Maharashtra Board Class 12 Secretarial Practice Chapter 10 Dividend And Interest PDF Download

Dividend And Interest

This chapter covers:

10.1 Dividend - Meaning

10.2 Features of Dividend

10.3 Legal provisions on dividend

10.3.1 Legal Provisions on sources of dividend

10.3.2 Legal Provisions for declaration of dividend

10.3.3 Legal provisions for payment of dividend

10.4 Unpaid and unclaimed dividend

10.5 Modes of payment of dividend

10.6 Interim dividend

10.7 Interest

10.7.1 Meaning

10.7.2 Features

10.8 Distinction

Introduction

Profit making and its maximization is the prime aim of all business organisations including a Joint Stock Company. The shareholders invest with an aim of earning returns out of the profits of the company.

Profit is the difference between revenues and the expenses for a given period.

10.1 Dividend - Meaning

The term dividend is derived from 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

1. The Institute of Chartered Accountants of India has defined Dividend as, "a distribution to shareholders out of profits or reserves available for this purpose."

2. The Supreme Court has defined it as, "In case of going-concern, it means portion of profits of a company, which is allotted to the holders of shares in a company."

a) Going concern means a business that is operating and making profits.

b) "Profits available for Distribution and profits available for Dividend" are different terms. The former means maximum profits which law allows a company to distribute to the shareholders by way of Dividend. The latter means profits which the Directors consider should be distributed after making provision for transfer to reserve, past losses etc.

Teacher's Note

Dividend is the money that a company gives to its owners (shareholders). For example, if you own shares in Reliance Industries and they make good profits, you get some money back as dividend.

Exam Trick

Remember: Dividend = Profit shared. Only when a company makes profit, it can give dividend to shareholders.

Points to Remember

Dividend is a part of company profits given to shareholders.
It is paid only when the company makes profits.
The Board of Directors recommends the dividend amount.
Shareholders approve it at the Annual General Meeting.
Once declared, dividend cannot be taken back by the company.

10.2 Features Of Dividend

1. It is the portion of profits of the company paid to its shareholders.

2. It is payable out of the profits of the company.

3. Dividend is an unconditional payment made by the company.

4. Company can pay dividend only to the shareholders viz. (1) Equity (2) Preference.

5. 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.

6. Dividend cannot be declared out of capital.

7. Dividend can be declared only on recommendation of the Board of Directors.

8. Dividend as recommended by Board of Directors is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.

9. Dividend for any previous year cannot be declared once that year's Annual Account has been approved in the AGM.

10. Dividend once approved and declared by shareholders creates a debt. It cannot be revoked.

11. Dividend includes Interim Dividend.

12. Dividend must be paid in cash and not in kind.

13. Dividend is to be paid on paid-up value of shares.

14. Dividend cannot be paid on calls paid in advance.

Note: Usually the term Dividend refers to Annual/final Dividend unless it is specifically mentioned as Interim Dividend.

Teacher's Note

Dividend has many rules. The company must follow all these rules when giving money to shareholders. Think of it like your parents giving you pocket money - they have rules for when and how much to give.

Exam Trick

Remember: Dividend cannot be paid from capital. Capital is the money used to buy assets, not to give to shareholders. Only profits can be shared.

Points to Remember

Dividend is paid only from company profits, not from capital.
Dividend is paid to registered shareholders only.
Board recommends, but AGM meeting declares the dividend.
Once declared, dividend becomes a debt of the company.
Dividend must be paid in cash, never in goods or gifts.

10.3 Legal Provisions On Dividend

10.3.1 Legal Provisions On Sources Of Dividend

a) Company may declare and pay dividend for any financial year out of the following:

1) Current Profits i.e. profits of the company of that year arrived at, after providing for depreciation and transfer to Reserves.

2) Out of profits of the company of any previous financial year, after providing for depreciation.

3) Money provided by the Central or State Government to pay dividend.

b) Dividend can be paid out of Capital Profits:

On fulfilling these condition:

(i) Capital profits are realised in cash

(ii) Articles of Association of the company permits such a distribution

(iii) It remains as profits after revaluation of all Assets and Liabilities.

Capital Profits arise when a company sells part of its fixed assets at price higher than original cost of such assets or premium earned on the issue of shares.

c) Dividend cannot be paid out of Capital.

d) Dividend can be paid out of free reserves of company.

Free Reserves are the reserves available for distribution of profits as per latest audited Balance Sheet of the Company.

Teacher's Note

A company can use different sources of money to pay dividend. Think of it like having money in different savings accounts - some from current earnings and some from savings.

Exam Trick

Remember: Dividend can come from current profits OR previous year profits OR government money OR capital profits OR free reserves. But never from capital investment itself.

Points to Remember

Dividend sources include current year profits and previous year profits.
Dividend can be paid from free reserves saved by the company.
Dividend can be paid from capital profits (money from selling old assets).
Dividend cannot be paid from the original capital of the company.
Government can also give money to the company to pay dividend.

10.3.2 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) Shareholders 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. 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).

1) Book closure: It means the time period when company does not handle any adjustments to the Register or requests to transfer Shares.

2) Record Date: It is the cut-off date for determining the number of registered members who are eligible for corporate benefits like Dividends and Bonus shares.

f) Listed company has to express the dividend on per share basis only.

Teacher's Note

To declare dividend, the Board must meet first and recommend it. Then shareholders vote on it at the AGM meeting. This is like a school where the principal suggests something and then all teachers vote to approve it.

Exam Trick

Remember: Board recommends → Shareholders approve → Money goes to bank account → Payment made within 30 days. This is the order you must follow.

Points to Remember

Board of Directors must meet to decide dividend amount and rate.
The company must notify stock exchange 2 days before Board meeting (for listed companies).
Book closure is the date when no share transfers are allowed.
Record date decides who gets the dividend payment.
Dividend must be deposited in bank account within 5 days of declaration.

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