12th SP Chapter 10 – Dividend and Interest
Q.1 A) Select the correct answer from the options given below and rewrite the statements.
1) Dividend is paid to _____.
a) Shareholder
b) Debenture Holder
c) Depositor
2) _____ is profit shared by a company with a shareholder.
a) Interest
b) Rent
c) Dividend
3) Dividend is recommended by _____.
a) Managing Director
b) Secretary
c) Board of Directors
4) Interim Dividend is declared by _____.
a) Board of Directors
b) Debenture holders
c) Depositors
5) Final Dividend is declared by _____.
a) Board of Directors
b) Shareholders
c) Depositors
6) Dividend cannot be declared out of _____.
a) Capital
b) Profit
c) Reserves
7) Dividend amount should be transferred in a separate Bank Account within _____ days of its declaration.
a) 5
b) 15
c) 50
8) Dividend should be paid within _____ days of its declaration.
a) 3
b) 13
c) 30
9) _____ holders get dividend from residual profits.
a) Equity share
b) Preference share
c) Debenture
10) Dividend is paid first to _____ shareholders.
a) Equity
b) Preference
c) Deferred
11) _____ warrant is a cheque containing dividend amount sent by company to the shareholders.
a) Dividend
b) Share
c) Interest
12) IEPF is created by _____ where unpaid dividend is transferred by company.
a) Central Govt.
b) Company
c) Shareholders
13) Payment of _____ Dividend must be authorized by the Articles of Association.
a) Interim
b) Final
c) Bonus
14) _____ is a return paid to creditors by the company.
a) Dividend
b) Interest
c) Rent
15) _____ is not linked to profits of the company.
a) Dividend
b) Interest
c) Bonus
Q.1 B) Match the pairs.
Answers.
a. 2) Appropriation of profit.
b. 5) Obligatory to pay.
c. 6) Decided and Declared by the Board of Directors.
d. 7) Decided by Board; declared by Members.
e. 1) Equity Shareholders
Answers.
a. 3) Registered Shareholders.
b. 2) Creditors
c. 4) Balance of unpaid Dividend Transferred here.
d. 7) Unpaid/Unclaimed Dividend.
e. 1) Must inform stock exchange about Dividend declaration
Q.1 C) Write a word or a term or a phrase which can substitute each of the following statements.
1) The return on investment paid to the shareholders of the company.
Ans: Dividend
2) The meeting where final dividend is declared.
Ans: Annual General Meeting
3) The company which has to intimate stock exchange about declaration of dividend.
Ans: Listed Company
4) The shareholders who get dividend at a fixed rate.
Ans: Preference Shareholders
5) The shareholders who get dividend at a fluctuating rate.
Ans: Equity Shareholders
6) Request by shareholder in prescribed form for payment of dividend into shareholders bank account.
Ans: Dividend Mandate
7) Number of days within which payment of dividend be completed b company, after its declaration.
Ans: 30 days
8) Dividend declared between two AGMs.
Ans: Interim Dividend
9) Dividend decided and declared by the Board.
Ans: Interim Dividend
10) The return paid to the creditors by the company.
Ans: Interest
Q.1 D) State whether the following statements are true or false.
1) Dividend is paid to registered shareholders of the company.
Ans: True
2) Dividend is decided by the Board.
Ans: True
3) Dividend is decided by the shareholders.
Ans: False
4) Dividend once declared cannot be revoked.
Ans: True
5) Dividends cannot be paid out of capital.
Ans: True
6) Shareholders decide about the rate and amount of profit to be given as dividend.
Ans: False
7) All categories of shareholders get a fixed rate dividend.
Ans: False
8) IEPF is the fund created by company.
Ans: False
9) Interest is a liability for company.
Ans: True
10) Interest is paid to shareholders of company.
Ans: False
Q.1 E) Find the odd one.
Final Dividend, Interim Dividend, Interest.
Out of Capital, Out of free reserve, Out of money given by the government.
Dividend Account, Dividend Mandate, unpaid/unclaimed dividend Account.
Dividend warrant, Dividend Mandate, Cheque.
Q.1 F) Complete the sentences.
1) Word dividend is derived from the Latin term Dividendum .
2) Dividend is paid to Registered Shareholders.
3) Dividend can be declared only on the recommendation of Board of Director.
4) Dividend must be paid in Cash.
5) The meeting at which the final dividend is approved is Annual General Meeting.
6) Dividend cannot be paid out of Capital.
7) Interim dividend is decided and declared by the Board of Directors.
8) Pre Decided and a fixed rate of dividend is paid to Preference Shareholders.
9) Payment of dividend must be completed within 30 Days.
10) Payment of Interim Dividend needs to be authorized by Articles of Association.
11) The obligator payment made by the company to its creditors is called Interest.
Q.1 G) Select the correct option from the bracket.
I)
(Creditors, IEPF, Latin term, At Board Meeting, At AGM)
Answer:
II)
(Unclaimed/Unpaid Dividend, Fixed rate Dividend, Dividend at a Fluctuating Rate, Interest, Within 30 days)
Answer:
Q.1 H) Answer in one sentence.
1) What is Dividend?
Answer: It is that part of the profits of the company which is distributed amongst its shareholders. The dividend is a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’
2) Who has the right to recommend Dividend?
Answer: Board of Directors has a right to recommend dividend.
3) What is the final Dividend?
Answer: Final Dividend is declared and paid after the close of the financial year.
4) What is an Interim Dividend?
Answer: The Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.
5) Who declares an Interim Dividend?
Answer: Board of Directors declares Interim Dividend.
6) Which shares get dividend at a fixed rate?
Answer: Preference Shares get dividend at a fixed rate.
7) Which shares get dividend at a fluctuating rate?
Answer: Equity Share get dividend at a fluctuating rate.
8) At which Meeting Interim Dividend is decided and declared?
Answer: Interim Dividend is decided and declared at the meeting of the Board of Directors.
9) What is Interest?
Answer: In financial terms, it is a payment made for using money of another. i.e. Borrower takes money from the lender.
10) State the time within which Unpaid Dividend be transferred to unpaid dividend Account?
Answer: This transfer should be within 7 days of the end of 30 days within which payment was to be made. In other words, this transfer should happen within 37 days from the declaration of dividend.
Q.1 I) Correct the underlined word/s and rewrite the following sentences.
1) Dividend is paid to creditors.
Answer: Registered Shareholders.
2) Interest is paid to shareholders.
Answer: Creditors.
3) Final Dividend is paid between two AGMs.
Answer: Interim Dividend
4) Special Resolution must be passed to declare Final Dividend.
Answer: Ordinary Resolution
5) Dividend must be paid within 60 days of its declaration.
Answer: 30 Days
6) The Dividend to be paid should be transferred to Dividend A/c within 30 daysof its declaration.
Answer: 5 days
7) Dividend is an obligation to be paid by a company every year.
Answer: Interest
8) Preference shareholders are given the last priority in payment of dividend.
Answer: Equity
9) Preference shareholders get dividend from residual profits.
Answer: Equity
10) Dividend is payable every year irrespective of profits made by company.
Answer: Interest
Q.1 J) Arrange in proper order
1)
a) Recommendation of Dividend.
b) Checking sufficiency of profits
c) Board Meeting
Answer: (b) Checking sufficiency of profits (c) Board Meeting (a) Recommendation of Dividend
2)
a) Transfer to Dividend Account
b) Transfer to IEPF
c) Transfer to Unpaid Dividend Account
Answer: (a) Transfer to Dividend Account (c) Transfer to Unpaid Dividend Account (b) Transfer to IEPF
3)
a) Closure of Register of Members.
b) Intimate Stock Exchange of Board Meeting.
c) Intimate Stock Exchange of declaration of dividend.
Answer: (b) Intimate Stock Exchange of Board Meeting. (c) Intimate Stock Exchange of declaration of dividend. (a) Closure of Register of Members.
4)
a) Decision on Rate of Dividend
b) Transfer to IEPF
c) Payment of Dividend.
Answer: (a) Decision on Rate of Dividend (c) Payment of Dividend (b) Transfer to IEPF
5)
a) Payment of Interim Dividend
b) Board meeting deciding and declaring Interim Dividend.
c) Authorization of Articles of Association.
Answer: (c) Authorization of Articles of Association. (c) Board meeting deciding and declaring Interim Dividend (a) Payment of Interim Dividend
Q.2 Explain the following terms/concepts.
1) Profit
Answer: a) Profit is the difference between revenues and expenses for a given period.
b) Profit making and its maximization is the prime aim of all business organizations including a Joint Stock Company.
c) The owners of company viz. the shareholders expect return on their investment in the form of profits of the company.
2) Dividend
Answer: a) Dividend is the return payable to the shareholders of the company for their investment in the share capital.
b) It is that part of the profits of the company which is distributed amongst its shareholders.
c) Dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’
3) Interest
Answer: a) It is the return payable to the creditors of the company viz. Debenture holder / Deposit holders for the loan given by them to the company.
b) In financial terms, it is a payment made for using money of another. i.e. Borrower takes money from the lender.
c) So interest is the cost of renting money, for the borrower and it is the income from lending money for the lender.
4) Final Dividend
Answer: a) It is declared and paid after the close of the financial year.
b) It is decided and recommended by the Board of Directors. It is declared by the shareholders in the AGM.
c) It is declared from different sources like; current year’s profits, free reserves, capital profits, Money provided by Govt. for dividend, etc.
5) Interim Dividend
Answer: a) It is declared and paid between two AGMs of an accounting year.
b) It is decided and declared by the Board of Directors in the Board Meeting.
c) It is declared out of profits of the current accounting year.
6) Unpaid Dividend
Answer: a) The dividend declared by company but has not been paid by it or claimed by a shareholder within 30 days of its declaration is termed as Unpaid and Unclaimed Dividend.
b) Total amount of dividend which remains unpaid/unclaimed should be transferred to ‘Unpaid Dividend Account’ opened in a scheduled Bank by the company.
c) This transfer should be within 7 days of the end of 30 days within which payment was to be made. In other words, this transfer should happen within 37 days from the declaration of dividend.
7) Unpaid Dividend Account
Answer: a) Total amount of dividend which remains unpaid/unclaimed should be transferred to ‘Unpaid Dividend Account’ opened in a scheduled Bank by the company.
b) This transfer should be within 7 days of the end of 30 days within which payment was to be made. In other words, this transfer should happen within 37 days from the declaration of dividend.
c) Within 90 (Ninet) days of transfer of amount in the ‘Unpaid Dividend Account’, the company is required to put on its website or any other website as approved by the Central Government, a statement which shows names, last known addresses and unpaid amount payable to each shareholder.
8) Dividend Mandate
Answer: a) A shareholder may wish to get dividend credited directly in the bank account.
b) Shareholder is required to send a request to the company in the prescribed form called. ‘Dividend Mandate’.
c) Dividend mandate authorizes the company to pay dividend directly to shareholders’ bankers.
9) IEPF
Answer: a) IEPF stands for Investors Education and Protection Fund. IEPF has been set up b the Central Government, since 2001. Examples of some amounts to be transferred to IEPF are – matured deposits with companies, matured debentures with companies, etc.
b) Any amount in the unpaid Dividend Account of a company that remains unpaid/ unclaimed for a period of 7 years from the date of such a transfer shall be, transferred b the company to ‘Investors Education and Protection Fund’ (IEPF).
c) The claimant of money will have to follow the procedures and submit necessary documents to get claim from IEPF along with a statement in the prescribed form which gives details of such transfers.
10) Rate of Dividend
Answer: a) Dividend rate, expressed as a percentage or yield, is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
b) The Board of Directors in Board Meeting decide the rate of dividend. The rate of final dividend is approved by shareholders in a shareholder’s meeting.
c) The rate of dividend for Equity shareholders are fluctuating. and Preference shareholders get dividend ate fixed rate.
Q.3 Study the following case/situation and express your opinion.
1) LMN Co Limited decides to declare dividend for the financial year 2018-19 in which it has earned profits less than their expectations :
a) Is Board right in recommending a dividend of Rs. 5/- per share out of free reserves?
Answer: Yes, Board is right in recommending a dividend of Rs. 5/- per share out of free reserves as a dividend can be paid out of free reserve of the company.
b) Can Board declare the dividend though it is not approved by AGM?
Answer: No, Board can not declare the dividend though it is not approved by AGM. Because It is decided and recommended by the Board of Directors. It is declared by the shareholders in the AGM.
c) Can the Board give dividend in the form of gifts?
Answer: No, Board can not give dividend in the form of gifts. Because dividend must be paid in cash and not in kind.
2) ABC Co. Ltd. decides to pay Interim Dividend:
a) Can it be paid out of free reserves?
Answer: No, Interim dividend cannot be paid out of any free reserves.
b) Is the Board right in declaring the same at the Board Meeting?
Answer: Yes, the Board is right in declaring the interim dividend at the Board Meeting.
c) Can the company distribute the same within 30 days of its declaration?
Answer: Yes, the company should distribute interim dividend within 30 days of its declaration.
3) RAJ Company limited decides to pay Interim Dividend:
a) Is the Board justified to decide Interim Dividend of Rs 5/per share even though profits till date are insufficient?
Answer: No, the Board is not justified to decide Interim Dividend of Rs 5/per share if the profits till date are insufficient. This is because the interim dividend is declared out of profits.
b) Can the Board declare it out of Free Reserves?
Answer: No, the Board cannot declare it out of Free Reserves.
c) Can the Board declare it out of Capital?
Answer: No, the Board cannot declare it out of Capital. It is declared out of profits of the current accounting year.
4) DIAMOND Co. Ltd. is considering to declare Interim Dividend.
a) In how many days of declaration it should transfer the funds to Dividend Account?
Answer: The amount to be given as Interim Dividend must be credited in a separate Bank account in a scheduled bank within 5 (five) days of its declaration.
b) In how many days it must pay it to shareholders?
Answer: Interim Dividend should be paid within 30 days of its declaration.
c) In how many days of declaration it must transfer the funds to the Unpaid Dividend A/C?
Answer: Unpaid / Unclaimed Interim Dividend should be transferred to ‘Unpaid Dividend Account within 7 days of the expiry of 30 days of declaration i.e. 37 days of its declaration.
5) The Board of Directors of STAR Co. Ltd. which is a listed company recommends a dividend of Rs 15/- per share to be paid in cash.
a) Is it justified to pay the dividend firstly to its Preference Shareholders and then after to Equity Shareholders?
Answer: Yes, it is justified to pay the dividend firstly to its Preference Shareholders and then after to Equity Shareholders. Preference shareholders are entitled to the dividend before it is paid to the equity shareholders as per the terms of issue of the preference shares.
b) Is the AGM required to approve the same?
Answer: Yes, AGM is required to approve the dividend. The dividend is approved by shareholders by passing an Ordinary Resolution at the Annual General Meeting.
c) Can the company pay dividend in cash?
Answer: Yes, the company can pay dividend in cash. The dividend may be paid by cheque or warrant or by any electronic mode to the shareholder.
6) GOLD Co. Ltd. declares a dividend of Rs 10/- per share for F.Y. 2018-19.
a) Is company under default if dividend was not paid within 30 days of its declaration?
Answer: Yes, the company is under default if dividend was not paid within 30 days of its declaration.
b) Is company right in transferring the unpaid dividend to its Debenture Reserve Accounts?
Answer: No, the company is not right in transferring the unpaid dividend to its Debenture Reserve Accounts. Total amount of dividend which remains unpaid/unclaimed should be transferred to ‘Unpaid Dividend Account’.
c) Does the company have to transfer the amount of unpaid dividend to IEPF after 30 days?
Answer: No. Any amount in the unpaid Dividend Account of a company that remains unpaid/unclaimed for a period of 7 (seven) years from the date of such a transfer shall be, transferred by the company to ‘Investors Education and Protection Fund’ (IEPF).
Q.4 Distinguish between the following.
1) Final Dividend and Interim Dividend.
2) Dividend and Interest
Q.5 Answer in brief.
1) State any four points to be kept in mind by a Listed Company with respect to Dividend.
Answer: Where a company’s shares are listed on the Stock Exchanges, additional requirements with respect to Listings agreements must be followed like :
Notify stock exchange where company’s securities are listed at least 2 days in advance of the date of meeting of the Board at which recommendation of final dividend is to be considered.
Intimate Stock Exchange immediately about declaration of dividend after the Board Meeting.
Give notice of Book closure to the stock exchange at least 7 working days before the closure.
Close the Register of members and the Transfer Register.
It must use electronic mode of payment such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved b the Reserve Bank of India (RBI).
Listed company has to express the dividend on per share basis only.
2) Discuss any four features of dividend.
Answer: Following are the features of Dividend:
It is the portion of profits of the company paid to its shareholders.
It is payable out of the profits of the company.
Dividend is an unconditional payment made by the company.
Company can pay dividend only to the shareholders viz. (1) Equity (2) Preference.
If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern rights of shareholders about receiving the dividend.
Dividend cannot be declared out of capital.
Dividend can be declared only on recommendation of the Board of Directors.
Dividend, as recommended by Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
Dividend once approved and declared by shareholders creates a debt. It cannot be revoked.
Dividend includes Interim Dividend.
Dividend must be paid in cash and not in kind.
Dividend is to be paid on paid-up value of shares.
Dividend cannot be paid on calls paid in advance.
3) Explain the features of Interest.
Answer: Following are the features of interest.
Interest is the price paid for the productive services rendered by capital.
It is directly related to risk. Higher the risk, higher is the interest.
The rate of Interest is expressed as the annual percentage of the Principal.
The rate of interest is determined by various factors like money supply, fiscal policy, volume of borrowings, rate of inflation etc.
Interest is a charge against the profit of the company. Even if a company makes no profit, interest should be paid.
It is payable at a fixed and generally predetermined rate.
Q.6 Justify the following statements.
1) Dividend is paid out of profits of the company.
Answer:
a) Under a depository system securities are held in electronic form.
b) All risks associated with physical certificates like delays, lost, theft, mutilation, bad deliveries, etc. are totally eliminated.
c) It is the safest and secure way of holding securities.
d) It offers scope for paperless trading by using state-of-art technology.
e) It leads to the elimination of storage and handling of certificates.
f) Therefore, Electronic holding of securities is safer than physical holding.
2) Interim dividend cannot be paid out of free reserves.
Answer:
a) Under a depository system securities are held in electronic form.
b) The transfer and settlement of securities done electronically.
c) Efforts in filling transfer forms and lodging the documents is eliminated.
d) Also the stamp duty levied on the transfer of physical shares is not applicable.
e) Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for unnecessarily a long time.
f) Hence, Depository provides easy and quicker transfer of shares.
3) AGM is crucial for Final Dividend.
Answer:
a) Under a depository system securities are held in electronic form.
b) The transfer and settlement of securities done electronically.
c) Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for unnecessarily a long time.
d) Costs, efforts and time involved in printing and distribution of certificates in cases of new issues, bonus, transfers, etc. is saved.
e) Efforts in filling transfer forms and lodging the documents is eliminated.
f) Also the stamp duty levied on the transfer of physical shares is not applicable.
g) Hence, the Depository system results in reduced time, cost and efforts.
4) Listed Company has to follow additional guidelines on dividend matters.
Answer:
a) Banking system keeps the money safe. Similarly, Depository system keeps the securities safe.
b) In bank funds are held in accounts having unique numbers. Similarly, Securities are held in accounts having unique IDs.
c) Like bank, There is no physical handling of securities during allotments, transfers, etc.
d) In banking system The transfer of funds between accounts is done. Similarly, in the Depository system, The transfer of securities between accounts is done.
e) Hence, Depository system is very similar to the Banking system.
5) Equity shares get last priority in dividend.
Answer:
It is the agent of Depositor. It is an intermediary appointed by Depository.
DP is registered under the SEBI A ct. It enjoys rights and obligations as specified under SEBI (Depositor and Participants) Regulations of 1996.
DP acts as a link between Depositor and the investor.
It directly deals with customers. It sends statement of accounts periodically.
It functions like a securities bank. The DP maintains account of securities of each investor.
It facilitates Dematerialisation.
It credits securities in the event of Rights Issue, Bonus Issue, etc.
It handles instant transfers of pa-outs like dividend, interest, etc.
It settles trade electronically.
Hence,DP is an important constituent of Depository system.
6) Unpaid dividend cannot be used by the company.
Answer:
a) Depository is an organization like the Central Bank where securities are held in electronic form at the investor’s request.
b) Depository system convert physical certificates into electronic and electronic into physical.
c) Dematerialization is a process whereby a client can get physical certificates converted into electronic mode.
d) Rematerialization is the process whereby a client can get his electronic holdings of securities converted into physical certificates.
e) All risks associated with physical certificates like delays, lost, theft, mutilation, bad deliveries, etc. are totally eliminated.
f) Hence, Depository system allows both: Physical to electronic and electronic to physical conversion.
7) Interest is a liability/obligation of the company.
Answer:
1) It is a code that uniquely identifies a specific securities issue.
2) ISINs in any country are allotted by that country’s NNA (National Numbering Agency)
3) ISIN is a standard numbering system that is accepted globally.
4) In India, issuing ISIN to securities is assigned by SEBI to NSDL (for demated shares) SEBI works as NNA in India.
5) For Government securities, allotment of ISIN is done by the RBI.
6) ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided in 3 (Three) parts.
7) The company has to apply for ISIN for its securities with documents like prospectus.
8) Hence, ISIN is necessary component of Demat.
8) Approval of members is not needed for Interim Dividend.
Answer:
1) It is a code that uniquely identifies a specific securities issue.
2) ISINs in any country are allotted by that country’s NNA (National Numbering Agency)
3) ISIN is a standard numbering system that is accepted globally.
4) In India, issuing ISIN to securities is assigned by SEBI to NSDL (for demated shares) SEBI works as NNA in India.
5) For Government securities, allotment of ISIN is done by the RBI.
6) ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided in 3 (Three) parts.
7) The company has to apply for ISIN for its securities with documents like prospectus.
8) Hence, ISIN is necessary component of Demat.
Q.7 Answer the following
1) Define Dividend and explain its features.
Answer:
The term dividend is derived from the Latin word ‘Dividendum’ which means ‘that which is to be divided’.
It is that part of the profits of the company which is distributed amongst its shareholders. Dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’
Definition:
The Institute of Chartered Accountants of India has defined Dividend as, “a distribution to shareholders out of profits or reserves available for this purpose.”
Following are the features of Dividend
It is the portion of profits of the company paid to its shareholders.
It is payable out of the profits of the company.
Dividend is an unconditional payment made by the company.
Company can pay dividend only to the shareholders viz. (1) Equity (2) Preference.
If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern rights of shareholders about receiving the dividend.
Dividend cannot be declared out of capital.
Dividend can be declared only on recommendation of the Board of Directors.
Dividend as recommended by Board of Directors is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
Dividend once approved and declared by shareholders creates a debt. It cannot be revoked.
Dividend includes Interim Dividend.
Dividend must be paid in cash and not in kind.
Dividend is to be paid on paid-up value of shares.
Dividend cannot be paid on calls paid in advance.
2) What is Interest? Explain its features.
Answer:
In financial terms, it is a payment made for using money of another. i.e. Borrower takes money from the lender.
So interest is the cost of renting money, for the borrower and it is the income from lending money for the lender.
It is the return payable to the creditors of the company viz. Debenture holder / Deposit holders for the loan given by them to the company.
Following are the features of Interest:
1) Interest is the price paid for the productive services rendered by capital.
2) It is directly related to risk. Higher the risk, higher is the interest.
3) Rate of Interest is expressed as annual percentage of Principal.
4) Rate of interest is determined b various factors like money supply, fiscal policy, volume of borrowings, rate of inflation etc.
5) Interest is a charge against the profit of the company. Even if company makes no profit, interest should be paid.
6) It is payable at a fixed and generally pre-determined rate.
3) Discuss legal provisions for declaration of dividend.
Answer:
The dividend is that part of the profits of the company which is distributed amongst its shareholders. Dividend is a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’
Legal Provisions for declaration of Dividend
1) Board Meeting:
Dividend can be declared only on recommendation of Board of Directors. Board Meeting should be called to pass resolution about :
a) Rate of Dividend and amount of Dividend to be paid
b) Book closure date for dividend
c) Date of Annual General Meeting.
d) Bank with which a separate account should be opened to remit the dividend amount.
2) Shareholder’s Approval:
a) Dividend is approved by shareholders by passing an Ordinary Resolution at the Annual General Meeting.
b) Shareholders can declare a lower rate of dividend than what is recommended by the Board but not higher than that.
c) Once the dividend is declared at the General meeting it cannot be revoked. The company is not permitted to declare it second time in that year.
3) Separate Bank Account
The company must deposit the dividend amount in a separate bank account opened in a scheduled bank called as Dividend Account within 5 (Five) days of its declaration.
Listed company: Where a company’s shares are listed on the Stock Exchanges, additional requirements with respect to Listings agreements must be followed like.
a) Notify stock exchange where company’s securities are listed at least 2(two) days in advance of the date of meeting of the Board at which recommendation of final dividend is to be considered.
b) Intimate Stock Exchange immediately about declaration of dividend after the Board Meeting.
c) Give notice of Book closure to the stock exchange at least 7(seven) working days before the closure.
d) Close the Register of members and the Transfer Register.
e) It must use electronic mode of payment such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved by the Reserve Bank of India (RBI)
f) Listed company has to express the dividend on per share basis only.
4) Prohibition to Pay Dividend
a) A company that has failed to repay deposit or interest on deposit cannot declare any dividend on its equity shares.
b) No dividend can be declared if company has defaulted on :
1) Redemption of Debentures or payment of interest, Redemption of Preference shares, payment of interest to financial institution, etc.
4) Explain Interim Dividend.
Answer:
Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend. Interim dividend is paid in the middle of the accounting year i.e. before the finalization of annual accounts for the year. Opinion of the company’s Auditors should be taken before declaring Interim Dividend.
Features of Interim Dividend
The Board of Directors has the power to declare Interim Dividend.
Interim Dividend is only a payment on account of the whole dividend for the year.
Company should provide depreciation for the entire year and not proportionately for a part of the year before declaring Interim Dividend.
Interim dividend cannot be paid out of any reserves.
Articles of Association of the company must authorize the Board of Directors to declare Interim Dividend.
The Board Meeting has to pass a resolution for declaring the Interim Dividend.
The amount to be given as Interim Dividend must be credited in a separate Bank account in a scheduled bank within 5 days of its declaration.
Interim Dividend should be paid within 30 days of its declaration.
Unpaid / Unclaimed Interim Dividend should be transferred to ‘Unpaid Dividend Account within 7 days of the expiry of 30 days of declaration i.e. 37 days of its declaration.
Any amount remaining unpaid/unclaimed in the ‘Unpaid Dividend A/c’ for 7 years should be transferred to IEPF.
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