Dividend Policy

DIVIDEND POLICY : DETERMINENTS VIS-À-VIS COMPETETION A PROJECT REPORT Submitted to the University of Rajasthan Jaipur FIVE YEAR LAW COLLEGE (As per requirement of fifth th semester) for the

B.A.LLB.(HONS). Examination2010

Paper-V (COMPANY LAW - I)

Under Supervision of Ms. SONY KULSHRESHTHA Faculty Lecturer University of Rajasthan

Submitted by AJIT YADAV B.A.,LL.B(Hons.) V Semester (07)

FIVE YEAR LAW LAW COLLEGE

UNIVERSITY OF RAJASTHAN

JAIPUR

CERTIFICATE

This is to certify that AJIT YADAV , a student of B.A LL.B (hons.) V Semester, Five Year Law College, Rajasthan University, Jaip Jaipur ur has has writt written en this this proj projec ectt entit entitle led d "DIVID "DIVIDEND END PLOICY PLOICY :

DETERMINENTS

VIS-À-VIS

COMPETETIONS"

under

my

supervision and guidance.

It is further certified that the candidate has done a sincere efforts in this work on the topic mentioned above.

Ms. Sony Kulshreshtha

Supervisor

ACKNOWLEDGEMENT I have written this presentation entitled "

DIVIDEND PLOICY : DETERMINENTS VIS-À-VIS COMPETETIONS " under the supervision of Ms. Sony

Kulshreshtha, Faculty Lecturer, Five Year Law College, University of Rajasthan, Jaipur.

I find no words to express my sense of gratitude for Ms. Sony Kulshreshtha, Faculty lecturer for providing the necessary guidance and constant encouragement at every step of her endeavour. The pains taken by her in the scrutiny of the rough draft as well his valuable suggestions to plug the loopholes therein have not only helped immensely in making this work see the light of the day, but above all, have helped in developing an analytical approach approach to this work.

I am grateful and thankful to Prof. P rof. (Mrs.) Mridul Srivastava, Director of Five Year Law College, University of Rajasthan, Jaipur for her cooperation and guidance.

Further I am grateful to my learned teachers for their academic patronage and persistent encouragement extended to me.

I am highly indebted to the office and Library Staff of the Five Year Law College, University of  Rajasthan, Jaipur for the support and cooperation extended by them from time to time. I cannot conclude with recording my gratefulness to my friends for the assistance received from them in the preparation of this project for which I am indebted to them.

Ajit Yadav. B.A.,LLB. (hons.) V Semester Roll No. 07 Five Year Law College University of Rajasthan, Jaipur

CONTENTS

Sr.no.

Topic

Page no.

1.

Certificate

i

2.

Acknowledgement

ii

3.

Introduction

1

4.

Legal Provisions as regards Dividend.

2

5.

Provision for Depreciation.

4

6.

a. Declaration of Dividends.

5

b. Interim Dividends 7.

Payments of Dividends.

6

8.

a. Dividend Warrants.

7

b. Payment of Dividend out of Capital. 9.

Payment of Interest out of Capital under  section 208.

8

10.

Investors Education and Protection Fund under Section 205 C..

9

11.

Conclusion.

10

Bibliography and Webliography

INTRODUCTION

The word "dividend" comes from the Latin word "dividendum " meaning "the thing which is to be divided among all" shareholder  members. It is the portion of  Dividends are payments made by a corporation to its shareholder members. corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend. For a joint stock company, company, a dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company, payi paying ng divi divide dends nds is not an expense; expense; rath rather er,, it is the the divi divisi sion on of afte afterr tax tax prof profit itss amon among g shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company´s balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from a regular one. Cooperatives, on the other hand, allocate dividends according to members' activity, so their  dividends are often considered to be a pre-tax expense. Dividends are usually settled on a cash basis, store credits (common among retail consumers' cooperatives) cooperatives) and shares in the company (either newly created shares or existing shares bought in the market.) Further, many public companies offer  dividend reinvestment plans, plans, which automatically use the cash dividend to purchase pu rchase additional shares for the shareholder.

LEGAL PROVISIONS AS REGARDS DIVIDEND

1. Right to Dividend : The dividend on preference shares is fixed and cannot be increased, however large the company’s compan y’s profit may be unless the preference shares carry the right to participate in surplus profits. Equity shareholders are entitled to be paid a dividend on shares only after all preference dividends have been paid to date. 2. Sources out of which Dividends may be paid : Section 205 provides that dividends may be declared out of following three sources : (a) Current Profits.

(b) Past reserves created out of profits or credit balance in the profit and loss account brought forward. (c) Out of money provided by the Government, if any. Dividends may be declared out of the profits of the company for the current year after  providing for depreciation. However, the Central Government may, if it thinks necessary so to do in the public interest, allow any a ny company to declare or pay dividend d ividend for financial year  out of the profits of the company for that year or any previous financial years without providing for depreciation. Further, Section 205 provides that a company must transfer a prescribed percentage of its profits (usually not exceeding 10%) to its reserves before declaring dividends. In this regard rules have been framed by the Central Government- requiring a company to transfer a minimum from its profits for that year to its reserves before declaring dividends. The rates are : Perc Percent entag agee rate rate divide dividend nd propos proposed ed

Minim Minimum um Perc Percen entag tagee of Profi Profits ts to be transferred to reserves

10% to 12.5%

2 .5 %

12.5% to 15%

5%

15% to 20%

7 .5 %

20% and above

10%

Section 205 A(3) provides that dividends can be declared out of reserves only on ly in accordance with the rules framed by the Central Government in this behalf. However, where a company compan y wishes to declare a dividend otherwise than as per these rules, it may do so with the previous approval of the Central Government.

In the event of absence or inadequacy of profits in any year, dividend may be declared by company out of accumulated past profit provided the following conditions are satisfied : 1. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the five year immediately preceding that year or 1 0% of  its paid up capital, whichever is less. 2. The total amount to be drawn from the accumulated profits earned in previous year nd transferred to the reserves shall not exceed an amount equal to 1/10th of the sum of its paid up capital and free reserves.

3. The amount so drawn from general reserve, shall first be utilized utilized to set off the loss incurred in the financial year before any dividend in respect of preference or equity eq uity share s is declared. 4. The balance of reserves after such withdrawal shall not be below 15% of its paid up share capital.

Lastly, a company can also declares dividends out of the money provided by b y the Central Government or a State Government for payment of such dividend in pursuance of guarantee given by that Government.

3. Provision for Depreciation : Depreciation on assets of the company must be provided before any dividend can be declared out of profits of any financial year.

A provision for depreciation is the amount written off for the wearing out of fixed assets. There are two basic aspects of the provision for depreciation to remember, 1.

A charge (provision) is made in the profit and loss account in each accounting period for  every depreciate asset. Nearly all assets are depreciate, the most important exceptions b eing freehold land and long term investments.

2.

The total accumulated depreciation builds up as the asset gets older. Unlike Unlike a provision for doubtful debts, therefore, the total provision for depreciation is always getting larger, until the fixed asset is fully depreciated. The similarly in the accounting treatment of the provision for doubtful debts and the provision may become apparent.

The ledger accounting entries e ntries for the provision for depreciation are as follows. 1. 2.

3.

4. 5.

There is a provision provision account for for each separate category of assets, assets, for example land and building, furniture and fittings. The depreciation charge for an accounting period is a charge against profit. profit. It is an increase in the provision for depreciation and is accounted as follows, with the depreciation charge for the period. The balance on the provision for depreciation account is the total accumulated depreciation. This is always a credit balance brought forward in the ledger account for  depreciation. The fixed asset accounts are unaffected by depreciation. They are recorded recorded in these accounts at cost or at their reevaluated amount. In the balance sheet of the business, the total balance on the provision for for depreciation depreciation account is set against the value of asset accounts to derive the net book value of the fixed assets.

4. Declaration of Dividend : The rate of dividend on equity shares is recommended by the BOD and is declared by the shareholders in the AGM. The shareholder canno t insist on either declaration of dividend or on increasing the rate recommended by the BOD.

Section 173 requires that the declaration of dividend should be shown as an ordinary business at an AGM of company. Further section 217 provides that, Directors should mention in their report to the shareholders the amounts, if any, which they recommend should be paid by way of dividend. From the above provisions, it is clear that dividend is declared at an AGM of the company. However, a company which could not declare dividend at an AGM may do so at a subsequent general meeting. Further, a dividend once declared cannot be revoked, except with the consent of the shareholders, for a declaration of dividend creates a debt to the shareholders in whose wh ose favour it is declared. However, where a dividend has been illegally declared, or where events like war, imposition of fresh taxes etc., intervene after the declaration, and business expediency so dictates, the BOD will be justified in revoking the declaration of  dividend.

5. Interim Dividend : A part of profits may be distributed before the accounts are presented and dividends declared at the annual general meeting. Such dividend are called ‘interim dividend’. Section 205 empowers the BOD of a company to declare interim dividend. However, the board should seek the opinion of auditors before declaring any interim dividend, as it must amount to payment of dividends out of capital, which is not allowed.

6. Payment of Dividends : Section 206 provides that no dividends shall be paid by a company in respect of any share therein except: (a) to the registered holder of such share or to his order or to his bankers; bank ers; or (b) in case a share warrant has been issued in respect of share in pursuance of section 114, to the bearer of such warrant or to his bankers.

Thus, if a shareholder has issued a mandate for payment of dividends on his shares to a bank, the company paying the dividend to the bank accordingly, would get a good discharge for the payment so made and the dividend shall be deemed to have been paid to the shareholder in cash as contemplated under section 205. Section 207 casts an obligation on the company to pay dividend, which is declared to the shareholder entitled therein 30 days from its declaration. The term payment implies the act of posting of dividend warrant or cheque as provided under the law, irrespective of  the fact whether the shareholder concerned receives it or not. However, the section provides for certain circumstances where the default shall be excusable. These circumstances are : a. Where the dividend could not be paid by reason of the operation of any law. b. Where a shareholder has given directions to the company company regarding the payment of  the dividend and those directions cannot be complied with. c. Where there is a dispute regarding the right right to receive the dividend., d. Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder. e. Where, for any other reason, the failure to pay the dividend(or to post the dividend warrant) within 30 days was not due to any default on the part of the company.

7. Dividend Warrants : We have mentioned above that section 205 specifically provides that any dividend payable in cash may be paid by cheque or warrant, and it shall be deemed to have been paid when the cheque or warrant therefore is posted to the registered address of the shareholder entitled to the payment of dividend.

The dividend warrant is an order by the company to its banker to pay the amount specified therein to the shareholder whose name n ame is written therein. The warrant is crossed as payee accounts only and therefore, the banker makes the payment to the shareholder  not in cash but by crediting it in his bank account. Further, the section proves also that any money transferred to the unpaid dividend account of any company which remains unpaid or unclaimed for a period of 7 years years from the date of such transfer must be transferred by the company to fund set up b y the central government under section 205 C.

8. Payment of Dividend out of Capital :

(a)

Dividends can only be declared de clared or paid out of (i) the current c urrent profits of the company, (ii) the past accumulated profits and (iii) moneys provided by the government for the payment of dividends in pursuance of a guarantee given by that government. No dividend can be paid p aid out of capital. (Sec. 205 (i)). director who is responsible for  payment of dividend out of capital ca pital shall be personally liable to take good such amount to the company. (b) Companies are not entitled to pay any an y dividend unless present or arrears of  depreciation have been provided for out of the profits and an amount of 10 % or reports has been transferred to reserve. However, cen tral government may allow any company to declare or pay dividends out of profits before providing for any depreciation. (c) Capital Profits may also be utilised for the declarations of dividend provided (i) there is nothing in the Article prohibiting the distribution of dividend out of capital profits; (ii) they have been reallied in cash: and (iii) they ave been realised in cash and (iii) they remain as profits after revaluation of all assets and liabilities. (d) Dividend cannot be paid out of accumulated profits unless current losses are made good.

9. Payment Payment of Inerest Inerest out of Capital Capital Under Under Section 208 :

(a) For the purpose of raising money to defray the expenses of the construction of any work or building, or the provision of any plant, which cannot be made profitable for a lengthy period, the company may: (i) pay interest on so much of that share capital as is for the time being paid up, for the period and subject to certain conditions and restrictions (ii) charge the sum so paid by b y way of interest, to capital as part of the cost of construction of the work or building, or the provision of the plant. (b) No such payment shall be made unless it is authorised by the articles or by a special resolution.

(c) No such payment, whether authorised by the articles or by special resolution, shall be made without the previous sanction of the Central Government. (d) Before sanctioning any such payment, the Central Government may, at the expense of  the company, appoint a person to inquire into, and report to the Central Government on, the circumstances of the case; and may, before making the appointment, require the company to give security for the payment of the costs of the inquiry. (e) The payment of interest shall be made only for such period as may be determined by the Central Government; and that period shall in no case extend beyond the close of the half-year next after the half-year during which the work or building has been actually completed or the plant provided. (f) The rate of interest shall, in no case, exceed four per cent per annum or such other rate as the Central Government may, by notification in the Official Gazette, direct. (g) The payment of the interest shall not operate o perate as a reduction of the amount paid up on the shares in respect of which it is paid.

10. Investor Education and Protection Fund Under Section 205 C :

1 .

(1) The Central Government shall establish a fund to be called the Investor Education and Protection Fund (hereafter in this section referred to as the “Fund”).

2 .

(2) There shall be credited to the Fund the following amounts, namely:(a) (b ) (c) (c) (d ) (e) (f)

(g )

amount amountss in the unpaid unpaid divide dividend nd account accountss of compani companies; es; the application moneys received by companies for allotment of any securities and due for refund; matu mature red d depos deposit itss with with comp compan anie ies; s; matured debentures with companies; the intere interest st accrued accrued on the amount amountss referr referred ed to in clause clausess (a) to (d); (d); grants grants and donatio donations ns given given to the Fund Fund by the Centra Centrall Governm Government ent,, State State Governments, companies or any other institutions for the purposes of the Fund;and the interest or other income received out of the investments made from the Fund;

3 .

(3) The Fund shall be utilized for promotion of investors’ awareness and protection of  the interests of investors in accordance with such rules as may be prescribed.

4 .

(4) The Central Government shall, by notification in the Official Gazette, specify an authority or committee, with such members as the Central Government may appoint, to administer the Fund, and maintain separate accounts and other relevant records in relation to the Fund in such form as may be prescribed in consultation with the Comptroller and Auditor-General of India.

5 .

(5) It shall be competent for the authority or Committee appointed under sub-section (4) to spend moneys out of the Fund for carrying out the objects for which the Fund has been established.

CONCLUSION

Management and the board may believe that the money is best re-invested into the company: research and development, capital investment, expansion, etc. Proponents of this view (and thus critics of dividends per se) suggest that an eagerness to return profits to shareholders may indicate having run out of good ideas for the future of the company. Some studies, however, have demonstrated that companies that pay dividends have higher earnings growth, suggesting that dividend payments may be evidence of confidence in earnings growth and sufficient profitability to fund future expansion. When dividends are paid, individual shareholders in many countries suffer from double taxation of those dividends: the company pays income tax to the government when it earns any income, and then when the dividend is paid, the individual shareholder pays income tax on the dividend payment; in many countries, the tax rate on dividend income is lower than for other forms of income to compensate for tax paid p aid at the corporate level. Taxation of dividends is often used as justification for retaining earnings, or for  performing a stock buyback , in which the company buys b uys back stock, thereby increasing the value of the stock left outstanding. In contrast, corporate shareholders often do not pay tax on dividends because the tax regime is designed to tax corporate income (as opposed to individual income) only once. The shareholder will pay a tax on capital gains (which is often taxed at a lower rate than ordinary income) income) only when the shareholder chooses to sell the stock. If a holder  of the stock chooses to not participate in the buyback, the price of the holder's shares should rise, but the tax on these gains is delayed until the actual sale of the shares. Certain types of  specialized investment companies (such as a REIT in the U.S.) allow the shareholder to partially or fully avoid double taxation of dividends. d ividends. Shareholders in companies which pay little or no cash dividends can reap the benefit of the company's profits when they sell their shareholding, or when a company is wound down and all assets liquidated and distributed amongst shareholders. This, in effect, delegates the dividend policy from the board to the individual shareholder. Payment of a dividend can increase the borrowing requirement, or leverage or leverage,, of a company.

BIBLIOGRAPHY & WEBLIOGRAPHY

1. 2. 3. 4.

Company Law by S.S.GULSHAN. Company Law by H.K.SAHARAY. Company Company Law Law by Avtaar Singh. Singh. Company Company Law by R.K.BANGIA. R.K.BANGIA.

lawandotherthings.blogspot.com.. 1. lawandotherthings.blogspot.com books.google.co.in. 2. books.google.co.in.