(^340) Financial Management
Procedural and Legal Aspects of Dividends
The amount of dividend that can be legally distributed is governed by company law,
judicial pronouncements in leading cases, and contractual restrictions. The important
provisions of company law pertaining to dividends are described below.
- Companies can pay only cash dividends (with the exception of bonus shares).
Apart from cash, dividend may also be remitted by cheque or by warrant. The
same may also be transmitted electronically to shareholders after obtaining their
consent in this regard to the bank account number specified by them. The step
has been proposed by the Department of Company Affairs to avoid delay in the
remittance of dividend. - Dividends can be paid only out of the profits earned during the financial year after
providing for depreciation and after transferring to reserves such percentage of
profits as prescribed by law. The Companies (Transfer to Reserve) Rules, 1975,
provide that before dividend declaration, a percentage of profit as specified below
should be transferred to the reserves of the company.
a. Where the dividend proposed is up to 10 per cent of the paid up capital, no
amount of the current profits need to be transferred.
b. Where the dividend proposed exceeds 10 per cent but not 12.5 per cent of the
paid-up capital, the amount to be transferred to the reserves should not be
less than 2.5 per cent of the current profits.
c. Where the dividend proposed exceeds 12.5 per cent but not 15 per cent, the
amount to be transferred to reserves should not be less than 5 per cent of the
current profits.
d. Where the dividend proposed exceeds 15 per cent but not 20 per cent, the
amount to be transferred to reserves should not be less than 7.5 per cent of
the current profits.
e. Where the dividend proposed exceeds 20 per cent, the amount to be transferred
to reserve should not be less 10 per cent.
f. A company may voluntarily transfer a percentage higher than 10 per cent of
the current profits to reserves in any financial year provided the following
conditions are satisfied:
(i) It ensures that the dividend declared in that financial year is sufficient to
maintain average rate of dividend declared by it over three years
immediately preceding the financial year.
(ii) In case, it has issued bonus shares in the year in which dividend is
declared or in the three years immediately preceding the financial year,
it maintains the amount of dividend equal to the average amount of