Page 314 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes
!
Caution The Companies (transfer to Reserves) Rules, 1975 provide that before dividend
declaration a certain percentage of profits as specified below should be transferred to the
reserves of the company:
(i) Where the divident exceeds 10% but not 12.5% of the paid up capital - Not less than
2.5% of the current profits
(ii) Where dividend exceeds 12.5% but not 15% - Not less than 5% of the current profits

(iii) Where dividend exceeds 15% but not 20% - Not less than 7.5% of the current profits
(iv) Where dividend exceeds 20% - Not less than 10% of the current profits

3. Due to inadequacy or absence of profits in any year, dividend may be paid out of the
accumulated profits of previous year provided conditions as stipulated by the Companies
(Declaration of Dividend out of Reserves) Rules, 1975 are satisfied:
(a) The rate of dividend should not exceed the average of the rates at which the dividend
was declared by it in 5 years immediately preceding that year or 10% of its paid up
capital whichever is less.
(b) The total amount to be drawn from the accumulated profits carried in previous
years and transferred to reserves shall not exceed an amount equal to 1/10th of the
sum of its paid up capital and free reserves and the amount so drawn shall first be
utilized to set off the losses incurred in the financial year before any dividend in
respect of preference or equity shares is declared and

(c) The balance of reserves after such drawl shall not fall below 15% of its paid up
capital.

(d) Dividend cannot be declared for past years for which accounts have been closed.

Procedural Aspects

The important events and dates are given below:
1. Board resolution: Dividend is the prerogative of the Board of Directors. Hence the Board
of Directors should in a formal meeting resolve to pay the dividend.
2. Shareholder’s approval: The resolution of the Board of Directors to pay the dividend has
to be approved by the shareholders in the Annual General Meeting.
3. Record date: The dividend is payable to members whose names appear in the Register of
Members as on the record date.

4. Dividend Payment: Dividend warrants must be posted within 30 days of the declaration
date.

Task Do you think payment of dividends is an obligation for the corporate. Justify.

308 LOVELY PROFESSIONAL UNIVERSITY