Page 222 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 10: Share Capital

(6) In case of inadequacy or absence of profits in any year, the company may declare dividends Notes
out of previous year’s accumulated profits and reserves in accordance with Rules framed

by the Central Government.
The Rules framed by the Central Government in this regard, called Companies (Declaration
of Dividends out of Reserves) Rules, 1975, inter alia, provide as follows:
(i) The rate of the dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the five years immediately preceding that

year or 10 per cent of its paid-up capital, whichever is less.
(ii) The total amount to be drawn from the accumulated profits earned in previous years

and transferred to the reserves shall not exceed an amount equal to 1/10th of the sum
of its paid-up capital and free reserves.

(iii) The amount so drawn from general reserves shall first be utilised to set-off the losses
incurred in the financial year before any dividend in respect of preference or equity

shares is declared.
(iv) The balance of reserves after such drawal shall not below 15 per cent of its paid-up
share capital.
(7) The rate of dividend is recommended by the Board of Directors and is declared by the
shareholders in the AGM. The shareholders cannot insist on either declaration of dividend
or on increasing the rate recommended by the Board of Directors.
(8) The dividends must be paid or the warrants in respect thereof posted to the shareholders,
within 30 days from the date of declaration (s.207).
The total amount of dividends unpaid or unclaimed should, within seven days from the
date of the expiry of the said period of 42 days, be kept in a separate special account with
any scheduled bank which would be called the Unpaid Dividend Account of company
Limited/Private Limited. The payment of dividends should then be made out of this
Account [s.205 A(1)].
All the unclaimed dividends lying to the credit of the said Dividend Account for a period
of more than three years will have to be transferred to a “General Revenue Account of
the Central Government”. The shareholders will have to prefer their claims for arrears of
dividends for more than three years to the Central Government [s.205-A(5)].

(9) Section 206A provides for payment of dividend and allotment of bonus and right shares to
the transferee on a mandate in this regard from the transferor. But in the absence of such
a mandate, it is obligatory on the part of the company to transfer the dividends accruing
on such shares to the Unpaid Dividend Account and to keep in abeyance offer to rights or
bonus shares till the title to the shares is decided.

(10) The articles may also empower the directors to declare interim dividends. An interim
dividend is that dividend which is declared by the Board of Directors at any time in
between two AGMs. The directors should seek the opinion of auditors before declaring

any interim dividend, as it must be paid out of the profits of the company, otherwise it may
amount to payment of dividend out of capital which is not allowed.

(11) Section 205 lays down the general rule that dividends can be paid out of profits only and
not out of capital. An exception to this rule is, however, constituted by s.208. It provides
that where shares are issued to raise money to defray the cost of works of building or
plant which cannot be made profitable for a long period, the company may (i) pay interest

@ 4 per cent on the amount of capital paid-up in respect of such shares, if the articles of
the company allow and previous sanction of the Central Government is obtained; and (ii)
charge such interest to capital as part of the cost of works, building, or plant.

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