Explain the procedure for Ascertainment of dividend.
Every trading company has implied and inherent (natural) power to distribute its net earnings or profits to shareholders in the form of a dividend. Power to declare dividends, therefore, need not expressly be given by the Memorandum or Articles of Association. Articles may, however, regulate the manner in which the dividends are to be declared and paid.
It should be noted that dividends can be declared only when there are divisible profits and the financial condition of the company is such as to permit the payments of dividends. Hence, the company must consider the following provisions of sec.205 of the company's Act and guidelines issued by the Central Government for ascertaining the dividend.
- Out of Profits: -the dividend can be declared by the company out of the following profits.
- Out of the current year’s profit arrived after providing for deprecation in the manner laid down in the Companies Act 1956. or
- Out of the profits of the company for any previous financial year or years after providing for depreciation. or
- Out of profits of the current year and previous years.
- Out of Capital Profits: -Capital profits mean the surplus rose from sale of business assets. The dividend can be declared out of capital profits subject to the following provisions:
- Capital profits have been realized in cash.
- Capital profits remain as profits after revaluation of all assets and liabilities.
- The Articles of Association permits to do so.
- Out of accumulated Profits and Reserves: -
In case of the absence of profits or inadequacy of profits, the company can declare the dividend out of the previous year's accumulated profits and reserves. The rules framed by Central Government, during 1975,
- Out of money provided by Government: -Company can declare dividends out of money provided by the Central Government or State Government, for the payment of dividends in pursuance of a guarantee given by that Government. Sec 205(1)
- Compulsory transfer of Reserves Sec.205 (a): -Before declaring any dividend the company shall transfer, out of its current profits, a certain percentage of profits to reserves, prescribed by the Central Government, specified as,
Rate of proposed Dividend % of paid-up capital
(% of paid-up capital)
Minimum amount to be transferred to Reserve
(% of net profit after tax)
1. More than 10 up to 12.5
2. More than 12.5 up to 15
3. More than 15 up to 20
4. More than 20
A company can voluntarily transfer a percentage higher than 10% of its profits to reserves, provided that the rate of dividend declared by it is at least equal to the average of the rates of dividend declared over the three years immediately preceding financial year.
- Provision for depreciation for past years: -
Before declaring dividends out of the current profits or out of profits of previous years; the company requires providing depreciation for any of the previous years if it has been not provided for.
However, the Central Government in the public interest may allow the company to declare the dividend out of the profits of the current year or previous year without providing for depreciation.