Dividends – Meaning and Concept
Dividends refer to the portion of a company’s profits distributed to its shareholders as a return on their investment. Under Section 2(35) of the Companies Act, 2013, the term “dividend” includes any interim dividend declared by the company. Dividends represent the relationship between the company and its members, reflecting the company’s financial health and profitability. They are payable only out of profits and not out of capital, except in circumstances specifically permitted by law. The declaration of dividends is a discretionary power of the company, subject to statutory conditions, and shareholders cannot demand dividends as a matter of right unless declared. This concept ensures that companies maintain financial stability while rewarding shareholders. Dividends may be declared annually at the Annual General Meeting or as interim dividends during the financial year, based on the company’s performance.
Legal Provisions Governing Dividends
The declaration and payment of dividends are governed primarily by Section 123 of the Companies Act, 2013. According to this provision, dividends can be declared only out of current profits, accumulated profits, or money provided by the government for payment of dividends. The Act mandates that depreciation must be provided before declaring dividends, ensuring a true reflection of profits. Additionally, dividends must be transferred to a separate bank account within five days of declaration, safeguarding shareholders’ interests. Section 124 deals with unpaid or unclaimed dividends, requiring such amounts to be transferred to the Unpaid Dividend Account. These provisions aim to ensure transparency, financial discipline, and protection of shareholder rights, while preventing misuse of company funds.
Rights, Restrictions, and Importance of Dividends
Dividends play a crucial role in maintaining investor confidence and market reputation. However, shareholders have no inherent right to dividends unless they are declared in accordance with law. The board of directors recommends the rate of dividend, while the shareholders approve it in the general meeting. Once declared, dividends become a debt owed by the company to its shareholders. The law also imposes restrictions to prevent reckless distribution, such as prohibiting payment from capital and requiring compliance with accounting standards. Failure to comply with dividend-related provisions may attract penalties. Thus, dividends balance corporate growth needs with shareholder expectations, reinforcing trust and corporate governance.
Realtime Example
Consider a public company that earns substantial profits during a financial year. After providing for depreciation and statutory reserves, the board recommends a dividend of ₹5 per share. The shareholders approve this recommendation at the Annual General Meeting. Once declared, the company is legally bound to pay the dividend within the prescribed time. If a shareholder fails to claim the dividend, the amount is transferred to the Unpaid Dividend Account under Section 124. This real-time scenario demonstrates how dividends operate practically, ensuring both shareholder benefit and statutory compliance.
Mnemonic to Remember Dividends
A simple mnemonic to remember the concept and legal aspects of dividends is “P-D-P-B”:
P – Profits only
D – Declared by company
P – Paid to shareholders
B – Board recommends
This mnemonic helps students recall that dividends are payable only out of profits, declared by the company following the board’s recommendation, and distributed to shareholders. It is especially useful for exam preparation in Company Law.
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