Question

Answer the following question.

Discuss legal provisions for declaration of dividend.

Answer 1

1) Board Meeting: Dividend can be declared only on the recommendation of the Board of Directors. Board Meeting should be called to pass a resolution about:

1. Rate of Dividend and amount of Dividend to be paid
2. Book closure date for the dividend
3. Date of Annual General Meeting.
4. Bank with which a separate account should be opened to remit the dividend amount.

2) Shareholders Approval:

1. The dividend is approved by shareholders by passing an Ordinary Resolution at the Annual General Meeting.
2. Shareholders can declare a lower rate of dividend than what is recommended by the Board but not higher than that.
3. Once the dividend is declared at the General meeting it cannot be revoked. The company is not permitted to declare it a second time in that year.

3) Separate Bank Account: The company must deposit the dividend amount in a separate bank account opened in a scheduled bank called a Dividend Account within 5 (Five) days of its declaration.

• Listed company: Where a company’s shares are listed on the Stock Exchanges, additional requirements with respect to Listings agreements must be followed.

1. Notify stock exchange where the company’s securities are listed at least 2(two) days in advance of the date of the meeting of the Board at which recommendation of the final dividend is to be considered.
2. Intimate Stock Exchange immediately about the declaration of the dividend after the Board Meeting.
3. Give notice of Book closure to the stock exchange at least 7(seven) working days before the closure.
4. Close the Register of members and the Transfer Register.
5. It must use an electronic mode of payment such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved by the Reserve Bank of India (RBI)
   1) Book closure: It means the time period when the company does not handle any adjustments to the Register or requests to transfer Shares.
   2) 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.
6. The listed company has to express the dividend on a per-share basis only.

4) Prohibition to Pay Dividend:

1. A company that has failed to repay deposit or any interest on deposit cannot declare any dividend on its equity shares.
2. No dividend can be declared if the company has defaulted on :
   1) Redemption of Debentures or payment of interest, Redemption of Preference shares, payment of interest to the financial institution, etc.