Dividend Criteria as per Companies Act, 2013

The 2013 Act proposes to introduce significant changes to the existing provisions of the 1956 Act in respect of declaration of dividend. The changes are likely to affect the existing practices followed by companies with regard to the declaration of dividend.

The existing provisions of the 1956 Act in relation to the transfer of a specified percentage of profit to reserve is no longer applicable and thus, companies will be free to transfer any or no amount to its reserves.

Schedule II of the 2013 Act, relating to depreciation defines the useful life of assets as against the depreciation rates specified in the 1956 Act.

1. Declaration of dividend

·    The existing requirement of the 1956 Act with regard to the transfer of a specified percentage of profits not exceeding 10% to reserve [that is, Companies (Transfer of Profits to Reserve) Rules, 1975] has not been acknowledged in the 2013 Act and thus companies are free to transfer any or no amount of profits to reserves [section 123 (1) of the 2013 Act].

·      Similar to the existing provisions of the 1956 Act, the 2013 Act also provides that no dividend shall be declared or paid in case of inadequate profits by a company subject to the Rules yet to be notified. The company also cannot declare or pay dividend from its reserves other than free reserves [section 123(1) of the 2013 Act]. This could mean that the requirements provided in Companies (Declaration of Dividend out of Reserves) Rules, 1975 have been retained.

·      As per the existing provisions of the 1956 Act, dividend includes interim dividend and all provisions of the 1956 Act which applies to the final dividend equally apply to interim dividend. The 2013 Act, however, imposes a further restriction on the declaration of interim dividend. The 2013 Act specifically provides that in case a company has incurred loss during the current financial year, up to the end of the quarter immediately preceding the date of declaration of the interim dividend, then the interim dividend cannot be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years [section 123(3) of the 2013 Act].

·      The 2013 Act states that if a company fails to comply with the provisions of acceptance of deposits and repayment of deposits accepted prior to the commencement of this 1956 Act, it will not be able to declare any dividend on equity shares, as against the non-compliance of section 80A of the 1956 Act regarding redemption of irredeemable preference shares, etc [section 123(6) of the 2013 Act].

·      The provisions of the existing Schedule XIV of the 1956 Act has been acknowledged under Schedule II of the 2013 Act. Important highlights from the Schedule II are as follows:

·   The useful life or residual value of an asset have been specified in Part C of the Schedule. Companies will be required to give disclosure for cases where the useful life or residual value is different from the useful life or residual value as specified in Part C of the Schedule.

·  It is clarified in the 2013 Act that the requirements of Part C will not be applicable for companies in respect of which the useful life or residual value is notified by a regulatory authority.

·      The 2013 Act does not give cognizance to the existing requirements of section 208 of the 1956 Act      that deals with the power of a company to pay interest out of capital in certain cases.

2. Transfer of shares to the investor education and protection fund (IEPF)

As against the existing requirement of section 205C of the 1956 Act, the 2013 Act proposes that all shares in respect of which unpaid or unclaimed dividend has been transferred to the IEPF shall also be transferred by the company in name of the fund along with a statement with certain specified details [section 124 of the 2013 Act].

In addition to above, following amounts also need to be transferred by the company to the IEPF [section 125 (2) of the 2013 Act]:

1.     Gain through the seizure and disposal of securities in possession of a person who fictitiously acquires      or subscribes for a company’s securities

2.     Sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation      for seven or more years

3.     Redemption amount of preference shares remaining unpaid or unclaimed for seven or more years

Additionally, the 2013 Act specifies the following modes of utilization of amounts available in the IEPF:

1.     The refund of unclaimed dividends, matured deposits, matured debentures, application money due for    refund and interest thereon

2.     Distribution of any disgorged amount among investors who have suffered losses due to wrong actions   by any person in accordance with the order of the Court that had decided for such disgorgement. In      order to prevent misuse of underlying securities, investors can claim them back from the IEPF through     the provisions in the rules.

3.     Reimbursement of legal expenses incurred in pursuing class action suits under sections 37 (misleading   prospectus) and 245 of the 2013 Act (management or conduct of affairs of the company being        

     overseen in a manner prejudicial to the interests of the company or its members or depositors) by        members, debenture holders or depositors as sanctioned by the Tribunal.

4.     Any other purpose incidental thereto, in accordance with such rules as prescribed