DECLARATION OF DIVIDEND

"Nothing comes free of cost and No Investment is a Charity". 

Every investor deploys his money in hope of receiving some return. In the context of a Company form of organisation, the Investment may be in the form of Owner's money(Share Capital) or Loan Capital (Borrowings in the form of debentures etc.,).

The return for loan capital is by way of Interest and the return for share capital is by way of Dividend. To repay principal along with interest is an obligation of the borrower company. But, the law doesn't confer any obligation for payment of dividend. 

"Even Shareholder's part with their money, they too invest for the growth of the company, they too have a legitimate claim in the profit of the company. But why dividend is not compulsory and why dividend payment is a management decision? "

It is the risk factor, which is borne by the shareholders. In simple terms, let us take the case of a sole proprietorship. In this the owner of the business invests his entire money, carries the whole RISKS of his business.

Similarly, in case of company, shareholders are called the owners, as they take the risk inherit in the business. What risk is that? The investment of shareholders are not backed by security on the properties of the company. 

Unlike loan providers, who generally give their money on the basis of a security on any asset of the company, the shareholders do not enjoy such security.

What is dividend?

From the simple discussion above, it is clear that the dividend payment is the return for the investment made by shareholders.

Dividend is paid out of After tax profits of the company. i.e., profits remaining after payment of corporate tax. (Net profit after tax)

This dividend may be fixed dividend(fixed amount say Rs. 10/ share or fixed rate say 5% of profit) or fluctuating dividend (based on the needs of the company for retaining some amount of profit)

Retained earnings : - Retained earnings or reserves or surplus of profits are a portion of the profit after tax not distributed as dividend and is set apart as reserves for present or future need of the business. 

Provisions under Companies Act, 1956:

• No dividend should be paid or declared for any financial year except out of the profits of the company, for that year arrived at after providing for depreciation as mentioned under Sections 349 & 350.
• Dividend includes interim dividend and all the provisions relating to dividend applies to interim dividend.(Interim dividend is the dividend paid in between two AGMs )
• No dividend shall be paid except in cash, with the exception of fully paid Bonus Shares.
• In the Annual General Meeting declaration of  Dividend is proposed by the Board of directors and shareholders approve the dividend after deliberations and discussions.
• Interim dividend is declared by the management and is approved in the board meeting.
•  The entire dividend amount must be deposited in a separate bank account within 5 days of declaration of dividend. 
• Dividend once declared, must be paid within 30 days of declaration. If the payment has not been made or unclaimed within 30 days, then seven days after the expiry of said 30 days, the entire amount of dividend remaining unpaid or unclaimed  shall be transferred to a Special Dividend account called "Unpaid divided account of  -------company ltd/private ltd"
• When company proposes to declare dividend at times of inadequate profits and from the accumulated profits , then the company should follow the Companies (Declaration of dividend out of Reserves) Rules, 1975.
• The dividend which remains unclaimed in the "Unpaid divided account of  -------company ltd/private ltd"  for a period of seven years should be transferred on the expiry of seven years to Investor Education and Protection Fund established under Section 205C.
• Dividend should be paid only to the registered shareholders or to their orders or to their bankers

In case of shares pending for registration of transfer, the dividend in respect of such shares must be kept in a separate bank account ("Unpaid divided account ")  or as declared by the transfer-or in the transfer instrument.

The offer of rights shares or bonus shares must be kept in abeyance in relation to such shares pending for registration.

Constraints in the payment of dividend:

1. Dividend decision is based on the financial needs of the management. 
2. If the investment opportunity for the company is more and the company wants to reinvest its earnings , then it will not declare dividend or distribute a very small amount of earnings.
3. If the Company doesn't have enough opportunity to invest its earnings, then the management would be willing to declare dividend liberally.
4. The Loan agreement or arrangement made by the company may, impose restrictions on the payment of dividend.
5. If the company's financial obligations are more, then the feasibility of declaring dividend is less.

Dividend, though a management decision to declare or not to declare, is ultimately a legitimate claim of  a shareholder as an investor. Dividend has an impact in the pricing of the shares of the company. It is a price sensitive information in the context of the Listed securities as it will result in increase or decrease in share prices.