LEGAL PROCEDURAL AND TAX ASPECTS
The amount of dividend that can be legally distributed is governed by company law pronouncements in leading cases, and contractual restrictions. The important provide company law pertaining to dividends are described below.
1. Companies can pay only cash dividends (with the exception of bonus shares). A cash, dividend may also be remitted by cheque or by warrant. The same may also mined electronically to shareholders after obtaining their consent in this regard to account number specified by them. The step has been proposed by the Department. Company Affairs to avoid delay in the remittance of dividend.
2. Dividends can be paid only out of the profits earned during the financial year after for depreciation and after transferring to reserves such percentage of profits as prescribed law. The Companies (Transfer to Reserve) Rules, 1975, provide that before dividend a percentage of profit as specified below should be transferred to the reserve company.
(a) Where the dividend proposal is up to 10 per cent of the paid up capital, no the current profits needs to be transferred.
(b) Where the dividend proposed exceeds 10 per cent but not 12.5 per cent of the paid up capital, the amount to be transferred to the reserves should bot be less than 2.5 per cent of the current profits.
(c) Where the dividend proposed exceeds 12.5 per cent but not 15 per cent, the amount to be transferred to reserves should not he less than 5 per cent of the current profits.
(d) Where the dividend proposed exceeds a 5 per cent but not 20 per cent, the amount to be transferred to reserves should not be less than 7.5 per cent of the current profits.
(e) Where the dividend proposed exceeds 20 per cent, the amount to be transferred to reserve should not be less 10 per cent.
(f) A company may voluntarily transfer a percentage higher than 10 per cent of the current profits to reserves in any financial year provided the following conditions are satisfied;
(g) A newly incorporated company is prohibited from transferring more than ten per cent of its profits to reserves. The current profit for the purpose of transfer to reserves will be profits after providing for statutory transfer to the Development Rebate Reserve and arrears of depreciation if any.
3. Due to inadequacy or absence of profits in any year, dividend may he paid out of the accumulated profits of previous years. In this context, the following conditions, as stipulated by the Companies (Declaration of Dividend out of Reserves) Rules, 1975, have to be satisfied.
4. Dividends cannot be declared for past years for which accounts have been adopted by the shareholders in the annual general meeting.
5. Dividend declared, interim or final, should be deposited in a separate bank account within 5 days from the date of declaration and dividend will be paid within 30 days from such a date.
6. Dividend. including interim dividend once declared becomes a debt. While the payment of interim dividend cannot be revoked, the payment of final dividend can he revoked with the consent of the shareholders.