Meaning: -Every trading company has implied and
inherent (natural) power to distribute its net earnings or profits to
shareholders in the form of dividend. Power to declare dividends, therefore,
need not expressly be given by the Memorandum or Articles of Association.
Articles may, however, regulate the manner in which the dividends are to be
declared and paid.
It
should be noted that dividend can be declared only when there is divisible
profits and the financial condition of the company is such as to permit the
payments of dividend. Hence, the company must consider the following provisions
of sec.205 of the companies Act and guidelines issued by Central Government for
ascertaining the dividend.
1.
Out of Profits: -the dividend can be declared by the company out
of following profits.
·
Out of current
year’s profit arrived after providing for deprecation in the
manner laid down in the companies Act 1956. or
·
Out of the profits of the
company for any previous financial year or years after providing for
depreciation. or
·
Out of profits of
current year and previous years.
2.
Out of Capital
Profits: -Capital profits mean the
surplus rose from sale of business assets. The dividend can be
declared out of capital profits subject to following provisions:
·
Capital profits have been realised in cash.
·
Capital profits remain as profits after revaluation
of all assets and liabilities.
·
The Articles of Association permits to do so.
3.
Out of
accumulated Profits and Reserves:
-In case of absence of profits or inadequacy of profits, the company can declare
the dividend out of the previous year's accumulated profits and reserves. The rules
framed by Central Government, during 1975,
4.
Out of money
provided by Government: -Company can
declare dividend out of money provided by Central Government or state
Government, for the payment of dividend in pursuance of a guarantee given by
that Government. Sec 205(1)
5.
Compulsory
transfer of Reserves Sec.205 (a): -Before declaring
any dividend the company shall transfer, out of its current profits, certain
percentage of profits to reserves, prescribed by the Central Government,
specified as,
Rate of
proposed Dividend % of paid up capital
(% of paid up
capital)
|
Minimum amount
to be transferred to Reserve
(% of net
profit after tax)
|
1. More than 10 upto 12.5
|
2.5
|
2. More than 12.5 upto 15
|
5.00
|
3. More than 15 upto 20
|
7.5
|
4. More than 20
|
10.00
|
A
company can voluntarily transfer a percentage higher than 10% of its profitss
to reserves, provided that rate of dividend declared by it is at least equal to
the average of the rates of dividend declared over the three years immediately
preceding financial year.
6.
Provision for
depreciation for past years: -Before declaring
dividend out of the current profits or out of profits of pervious years; the
company requires providing depreciation for any of the previous years, if it
has been not provided for.
However, the
Central Government in the public interest may allow the company to declare the
dividend out of the profits of current year or previous year without providing
for depreciation.
