATION
AND PROTECTION FUND
Failure to do so, every director of the
company, shall, if knowingly a party to the
default, be punishable with simple
imprisonment for a term which may
extend to 3 years and shall also liable to a
fine of rupees for everyday during which
such default continues

15. TRANSFER OF UNPAID/ UNCLAIMED
DIVIDEND TO INVESTOR EDUCATION
AND PROTECTION FUND
The company shall be liable to
pay simple interest at a rate of
18% p.a. during the period for
which such default continues.

16. LEGAL CONSTRAINTS
• Most state securities regulations prevent firms from
paying out dividends from any portion of the company’s
“legal capital” which is measured by the par value of
common stock -- or par value plus paid-in-capital.
• Dividends are also sometimes limited to the sum of the
firm’s most recent and past retained earnings -- although
payments in excess of current earnings is usually
permitted.
• Most states also prohibit dividends when firm’s have
overdue liabilities, is legally insolvent, or bankrupt.

17. INTERNAL CONSTRAINTS
• A company’s ability to pay dividends is usually
constrained by the amount of available cash rather
than the level of retained earnings against which to
charge them.
• Although it is possible to borrow to pay dividends,
lenders are usually reluctant to grant them because
using the funds for this purpose produces not
operating benefits that help to repay them.

18. GROWTH PROSPECTS
• Newer, rapidly-growing firms generally pay little or
no dividends.
• Because these firms are growing so quickly, they
must use most of their internally generated funds to
support operations or finance expansion.
• On the other hand, large, mature firms generally
pay cash dividends since they have access to
adequate capital and may have limited investment
opportunities.

19. OWNER CONSIDERATIONS
• As mentioned earlier, empirical evidence
supports the notion that investors tend to belong
to “clienteles” -- where some prefer high
dividends, while others prefer capital gains.
• They tend to sort themselves in this way for a
variety of reasons, including:
– tax status
– investment opportunities
– potential dilution of ownership

20. MARKET CONSIDERATIONS
• The most important aspect of
dividend policy is that the firm
maintain a level of predictability,
• Stockholders that prefer dividend-
paying stocks prefer a continuous
stream of fixed or increasing
dividends.

21. MARKET CONSIDERATIONS
• Shareholders also view the firm’s
dividend payment as a “signal” of the
firm’s future prospects.
• Fixed or increasing dividends are
often considered a “positive” signal,
while erratic dividend payments are
viewed as “negative” signals.

22. THANK YOU