Posted by:Amani Nagda
Procedure for declaring a dividend
The word ‘dividend’ is derived from the Latin word ‘dividendum’ which translated to, things to be divided.
A dividend is a form of payment which is made by a corporation to its shareholders, usually as a distribution of deserved profits.
When a corporation earns a profit or surplus, the corporation is able to reinvest that same amount of profit in the business which is termed as retained profits and pay a certain proportion of that profit as a dividend to its shareholders. Distribution of these profits to shareholders may be in the form of cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or simply by repurchase of the shares.
A dividend is generally allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding accordingly. For a joint-stock company, paying dividends is not an expense; instead, it is like the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are hence shown in the shareholders' equity section on the company's balance sheet. Public companies are usually known to pay dividends on a fixed schedule, but they may declare a dividend at any time, sometimes called a special dividend declared to distinguish it from the fixed schedule dividends. Cooperatives, on the other hand, allocate dividends according to their members' activity, so their dividends are often considered to be in the form of a pre-tax expense.
Listed below are the types of Dividends:
- Cash dividends are known to be the most common and popular form of payments and are paid out in the form of currency, usually through electronic funds transfer or a printed paper cheque. Such dividends are actually a form of investment income and are usually taxable to the receiving shareholder in the year they that are paid. This is the most common method of sharing corporate profits with the shareholders of the company. For each share owned by a shareholder, a certain decided amount of money is distributed. So, if a person owns 100 shares and the cash dividend is 5 Rupees per share, the holder of the shares will get Rs.500 in return as Dividend. Dividends paid are not classified as any kind of expense as such, but rather a deduction of retained earnings. Dividends paid do not show up on an income statement of the firm but instead appears on the balance sheet.
- Stock or scrip dividends are those that have to be paid out in the form of additional stock shares of the issuing corporation, or another corporation. They are usually issued in proportion to the shares that are owned by the shareholders.
- Stock dividend distributions are issues of new shares made to limited partners by a partnership in the form of additional shares. Nothing is split, these shares increase the market capitalization and total value of the company at the same time reducing the original cost basis per share.Stock dividends are not includable in the gross income of the shareholder for US income tax purposes. Because the shares are issued for proceeds equal to the pre-existing market price of the shares; there is no negative dilution in the amount recoverable.
- Property dividends are those dividends that are paid out in the form of assets from the issuing corporation or another corporation, such as in a subsidiary corporation.
- Interim dividends are dividend payments which aremade before a company's Annual General Meeting (AGM) and final financial statements. This declared dividend is usually accompanied by the company's interim financial statements.
- Other dividends can be used in a structured finance. Financial assets with a known market value can be distributed in the form of dividends; warrants are sometimes distributed in this way. For large companies which offer subsidiaries, dividends can take the form of shares in a subsidiary company. A common technique for "spinning off" a company from its parent company is to distribute shares in the new company to the old company's shareholders. The new shares can then be traded accordingly independently.
In India, the companies which declare or distribute dividend, are required to pay a special Corporate Dividend Tax along with the tax levied on their income. The dividend received by the shareholders is then free from an obligation or liability imposedin their hands. However, the amount of dividend income over and above Rs.10,00,000 shall attract 10 per cent dividend tax in the hands of the shareholder which will be in effect rightly from April 2016.
Steps Involved –
1. Computation of the depreciation
By the rate specified in Schedule XIV or any other basis approved by the Central Government, the depreciation shall first be computation.
2. Mandatory transfer of profits to reserves
Before declaring dividend, some part of the profit has to mandatorily be transferred to the reserves of the Company. The amount to be transferred is based on the proposed rate of dividend.But, the voluntary transfer of a higher percentage of profits to the reserves is allowed subject to the conditions stipulated in the Act.
3. Board Resolution
The Board Resolution is one of most important steps in the process of declaration of dividends. Until and unless the Board endorses the payment of dividends, it cannot be declared at the Annual General Meeting.
4. Annual General Meeting (AGM)
The agenda in the notice for an Annual General Meeting must compulsorily mention the declaration of dividends and is required to be sent to both the members as well as to the creditors. An ordinary resolution is required in order to declare dividend.
5. Time limit for payment of dividend
A separate dividend a/c is made to be opened along with the Company’s bankers. The dividend amount which is payable should then be accordingly transferred to the new account and within 30 days of the Annual General Body Meeting, the dividend warrants should be sent out to the shareholders.
6. Transfer to unpaid dividend account
Within 7 days (1 week) from the date of expiry of 30 days of the date of declaration of the dividend, the amount remaining unclaimed or unpaid is required to be transferred to the ‘unpaid dividend account’ that is to be opened in the scheduled Bank of the shareholder. The dividend which remains unclaimed or unpaid for 7 years is to be transferred to the Investor Education and Protection Fund within a span of 30 days of its becoming due for the transfer.
7. Reasons under which dividend need not be paid
1. Where it cannot be paid because of the reason of operation of any other law otherwise.
2. Where a particular shareholder has given a certain direction to the company regarding any kind of payment of dividend and those directions could not be perfectly complied with.
3. Where there is an argument and dispute regarding the right to receive a dividend.
4. Where the company has lawfully adjusted the dividend against any sum due from the shareholders
5. Where the dividend could not be paid not due to any default on the part of the company in any manner.
8. Tax limit
In conjunction with the income-tax chargeable in respect of the total income of a company for any assessment of the year, any amount which is declared, is distributed or paid by the company in the form of dividends, interim or otherwise and also whether paid out of the current or accumulated profits, it is charged with an additional tax which is at the rate of 15%
This tax has to be paid within the time period of 14 days of declaration, distribution or payment of any dividend, whichever is the earliest for the shareholder.
9. Special provisions related to Listed Company
After completing all the steps above, listed companies also have to give a prior intimation regarding the venue of the Board Meeting to the stock exchange where the known securities are listed. Within 15 minutes of the end of the Board Meeting, intimation also has to be sent to the stock exchange company enclosing the particulars about the information of the dividend. These details necessarily have to be given to the Stock Exchange.
The various steps above are compulsorily involved in the declaration of dividend by a Company which is incorporated under the Companies Act, 2013. However, the Memorandum and Articles of Association of the Company can at times bring about a change or deviation of the said steps.