What do you understand by dividend ?

Dividends are the profits of trading divided among the shareholders in proportion to their shares and in accordance with their rights as shareholders. Every trading company has inherent power to pay dividend. It need not be expressly provided in its memorandum or articles.

A dividend can be declared by the shareholders but no dividend shall exceed the amount recommended by the board of directors. If the directors feel that a dividend should not be declared, the shareholder in general meeting cannot themselves declare it. Apart from these, the articles may empower the directors to declare interim dividends.

The articles usually provide that the dividends shall be paid to the shareholders in proportion to the amounts paid on the shares held by them respectively. If not, dividends are paid on each share in proportion to the nominal value of that share without reference to the amount paid upon it.

A company may declare and pay dividends out of current or previous year’s profits or out of both or out of money provided by the central or state government for payment of the dividend in pursuance of a guarantee given by such government. In the public interest the central government may allow a company to declare dividend out of profits of the current year without requiring the company to provide for depreciation.

Before declaring any dividend certain percentage of profits as prescribed by the central government, but not exceeding 10 per cent will have to be transferred to the reserves of the company. The company, if authorized by its articles may voluntarily create greater reserves.

The dividend is to be paid in cash or by cheque or by dividend warrant. Payment of dividend in case, however, does not prevent a company from capitalizing its profits or reserves for the purpose of issuing fully paid bonus shares, or paying up the unpaid portion of share money payable by the shareholders on calls.

If a company wants to pay dividend out of past years profits transferred to reserves, the company must comply with the rules framed by the central government or the company has to obtain previous approval of the central government.

Where a dividend is not paid within 42 days of its declaration or the dividend warrant is not posted within the period, that company will transfer the unpaid dividend in an “Unpaid Dividend Account” with a scheduled bank. This shall be done within seven days of the expiry of the said 42 days. Where any money in the unpaid dividend account of the company remains unpaid or unclaimed for three years from the date of the company remains unpaid or unclaimed for three years from the date of transfer to the account, and then the company shall transfer such money to the general revenue account f the central government. Any person, who claims any dividend out of such unpaid or unclaimed dividend as transferred to general revenue account, may apply to the central government for payment.

The dividend shall be payable to the registered shareholder or to his order or to the banker. Where share warrants have been issued the dividend may be paid to the bearer of the warrant or if so directed to his banker.

The dividend shall be paid to the registered shareholder within 42 days of its declaration. For non-payment of dividend within specified period, every director, who is knowingly a party to the default, is liable to simple imprisonment which may extend to seven days or fine.