RETURNS ON CAPITAL

Chapter - II

Dividend on shares -Types of Dividend- Rules relating to payment of dividend.

Bonus Shares. Divisible profit. Interest - Charge against profit - Rules

regarding payment of interest.

Content

Print Resources…. Elements of Company Law – N.D. Kapoor,

Sultan Chand & Sons Web Resources….

www.icsi.eduwww.mca.gov.in www. Vakilno1.com

Resources

That portion of the corporate profit set aside and declared by the company which will be shared by each individual member of a company.

Receipt of profit by the members in proportion to their respective shares.

Dividend…???

Act doesn’t define term ‘Dividend.’ Dividend includes interim dividend. CIT Vs GIRIDHARDAS & Co. (Pvt.) Ltd.;

In case of going concern, the portion of the profits of the co. which is

allocated to members. In case of a winding up,

division of a realised assets among the creditors and contributories according to their respective right.

Dividend : in legal context

The Companies Act, 1956. Securities Contracts (Regulations) Act, 1956. The Companies (Transfer of Profits to

Reserve) Rules, 1975. Companies (Declaration of Dividend out of

Reserves) Rules, 1975.

Provisions governing declaration and payment of dividend

a) Profits of the company for the year for which dividends are to be paid.

b) Undistributed profits of the previous financial years. c) Moneys provided by the Central Government or a State

Government for the payment of dividends in pursuance of a guarantee by the Government concerned

Dividends cannot be declared out of; 1) The Securities Premium Account or 2) The Capital Redemption Reserve Account or 3) Revaluation Reserve or 4) Amalgamation Reserve or 5) Out of the Profit on re-issue of forfeited shares or 6) Out of profit earned prior to the incorporation of the Company.

Sources of Dividends

Dividend shall not be paid out of capital – Burland Vs. Earle.

Section 205 of the Act only prescribes that dividend shall be paid out of profits of the company.

Co. can declare and paid dividend by making following provisions 205 (1) – Loss 205 (2) – Depreciation on Assets

Determination of Dividend

A company cannot declare dividend in the following circumstances:-  When a Company is not having profit i.e. is a

loss making company. When a Company fails to redeem its

preference shares as per the provisions of Section 80A (2B) of the Companies Act.

Declaration of Dividend

Section 205 (2A) - 10% will have to be transferred to the reserves of the Company.

Rate of proposed dividend as to Paid up Capital ------------------

Amount to be transferred to Reserves Exceeding 10% but not exceeding 12.5% 2.5% of current

profits Exceeding 12.5% but not exceeding 15% 5% of current

profits Exceeding 15% but not exceeding 20% 7.5% of current

profits Exceeding 20% 10% of current

profits

Compulsory Reserves

1) Recommendation by Board of Directors2) Approval by the Shareholders3) Dividend now includes interim dividend4) Dividend to be deposited in a separate bank account5) Dividend to be paid by cheque or warrant (205(5)(b))6) Time frame for payment of dividend (207)7) Transfer of unpaid dividend (205A)8) Transfer of unpaid or unclaimed dividend to the Investor

Education and Protection Fund9) Directors Report (217(1)(c)) 10) Information under Corporate Governance Report

Procedure for declaration of Dividend

Cash dividend Stock dividend Bond dividend Property dividend Scrip dividend Liquidating dividend

Types of Dividend

Profit available for dividend means net profits after making any deduction which the directors can duly make.

Profit which can be distributed legally in the form of dividends to the shareholders of the company are called divisible profits.

Divisible Profit

Revenue Profit (PBDT) ******Less : Accumulated Loss ***Less : Depreciation ***Less : Int. on Debenture ***

PBT *****Less : Income Tax ***

PAT ****Less : Pref. Dividend ***

PAT (Divisible Profit) ****

Calculation of Divisible Profit

Company can pay interest on Shares if Shares issued for raising money to meet the exp. of construction

of any work, Building or Plant long duration project

Interest on Paid up amt. of Share Capital Cost of construction It doesn’t operate as reduction of capital.

Interest (208)

Provision in AOA Approval from CG Inquiry by CG Duration of Payment Rate of Interest

Rules regarding Payment of Interest

Bonus Shares

Dividend paid in the form of fully paid equity shares. An offer of free additional shares to existing

shareholders. Company's accumulated earnings which are not given

out in the form of dividends, but are converted into free shares.

Also called scrip issue or capitalization issue. Reliance Industries, Infosys Technologies and Sun

Pharma.

Meaning

Large accumulated reserves Inability to give cash bonus When the value of fixed assets far exceeds

the amount of the capital higher rate of dividend is not advisable for

the distribution of the accumulated reserves Difference between the market value and

paid up value of shares of the company

Circumstances

1) Surplus in Profit and Loss Account 2) General reserve3) Dividend equalization reserve.4) Capital reserve arising from profit on sale of fixed

assets received in cash.5) Balance in debenture redemption reserve after

redemption of debentures.6) Capital Redemption Reserve Account created at

the time of redemption of redeemable preference shares out of the profits.

7) Securities Premium collected in cash only.

Eligible Reserves

1. Capital reserve arising due to revaluation of assets.2. Securities premium arising on issue of shares on

amalgamation or take over.3. Investment allowance reserve/Development rebate

reserve before expiry of 4 years of creation.4. Balance in debenture redemption reserve account

before redemption takes place.5. Surplus arising from a change in the method of

charging depreciation.

Unqualified Reserves

The company shall, while issuing bonus shares, ensure the following Issue is made out of free reserves Reserves created by revaluation of fixed assets are not

capitalized The declaration of bonus issue, in lieu of dividend, is not

made. Conversion of partly paid shares into fully paid Company has not defaulted in payment of interest or

principal or any other sum. After BOD approval within 6 months implementation Provision in AOA about Capitalisation of Profit; if not –

resolution Exceeding the amt. of issued & subscribed capital over

Authorized capital No bonus issue shall be made within 12 months of any '

public/right issue.

SEBI Guidelines

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