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7 Dividend and Interest
Companies collect capital by the issue of owned capital and borrowed capital sources. They use capital
for conducting their business. They earn revenue (income) from the Sales and other operations. This revenue
is used for payment of all expenditure of the organization. Expenditures include purchase, production, office,
selling and distribution expenses. The remaining amount is used for payment of return to capital providers.
Interest is paid by the company as return on borrowed capital. It is not related to profit and obligated to pay at
fixed rate. Dividend is paid to the shareholders as a return on investment after payment of tax to government
and maintains reserve for organization. It is related to profit and not obligated to pay at fixed rate.
The term dividend is derived from Latin word ‘Dividendum’ which means ‘that which is to be divided’.
It is a part of the profits of the company which is divided into its shareholders.
Definitions
❖ “A distribution to shareholders out of profits or reserves available for this purpose”___ ICAI
❖ “In case of going-concern, it means portion of profits of a company, which is allotted to the holders of
shares in a company.” ___The Supreme Court
❖ “A dividend is a distribution of a portion of a company’s earnings decided by the board of directors, to a
class of its shareholders”.
❖ “Dividend is a part of divisible profits of a business company which is distributed to the shareholders.” ___
S M Shah
From the above definition it is clear that dividend is a distribution of a portion of a company’s earnings,
decided by the board of directors, to a class of its shareholders. A share of the after-tax profit of a company,
distributed to its shareholders according to the number and class of shares held by them is called dividend.
Features
1. Reward on Investment: Shareholders provide owned capital to the organization and bear risk of the
business. They are owners of the company and have right get profit from the company. So company paid
part of profit to shareholder as a dividend. It is return on the share investment. Therefore, dividend is
considered reward for equity shares and preference shares.
2. Part of Profit: Company earns revenue from sales and other operations of business. This revenue is used
for payment of all expenditure, interest to creditors and tax to the government. If any amount remains
after payment of these, this amount considered as a ‘profit’ of the company. This profit divided into
shareholders and company. Shareholders get dividend and company get reserve fund. So dividend is a part
of profits of the company.
3. Unconditional Payment: For the payment of dividend, company does not impose any specific conditions
on the receiver (shareholder). So dividend is an unconditional payment made by the company.
4. Rate of Dividend: Company issue two types of shares, so rate of dividend changes as per type of shares.
Preference shareholders get dividend at fixed rate and equity shareholders get dividend at fluctuating rate.
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If the company has issued equity shares with differential rights as to dividend, the terms of issue of such
shares will govern rights of shareholders about receiving the dividend.
5. Recommended by Board of Directors: Dividend can be declared only on recommendation of the board of
directors, because they have proper authority to recommend the rate of dividend. Without
recommendation of board of directors company cannot declare dividend.
6. Shareholder Sanction: The rate of dividend is recommended by the Board of Directors and approved by
the shareholders by passing ordinary resolution at the Annual General Meeting. Shareholders have
ultimate authority in the company.
7. Statutory Debt: Once dividend approved and declared by shareholders it becomes statutory debts of the
company. It cannot be canceled. So after declaration within 5 days open the separate bank account and
transfer the dividend amount. If company not paid within time limit, it becomes default and penalized by
law.
8. Paid on: As per the regulation of 83 of the Table F (AOA) of Companies Act, 2013, dividend is paid in
proportion of paid-up share capital. It means company only considers paid paid-up value of shares while
calculating dividend. The unpaid value and advance call cannot be considered for the payment of dividend.
On the advance call company pay interest and on unpaid call company charge interest.
9. Paid in: As per Companies Act, company must be paid dividend in cash form, any other form not allowed
such goods, shares, debentures, discounts, concessions, facilities, etc.
10. No Dividend for Past Year: Dividend for any previous year cannot be declared once that year’s Annual
Accounts has been approved in the Annual General Meeting. Company only provide dividend for current
year. Company also cannot declare dividend for future year.
11. Sources of Dividend: Profit is the main source for the payment of dividend. Current year profit, last year’s
profit (Reserve Fund), Capital Profit and money provided by government use as source of dividend. But
company cannot use securities premium amount and capital amount for payment of dividend.
12. Affect the Market Price: Dividend is affecting the market price of the shares. Dividends declared by a
company are generally sign of their financial health. Investors prefer company with a history of good
dividends as it adds stability to their investments. If company declare dividend to shareholders, increase
the market price and if company does not declare dividend, decrease the market price of shares.
13. Dividend Policy: Dividend policy means set of guidelines related to ascertainment, declaration and
payment of dividend to shareholders. It is an action plan adopted by the Board of Directors for distribution
of profits. By the policy Profit (Earnings) Available to Equity shareholders is divided into dividend and
reserve fund. Normally company use following two policies regarding dividend.
a) Conservative Policy: Under Policy company pay low dividend to shareholders and maximum
amount is retained as a reserve fund. This policy is adopted by the company, when require more
funds for expansion, growth and modernization of business.
b) Liberal Policy: Under this policy company declare higher rate of dividend to shareholders and
retain lower portion of profit as a reserve fund. This policy is adopted by the company, when
organization does not have any future plan regarding expansion, growth and modernization of
business.
14. Affecting factors: The dividend policy is affected by the many factors. These factors are classified into
internal and external.
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a) Internal Factors: Nature of business, future policy, sources of dividend, management approach,
expansion and diversification programs, etc.
b) External Factors: Legal provisions, tax policies, business cycles, market completion, inflation level,
interest rate, etc.
15. Types: Dividend is classified into two types
a) Final Dividend: It is declared at Annual General Meeting of the company. It is recommended by
board of directors and approved by shareholders by passing resolution in the AGM.
b) Interim Dividend: it is declared by the BOD between two AGM of the company. For the interim
dividend require provisions in the Articles of Association. This dividend depends upon profit and
loss position of company.
Legal Provisions on Sources of Dividend (Sec 123)
1) Out of Current Profits: Dividend should be provided from the current year profits after making the
provisions for the depreciation and transfer to Reserves.
2) Out of Accumulated Profits/ Last Year’s Profit/ Reserve Fund: Company every year transfers some part of
profits to the reserve fund. This Reserve Fund also known as Accumulated Profits/ Last Year’s
Profit/Retained Earnings. Reserves can be used by company for the payment of dividend, but before
declaration of dividend company must make provisions for depreciation.
3) Out of Money provided by Government: Sometimes Central Government or State Government gives the
guarantee to provide money for the payment of dividend to shareholders. So this money can be used by
the company for the payment of dividend. Normally central or state government provides this type
guarantee in case of infrastructural development companies and government companies.
4) Out of Capital Profits: When company earns profits by selling of old fixed assets or revaluation of assets,
this profit known as capital profits. This profit can be used by company for payment of dividend. For using
the capital profits company must fulfilling these conditions:
a. Capital profits are realized in cash.
b. Approved by Articles of Association
c. It remains as profits after revaluation of all assets and liabilities
5) Free Reserve: No dividend shall be declared or paid by a company from its reserves other than free
reserves. Free Reserves means the reserves available for distribution of profits as per latest audited
Balance Sheet of the company. Company does not includes reserve for depreciation, reserve for
redemption of debentures or deposits or any other statutory reserves
6) No Capital Amount: For the payment of dividend company cannot use any capital amount, because capital
amount raised for satisfying the fixed capital and working capital requirement of the organization.
Legal Provisions for Declaration of Dividend
1) Board Meeting: Dividend can be declared only on recommendation of Board of Directors, because they
have proper authority as per law. Company arranges the board meeting and passes the following
resolutions.
❖ Approve the Annual Accounts (Balance Sheet and Profit & Loss A/c)
❖ Rate of Dividend and amount of dividend to be paid. (for Preference shareholder fixed rate and for
Equity shareholder fluctuating rate generally average of last 3 years)
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❖ Book closure date for dividend (Register of Members and Transfer Book)
❖ Fixing the date and agenda of Annual General Meeting
❖ Bank with which a separate account should be opened to transfer the dividend amount.
2) Shareholder Approval: As per the regulation 80 of Table F (AOA) dividend must be declare at the Annual
General Meeting. The rate of dividend is recommended by the Board of Directors in the board meeting
and this rate of dividend is approved by shareholders by passing an ordinary resolution at Annual General
Meeting. The equity shareholders (members) do not have a right to increase rate of dividend which is
recommended by the board of directors, but they may be decrease the rate of dividend. Once the dividend
is declared at the General meeting it cannot be revoked {cancel}. Company is not permitted to declare it
second time in that year.
3) Separate Bank Account: Section 123(4) provides that the amount of the dividend, including interim
dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of
declaration of such dividend.
4) Prohibition to Pay Dividend: Companies may be prohibited for declaration and payment of dividend as per
following provisions.
❖ As per Secretarial Standards-3 company shall not declare Dividend on its equity shares in case of non-
compliance of provisions relating to the acceptance of deposits such repayment of deposit or interest
payment.
❖ A company shall also not declare any Dividend, if it has defaulted in –
a) Redemption of debentures or payment of interest thereon or creation of debenture redemption
reserve,
b) Redemption of preference shares or creation of capital redemption reserve,
c) Payment of Dividend declared in the current or previous financial year(s), or
d) Repayment of any term loan to a bank or financial institution or interest thereon, till such time the
default is subsisting.
❖ No Dividend shall be declared by the company during the extended time, if any, granted by the
Tribunal/Court for repayment of above liabilities.
Provisions for Listed Companies for Declaration of Dividend
When a company’s shares are listed on the Stock Exchanges, the company has to follow additional
requirements with respect to listings agreements. They are as follows:
1) Notify the stock exchange where company’s securities are listed at least 2 days in advance of the date
Board Meeting held to consider the recommendation of final dividend.
2) After the board meeting company immediately issue intimation to Stock Exchange about declaration of
dividend
3) To give notice of book closure to the stock exchange at least 7 working days before the closure or
record date.
4) Close the Register of Members and Transfer Register
5) Time gap between two book closures and record date would be at least 30 days.
6) Company must use electronic mode of payment such as Electronic Clearing Services (ECS)/ National
Electronic fund Transfer (NEFT), as approved by the Reserve Bank of India (RBI).
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7) Listed company has to express the dividend on per share basis only.
❖ Book Closures: It is the time period when company does not handle adjustment to the Register or requests
to transfer shares.
❖ Record Date: It is the cut-off date for determining the number of registered members who are eligible for
corporate benefits like dividends and bonus shares
Legal Provisions for Payment of Dividend
1. Paid in Cash: The Company must pay dividend in the form of cash only. It cannot be issued in any other
form such as goods, bonus shares, debentures, other financial instruments, discounts, concessions,
facilities, etc.
2. Modes of Payment: Dividend is a portion of profits of the company that is distributed among the
shareholders of organization. The following modes are used for payment of dividend
a) Dividend Warrant: It is a cheque sent by a company to a shareholder for payment of dividend to the
registered address of the shareholder. If shares hold in physical format that time company issue the
dividend warrant. Normally dividend warrants are issued at par. Dividend warrant at par means it is
cheque of dividend where payee gets exact amount stated in the cheque without any charge payable
even if it is issued out of the state.
b) Dividend Mandate: A shareholder may wish to get dividend credited directly in the bank account.
Shareholder is required to send a request to the company in prescribed form called, ‘Dividend
Mandate’. It refers to an authorization by a stockholder to the company in which he or she has a
holding to pay dividends directly into his or her bank account. By dividend mandate save efforts, time
and cost of shareholder and company. It also reduces the chances of loss of physical cheque in transit.
c) Electronic Mode: Company can use electronic mode to pay dividends to its shareholders. Listed
Company must use electronic mode for payment of dividend such as Electronic Clearing Services (ECS)/
National Electronic fund Transfer (NEFT), as approved by the Reserve Bank of India (RBI).
3. Joint Holding of Shares: When a person holds one or more shares jointly with one or more person(s) in a
Company, he/she is called Joint shareholder. Dividend warrant should be sent to the registered address of
the first named joint shareholder as per the Register of Members or to such a person at his address as the
shareholder or joint shareholders have given to the company in writing.
4. Time Limit: Company must pay dividend within 30 days from the date of its declaration. It is a time limit
for payment of dividend as per law.
5. Dividend Entitlement: Dividend is entitled to shareholder as per types of shares. Preference shareholders
are get dividend before the equity shareholders. Company first pay dividend to preference shareholders
and arrears of dividend on cumulative preference shares. Then remaining amount available for equity
shareholders, from this amount company separate reserve fund and pay dividend to equity shareholders,
normally it is an average of last 3 years. If any profit amount remains after this, company distribute this
amount into equity shareholders and participating preference shareholders.
6. Payable To: If shares are held in Physical form, dividend is paid to the shareholders whose names appear
in Company’s Register of Members. If shares are held in electronic form, dividend will be paid to the
beneficial owner as per statements provided by the Depository.
Physical Form Registered Shareholder
Electronic Form Beneficial Owner
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7. Default: If company makes any mistake regarding sources, declaration and payment of dividend, it
considered as a default of company and declared dividend is considered illegal. That time every director
punished by monetary fine or imprisonment or both. Company will be liable to pay simple interest at the
rate of 12% p.a. during the period when the default continues. If company fail to comply with any of
requirement of this section, the company and directors shall be liable to pay fine.
Unpaid and Unclaimed Dividend (Sec 124 & Sec 125)
The dividend declared by the company but not paid to the shareholders within 30 days from
declaration, is known as Unpaid Dividend. As per the Companies Act unpaid dividend considers default of the
company.
Dividend declared by the company but shareholder not encashed or claimed the dividend warrant
from the bankers of the company within 30 days and such amount remain unpaid with the bank, is known as
Unclaimed Dividend.
The dividend declared by company but has not been paid by it or claimed by a shareholder within 30
days of its declaration is known as Unpaid and Unclaimed Dividend. Provisions regarding Unpaid/Unclaimed
Dividend as follows
a) Unpaid/Unclaimed Dividend Account: After the declaration of dividend company must make arrangement
regarding payment of dividend within 30 days. Any such amount of dividend remain unpaid or unclaimed
should be transferred to ‘Unpaid Dividend Account’ opened in a scheduled bank by the company.
b) Time Limit for Transfer: the unpaid/unclaimed dividend amount transfer should be within 7 seven days of
end of 30 days within which payment was to be made. In other words this transfer should happen within
37 days from declaration.
c) Statement on a Website: The Company also prepares the statement of Unpaid Dividend Account and
publishes on company’s website or any other website as approved by the Central Government with 90
days from transfer amount. Statement containing the names, their last known addresses and the unpaid
dividend to be paid to each person.
d) Claiming Unpaid Dividend: After transfer any shareholder make claim for dividend payment, that time
company approve the claim and make payment of dividend from the Unpaid Dividend Account after
verification of details.
e) Investor Education and Protection Fund (Sec 125): Any amount in the Unpaid Dividend Account of a
company which remains unpaid/ unclaimed for a period of 7 years from the date of such transfer shall be,
transferred by the company to ‘Investors Education and Protection Fund’. The company shall send a
statement in the prescribed form of the details of such transfer to the authority which administers the said
Fund and that authority shall issue a receipt to the company as evidence of such transfer
f) Claim from IEPF: If any shareholder make claim on unpaid dividend after transfer the amount to IEPF. The
claimant of money will have to follow the procedures and submit necessary documents to get claim from
IEPF along with a statement in the prescribed form which gives details of such transfers.
g) Offence & penalty: Section 124(7) provides that if a company fails to comply with any of the requirements
of this section, the company shall be punishable with fine which shall not be less than five lakh rupees but
which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees.
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❖ Investor Education and Protection Fund (IEPF) has been set-up under Section 205C of the Companies Act,
1956 by way of the Companies (Amendment) Act, 1999. The IEPF fund has been set up under the Ministry
of Corporate Affairs and SEBI for promotion of investor awareness and protection of investor interests. As
per the Act, the following amounts which have remained unclaimed and unpaid for a period of seven years
from the date they became due for payment shall be credited to the IEPF:-
a) Unpaid dividend accounts of the companies;
b) The application moneys received and due for refund;
c) Matured deposits;
d) The interest accrued in the amounts referred to in clauses (a) to (d);
e) matured debentures;
f) Grants and donations by the Central Govt., State Govt., companies or any other institutions;
g) The interest or other income received out of the investments made from the Fund.
❖ Scheduled banks are covered under the 2nd Schedule of the Reserve Bank of India Act, 1934. To qualify as
a scheduled bank, the bank should conform to the following conditions:
➢ A bank that has a paid-up capital of Rs. 5 Lakh and above qualifies for the schedule bank category
➢ A bank requires to satisfy the central bank that its affairs are not carried out in a way that causes
harm to the interest of the depositors
➢ A bank should be a corporation/ cooperative rather than a sole-proprietorship or partnership firm
Procedure of Declaration and Payment of Dividend
Dividend is proposed by
Board in Board Meeting
Dividend is declared by
members in Annual
General Meeting
Dividend is transferred
by the company in
separate bank account
within 5 days of
declaration by
members
Dividend is paid to the
members within 30
days of declaration by
members
Unpaid/Unclaimed
dividend is transferred
to unpaid dividend
account within next 7
days (if not transferred,
interest @12% p.a.
from date of default is
payable)
Unpaid/Unclaimed
dividend along with interest
accrued is transferred to
Investor Education and
Protection Fund after
expiration of 7 years of
transferring in unpaid
dividend account
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Interim Dividend
Dividend declared by the Board of Directors between two Annual General Meetings is called Interim
Dividend. It is paid in the middle of the accounting year (before finalize the Annual Accounts). Company must
obtain opinion of Auditors before declaration of interim dividend.
Features
1. The Board of Directors has the proper authority to recommend and declare Interim Dividend.
2. It is declared between two A.G.M, when company earns sufficient profits in first six months.
3. For declaration of interim dividend require provisions in Articles of Association.
4. Rate of interim dividend less than final dividend, as it is a part of final dividend.
5. It is declared only out of periodic profits, i.e. profit earned is substantial in 1st six months and company is
likely to keep the same trend in future.
6. It is declared before preparation of the final accounts of the company.
7. For interim dividend board of directors pass a resolution in the board meeting.
8. The amount to be given as Interim Dividend must be credited in a separate Bank account in a scheduled
bank within 5 days from declaration.
9. It should be paid within 30 days of its declaration.
10. Unpaid / Unclaimed Interim Dividend should be transferred to ‘Unpaid Dividend Account’ within 7 days of
the expiry of 30 days of declaration.
11. Any amount remaining unpaid/ unclaimed in the ‘Unpaid Dividend A/c’ for 7 years should be transferred to
Investor Education & Protection Fund.
Interest
Interest is the return on investment that a lender charges from his client on the money or loan that he
has lend. It is the return payable to the creditors of the company viz. Debenture holder / Depositors for the
loan given by them to the company.
Features
1. Interest is the price for the productive services rendered by capital.
2. It is directly related to risk. Higher the risk, higher is the interest.
3. Interest is paid at fixed rate to the debenture holders, depositors, bondholders and lenders. Interest is
generally expressed as percentage which is charged per month or per annum. It is affected by various
factors like money supply, fiscal policy, volume of borrowings, rate of inflation, etc.
4. Interest is a charge against profit. It is not linked to the profits of the company. It is a financial obligation
that needs to be honored by the borrower to the lender or creditor.
5. Interest enjoys highest priority in payment. It is paid before tax and dividend.
6. Interest is charged as an expense in the Income statement and so it is deducted from profit which
ultimately reduces tax so interest payment is tax deductible expenses
7. There is no interim interest. It is paid as per the terms and conditions.
8. Interest payment decision taken by officers of the company, so not require pass any resolution in any
meeting.
