- Dividend defined under section 2(35) of the Companies Act, 2013, includes any interim dividend.
- Dividend means the portion of the profit received by the shareholders from the company’s net profits, which is legally available for distribution among the members.
- Therefore, dividend is a return on the share capital subscribed for and paid to its shareholders by a company.
Difference between Dividend and Interest
- Dividend cannot be paid out of the assets of the company, generally it can be declared only out of the profit available for the purpose. Interest is a charge on profits while dividend is an appropriation of profits.
- While dividend is paid on preference and equity shares, interest is paid on debentures and long term and short term loans/borrowings including fixed deposits. Interest is a debt which like all debts is paid out of the company’s assets generally.
- A dividend however becomes a debt only after it has been declared by the company. Right to claim dividend will only arise after a dividend is declared by the company in general meeting and until and unless it is so declared, the shareholder has no claim against the company in respect of it.
TYPES OF DIVIDEND
- Dividend is said to be a final dividend if it is declared at the annual general meeting of the company.
- Final dividend once declared becomes a debt enforceable against the company.
- Final Dividend can be declared only if it is recommended by the Board of Directors of the Company.
Dividend is said to be an interim dividend, if it is declared by the Board of Directors between two annual general meetings of the company. However, all the provisions relating to the payment of dividend shall be applicable on the interim dividend also.
Board is authorized to declare interim dividend
Section 123(3) provides that the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared.
In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividend declared by the company during the immediately preceding three financial years.
Sources of Declaration of Dividend
Section 123(1) of Companies Act 2013 provides that no dividend shall be declared or paid by a company for any financial year except—
(a) (i) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or
(ii) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or
(iii) out of both; or
For the above purpose, depreciation shall be provided in accordance with the provisions of Schedule II.
(b) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government
Declaration of interim dividend
Section 123(3) of the Companies Act, 2013 provides that the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the Profit and Loss Account as well as profit of the financial year in which the interim dividend is sought to be declared.
When the company has incurred any loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding the three financial years.
Amount of Dividend to be deposited in Special Account of a Schedule Bank
Section 123(4) provides that the amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. Where, if the articles of the company do not authorize so, it has to be amended accordingly.