Declaration and Payment of Dividend
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In 30 seconds
- Dividend [Sec 2(35)] merely 'includes any interim dividend' — inclusive, not exhaustive — and is always computed on face value, never market price.
- Section 123: four sources of dividend, Schedule II depreciation first, Rule 3's four cumulative conditions for dipping into accumulated profits, and prohibitions on Sec 73/74 defaulters and Section 8 companies.
- Master timeline 5-30-7-90-7(yr): deposit in 5 days → pay/post in 30 days → UDA in 7 days → statement in 90 days → IEPF after 7 years (money; shares after 7 consecutive years).
- Section 126 abeyance: on an unregistered transfer, dividend goes to the UDA and rights/bonus shares are held back — unless the registered holder authorises otherwise in writing.
- Interest mnemonic 1-2-8: 12% p.a. for default in transferring to the UDA (Sec 124(3)) vs 18% p.a. for default in paying shareholders within 30 days (Sec 127(2)).
Companies Act, 2013 as amended, per the May 2026 syllabus.
How the chapter fits together
Every question in this chapter walks the same road: what a dividend is, where it can come from, how it must be paid, what happens when payment fails, and who gets punished. Learn Sections 123–127 as one pipeline:
- 2(35) meaning (“includes any interim dividend”) → types: interim vs final; preference (cumulative / non-cumulative, Sec 43) vs equity →
- 123 declaration — four sources → Rule 3 for accumulated profits → 5-day deposit → 30-day payment → prohibitions [123(6), Sec 8(1)] →
- 124 Unpaid Dividend Account — 30 days unpaid → 7 days → UDA → 90-day statement → 12% p.a. on default → 7 years → IEPF (money + shares) →
- 125 IEPF — credits (a)–(n), utilisation, Authority →
- 126 abeyance on unregistered transfers → 127 punishment — director: 2-year imprisonment + ₹1,000/day; company: 18% p.a.; five exemptions.
Two mnemonics carry half the chapter:
- Timeline “5-30-7-90-7(yr)” — deposit 5 days → pay/post 30 days → UDA transfer 7 days → statement 90 days → IEPF 7 years. The windows are sequential, not overlapping: the 30-day pay window expires, then the 7-day UDA window starts, then the 90-day statement, then the 7-year IEPF clock.
- Interest “1-2-8” — 12% (default in transfer to UDA, Sec 124) vs 18% (payment default, Sec 127). Bigger number = bigger default, because it is shareholder-facing.
Dividend — meaning and types
Dividend [Sec 2(35)]
“Includes any interim dividend” — an inclusive, not exhaustive definition. In substance: a distribution of profits / free reserves to members, always calculated on face value, never market value.
Free reserves [Sec 2(43)]
Reserves per the latest audited balance sheet available for dividend — excluding unrealised or notional gains, revaluation reserve, and fair-value surplus/change in carrying amount. These can never fund a dividend even though the books show them as “reserves”.
| Type | Who declares / when | Traps |
|---|---|---|
| Interim [123(3)/(4)] | Board, between two AGMs, before adoption of final accounts | Loss during the year up to the preceding quarter → rate ≤ average of preceding 3 years; revocable only with consent of all shareholders |
| Final | Board recommends; shareholders approve at the AGM — ordinary business, ordinary resolution [102(2)] | Members can reduce but never increase the recommended rate (Table F, Reg. 80); once declared, cannot be revoked |
| Cumulative preference [Sec 43] | Dividend accumulates; arrears paid from future profits | No equity dividend until arrears cleared; presumed cumulative unless stated otherwise |
| Non-cumulative preference | Payable only in a profit year; no accumulation | Right lapses if not declared that year |
A company declares a 20% dividend. A member holds shares of ₹10 face value, currently trading at ₹250. How much does she receive per share?
Dividend percentage is always computed on the face/nominal value of the share, never on market price. This one line settles every “rate of dividend” sub-part.
Answer: ₹2 per share — 20% of the ₹10 face value. The market price (₹250, ₹300, anything) is irrelevant.
Declaration — sources, Rule 3 and prohibitions (Sec 123)
Section 123(1) permits dividend out of four sources only:
- (a) Current year’s profit, after depreciation;
- (b) Past years’ profits / free reserves, after depreciation;
- (c) Both of the above; or
- (d) Money provided by the Government under a guarantee given by it.
The riders around 123(1)–(2):
- Proviso (a) — profit computation: unrealised gains, notional gains and revaluation gains are excluded while computing profits.
- 3rd proviso — only free reserves: no reserve other than free reserves can be used.
- 4th proviso — set-off first: past losses and un-provided depreciation must be set off before any dividend.
- 123(2) — depreciation: profits are available only after Schedule II depreciation; skipping it means dividend out of capital, which is prohibited.
- Transfer to reserves before declaring is fully discretionary — no minimum or maximum %. (The old law had caps; do not apply old rules.)
- Capital profits are generally not distributable — they are not earned in the normal course.
Accumulated profits (2nd proviso + Rule 3). In a year of inadequate or no profit, dividend can be declared out of accumulated profits (free reserves) only if all four Rule 3 conditions are satisfied together — the most restrictive wins:
- I — Rate ceiling: rate ≤ average of the preceding 3 years’ dividend. Skip this condition only if the company declared NO dividend in each of the preceding 3 FYs.
- II — 10% cap: amount drawn ≤ 10% of (paid-up capital + free reserves).
- III — Set-off: the amount drawn must first set off the current year’s losses.
- IV — 15% floor: balance of reserves after the withdrawal ≥ 15% of paid-up capital.
Carve-out: Rule 3 (all four conditions) does not apply to a Government company whose entire paid-up capital is held by the Central/State Government(s) [Notification 463(E), 05-06-2015].
Who cannot declare dividend at all:
- A company in default under Sections 73/74 (deposits) — barred from dividend on equity shares “so long as the failure continues” [123(6)].
- Section 8 companies — absolute prohibition, regardless of profits [8(1)].
Payment mechanics — deposit, mode and payee
- 5-day deposit [123(4)]: within 5 days of declaration, the dividend amount (including interim) must be deposited in a separate scheduled-bank account. Waived for a Government company wholly owned by the Central/State Government(s) [Notif. 463(E)].
- Interim loss-year cap [123(4)]: loss during the current FY up to the end of the preceding quarter → interim rate ≤ average of the preceding 3 years.
- Mode [123(5)]: only in cash — cheque, dividend warrant, or electronic mode; never in kind. Sole exception (First Proviso): capitalisation of profits/reserves to issue bonus shares or to pay up unpaid calls — that is not “dividend in lieu of” anything.
- Payee and time [123(5)]: the registered shareholder, his order, or his banker — within 30 days of declaration.
- Partly-paid shares [Sec 51]: dividend may be paid pro rata to the paid-up amount, if the Articles authorise it.
- Nidhi modification [123(5)]: a cash dividend unclaimed within 30 days may be credited to the member’s account — a modified compliance mechanic, not an exemption.
Record date
The date fixing entitlement to the dividend. The Register of Members on that date decides the payee — a buyer not yet registered gets nothing, even if he has fully paid the consideration; the transferor’s name rules until registration.
Unpaid dividends — UDA, IEPF and abeyance (Secs 124–126)
Unpaid Dividend Account [Sec 124(1)]
A special account in a scheduled bank for unpaid/unclaimed dividend. It comes into play after the 30-day payment window fails and must be funded within 7 days. “Unpaid” (company failed to pay) and “unclaimed” (shareholder did not collect) are treated alike for UDA/IEPF timelines.
The Section 124 pipeline:
- 30 + 7 days: dividend unpaid/unclaimed after the 30-day window → transfer to the UDA within 7 days of that window’s expiry [124(1)].
- 90 days: statement of names, addresses and amounts, placed on the website(s), within 90 days of the transfer [124(2)].
- 12% p.a.: simple interest on default in transferring to the UDA, from the date of default — for the benefit of the members [124(3)].
- Claim: the claimant applies to the company [124(4)].
- 7 years: UDA balance still unpaid/unclaimed → transferred with interest to the IEPF [124(5)].
- Shares [124(6)]: dividend unpaid/unclaimed for 7 consecutive years → the underlying shares are transferred to the IEPF. Exception: if dividend was paid or claimed for any one year within the 7, the shares are not transferred.
- Penalty [124(7)]: company ₹1,00,000 + ₹500/day (max ₹10,00,000); officer in default ₹25,000 + ₹100/day (max ₹2,00,000).
IEPF [Sec 125]. Established by the Central Government, with 14 credit categories (a)–(n) — including application money, matured deposits, matured debentures, fractional-share proceeds and preference-redemption money unclaimed for 7 years [125(2)(h)–(m)]. Utilisation [125(3)]: refunds to claimants; investor education, awareness and protection; distribution of disgorged amounts; Tribunal-sanctioned reimbursement of class-action legal expenses (Secs 37/245); and incidental purposes. Donating fund money back to the Government for training is not a valid use.
Disgorgement [Sec 38(4)]
Court-ordered repayment of ill-gotten gains — the amount is credited to the IEPF and can be distributed to eligible applicants from it.
IEPF Authority [125(5)–(7)]: administers the Fund w.e.f. 13.01.2016; the Secretary, MCA is ex-officio Chairperson, with 6 members (max 7) and a CEO as convenor; the Fund’s accounts are audited by the CAG.
Abeyance [Sec 126]. Where a transfer instrument is not yet registered: the dividend goes to the UDA — unless the registered holder authorises in writing payment to the transferee — and the offer of rights shares [62(1)(a)] and bonus shares [First Proviso to 123(5)] is kept in abeyance. Distinguish the two UDA routes: Sec 124 is the general non-payment route; Sec 126 is the specific unregistered-transfer route.
Punishment, exceptions and master timelines (Sec 127)
Failure to pay the dividend or post the warrant within 30 days of declaration:
- Director who is knowingly a party to the default: imprisonment up to 2 years and fine of minimum ₹1,000 per day of default [127(1)].
- Company: simple interest at 18% p.a. during the period of default [127(2)].
Dividend warrant
A cash-equivalent instrument posted to the member’s registered address. The offence is the company’s failure to post it within 30 days — non-receipt by the shareholder is not an offence.
The five exemption grounds from Section 127 punishment:
- (a) The dividend could not be paid by reason of operation of law;
- (b) The shareholder’s directions cannot be complied with and this has been communicated to him — both limbs needed;
- (c) A dispute regarding the right to receive the dividend;
- (d) The dividend is lawfully adjusted against a sum due from the shareholder (e.g., calls in arrears);
- (e) Any other reason where the failure is not due to the company’s default.
Nidhi modification: for dividend ≤ ₹100, a newspaper announcement (local language) plus a notice-board display for 3 months is sufficient compliance.
Every carve-out in the chapter, in one table:
| Provision — general rule | Exception / carve-out |
|---|---|
| Rule 3, Condition I — rate ≤ average of preceding 3 years | Does not apply if NO dividend was declared in each of the preceding 3 FYs |
| Rule 3 (all 4 conditions) + 5-day deposit [123(4)] | Not applicable to a Government company wholly owned by Central/State Govt(s) [Notif. 463(E), 05-06-2015] |
| 123(5) — dividend only in cash | Bonus shares / paying up unpaid calls via capitalisation of profits or reserves (First Proviso) |
| 123(5) — pay the registered holder | Nidhi: cash dividend unclaimed in 30 days may be credited to the member’s account |
| 124(6) — shares to IEPF after 7 consecutive years | Not transferred if dividend was paid/claimed for any year during the 7 |
| 126 — dividend on unregistered transfer goes to UDA | Unless the registered holder authorises payment to the transferee in writing |
| 127 — non-payment/non-posting in 30 days is an offence | Five exemption grounds (a)–(e) + Nidhi modification (≤₹100: newspaper + notice board, 3 months) |
The master timeline:
| Period | Event / action | Section |
|---|---|---|
| 5 days | Deposit dividend (incl. interim) in a separate scheduled-bank account, from declaration | 123(4) |
| 30 days | Pay dividend / post warrant, from declaration | 123(5), 127 |
| 7 days | Transfer unpaid/unclaimed dividend to UDA, from expiry of the 30-day period | 124(1) |
| 90 days | Statement (names/addresses/amounts) on website(s), from transfer to UDA | 124(2) |
| 7 years | UDA amount unpaid/unclaimed → IEPF, with interest | 124(5) |
| 7 consecutive years | Dividend unpaid/unclaimed → related shares to IEPF | 124(6) |
| 7 years | Application money, matured deposits/debentures, fractional-share proceeds, preference-redemption money unclaimed → IEPF | 125(2)(h)–(m) |
| 3 months | Nidhi: notice-board display for dividend ≤ ₹100 (with newspaper announcement) | 127 (Nidhi mod.) |
And the penalties, exactly:
| Default | Liable | Sanction | Section |
|---|---|---|---|
| Contravention of Sec 124 (failure to transfer to UDA etc.) | Company | Penalty ₹1,00,000 + ₹500/day continuing (max ₹10,00,000) | 124(7) |
| Same | Officer in default | Penalty ₹25,000 + ₹100/day continuing (max ₹2,00,000) | 124(7) |
| Default in transferring unpaid dividend to UDA | Company | Simple interest 12% p.a. from the date of default, for the members’ benefit | 124(3) |
| Failure to pay dividend / post warrant within 30 days | Director (knowingly a party) | Imprisonment up to 2 years + fine min. ₹1,000/day of default | 127(1) |
| Same | Company | Simple interest 18% p.a. during the default period | 127(2) |
- Treating Sec 2(35) as a full definition — it only says dividend “includes any interim dividend”; inclusive, not exhaustive.
- Computing dividend on market value — always on face value: 20% on a ₹10 share is ₹2, whether it trades at ₹250 or ₹300.
- Calling non-receipt of a warrant an offence — the offence is only the company’s failure to post within 30 days.
- Mixing the interest rates: 12% p.a. is for default in transferring to the UDA (company → UDA, Sec 124(3)); 18% p.a. is for default in paying shareholders within 30 days (company → shareholder, Sec 127(2)).
- Confusing Rule 3 Condition I with the 123(4) interim cap — both use the 3-year average, but Rule 3 governs declaring out of accumulated profits, while 123(4) governs an interim dividend when there is a current-year loss up to the preceding quarter.
- Equating “penalty” under 124(7) with “punishment” under 127 — 124(7) is a civil monetary penalty; 127 carries fine plus imprisonment.
- Applying the old transfer-to-reserves percentage caps — transfer to reserves before dividend is now fully discretionary, with no minimum or maximum.
- Equating the Government-company exemption with the Nidhi modification — a wholly Govt-owned company is fully exempt from Rule 3 and the 5-day deposit; a Nidhi only gets modified compliance mechanics, not exemption.
Quick revision cards
Four sources of dividend [123(1)]?
Rule 3's four conditions (accumulated profits)?
The timeline mnemonic?
12% vs 18% interest?
Director's punishment under Sec 127?
Sec 124(7) penalty amounts?
Five exemptions from Sec 127?
Only exception to cash-only dividend?
Who cannot declare dividend?
When do shares escape the 7-year IEPF transfer?
What can free reserves never include?
Sec 126 abeyance in one line?