LEGAL ,PROCEDURAL AND TAX
ASPECTS OF DIVIDEND POLICY
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SUBMITTED TO:
PROF. KARAMJEET SINGH
UNIVERSITY BUSINESS SCHOOL
SUBMITTED BY:
TRANNUM GUPTA(31) & TANVI(30)
M.COM (HONS) – 1ST YEAR
DIVIDEND POLICY
LEGAL ASPECTS PROCEDURAL ASPECTS TAX ASPECTS
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LEGAL ASPECTS
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The amount of dividend that can be legally distributed
is governed by :
I. Company Law
II. Judicial Pronouncements
III. Contractual Restrictions
SOURCE OF DECLARING DIVIDEND
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(a) Out of current profits.
(b) Out of past profits.
(c) Out of moneys provided by the Government.
Provisions of Company Law
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1. As per the guidelines proposed by Department of
Company Affairs ,Companies can pay dividends only in
the form of:
Cash dividends (except for the Bonus Shares)
Cheques and warrants ,or
Electronically to shareholders to the bank account
number specified by the shareholder.
2. Dividends can be paid only out of the profits earned
( after providing for depreciation and after transferring to
reserves )such percentage of profits as prescribed by law.
The companies (Transfer of Reserve ) Rules 1975, provide
the various percentage rates regarding this:
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Percentage of Dividend Amount to be transferred to
Proposed Reserves
Upto 10% of paid-up capital No amount of current profits
Exceeds 10%but less than 12.5% of Not less than 2.5% of current
paid up capital profits
Exceeds 12.5% but less than 15% Not less than 5% of current profits
of paid up capital
Exceeds 15% but less than 20% Not less than 7.5% of current profits
Exceeds 20% Not less than 10%
A company may voluntarily transfer a percentage higher than
10% of the current profits to reserves in any financial year by
satisfying following conditions:
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Dividend declared <= Average dividend declared over 3 years
immediately preceding the financial year
Amount of dividend = Average amount of dividend declared
over 3 years immediately preceding the financial year
(in case the company has issued bonus shares in which dividend is
declared or in the 3 years immediately preceding the financial
year)
However maintenance of such minimum rate or quantum is not
necessary if the net profits after tax in financial year is lower by
20% or more than the average profits after tax of the two
immediately preceding financial years .
A newly incorporated is prohibited from transferring
more than 10%of its profits to reserves.
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3.In case of inadequacy or absence of profits in any
year ,dividend may be paid out of the accumulated
profits of previous years. The conditions stipulated by
the Comapnies (Declaration of Dividend out of
Reserves)Rules,1975 are:
a. The rate of dividend should not exceed
average of the rates at which dividend was declared by it in 5
years immediately preceding that year or
10% of its paid up capital, whichever is less.
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(b) The total amount to be drawn for the declaration
of dividend from the accumulated profits should not
exceed :
an amount equal to one-tenth of the sum of its paid up capital
free reserves, and
the amount so drawn should first be utilised to set-off the
losses incurred in the financial year.
(c) The balance of reserves after such drawl should
not fall below 15% of its paid up capital.
OTHER PROVISIONS
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1.Dividend cannot be declared for which accounts have
been adopted by the shareholders in the annual general
meeting.
2.Interim or final dividend declared to be deposited
In a separate back account
Within 5 days from the declaration date
To be paid within 30 days from such date
3.Dividend including interim dividend once declared
becomes a debt but its payment cannot be revoked.
4. The payment of final dividend can be revoked with the
consent of shareholders.
PROCEDURAL ASPECTS
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The important events and dates in the dividend payment
procedure are:
1. Board Resolution
2. Shareholder Approval
3. Record Date
4. Dividend Payment
5. Unpaid Dividend
BOARD RESOLUTION
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Dividend decision is prerogative of the BOD.
BOD in a formal meeting resolve to pay the dividend.
SHAREHOLDER APPROVAL
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The resolution of BOD is to be approved by
shareholders in AGM.
In declaration of interim dividend their approval
isn’t required.
Shareholders doesn’t have power to declare the
dividend.
They also can’t increase the amount of dividend.
But they can reduce the amount of the proposed
dividend.
RECORD DATE
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Dividend is payable to shareholders whose name
appears in the register of members on the record date.
Record date is the future specified date
set by the directors on which all persons
whose names are recorded as
shareholders receive the declared
dividend.
DIVIDEND PAYMENTS
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Dividend warrant must be posted within 30 days after the
declaration.
After the expiry of 30 days, unpaid dividends must be transferred
to a special account opened with a scheduled bank within 7 days.
If fails, then interest of 12% per annum is to be paid.
In case of joint holders, dividend should be paid to first joint
holder.
In case of non-resident shareholders, dividend should be paid to
authorised dealers.
In case of dematerialised shares, firms are required to collect the
listn of members holding shares in depository and pay them
dividend.
UNPAID DIVIDEND
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If the money transferred to the unpaid dividend
account remains unpaid/unclaimed for a period of 7
years then company is required to transfer the same
to the ‘Investor Education and Protection Fund’
established for the purpose.
TAX ASPECTS
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•W.E.F. Financial year 2003-04, dividend income
from domestic companies and mutual funds is
exempt from tax in the hands of the
shareholders/investors/unit holders.
•But domestic companies will be liable to pay
dividend distribution tax at the effective rate of
16.995% on dividends paid after April 1, 2007.
THANK YOU!!
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