Dividend is the shareholders return on their investment/capital in the company. And it is the part of distributable profits which has been paid out to them.
Content
1. Definition of dividend
2. Types of dividend
i) Classification is based on time i.e. a) Interim b) Final
ii) ,
1. Definition of dividend
section 2(35) of the companies act 2013, while defining the term dividend simply states that “dividend” includes any interim dividend.
Further, this definition instead of explaining the term merely enlarges its scope by including ‘interim dividend’ in its fold.
It is the shareholders return on their investment/capital in the company. And it is the part of distributable profits which has been paid out to them. In simple words, it is the distribution of profits i.e. a portion of profits earned allocated as payable to the shareholders whenever declared.
The company in general meeting declare dividends, but no dividends shall exceed the amount recommended by the board.
It is recommended by the board of directors in the board’s report and approved by the shareholders at the general meeting.
It is not the liability unless it is declared by the shareholders at validly constituted general meeting by passing and ordinary resolution at the rate recommended by the board or at such lower rate as may be decided.
Declaration of dividends by the company at a rate higher than the rate recommended by the board is not permitted.
Further, it is declared as proportion of nominal value or face value of a share.
For Example:
XY Ltd issued equity shares having face value Rs. 10 per share. The share is currently quoting at NSE of Rs. 500 per share . The company at its AGM held on 27.07.23 has declared dividend of 20%. Mr. Sunil owns 1000 shares which he purchased at Rs. 300 per share . What is the amount of dividends he will receive?
It is calculated on face value or nominal value i.e. Rs. 10/- So per share will be 20% of Rs. 10/- = Rs. 2 per share . So Mr. Sunil will receive 2*1000 shares = Rs. 2,000.
2. Types of dividends
These are classified into two types i.e.
i) Classification is based on time
ii) Classification is based on nature of shares
Lets discuss the different types in detail.
i) Classification is based on time i.e. when declared .
It is of two types i.e. 1) Interim and 2.) Final
What is interim dividend?
Section 123(3) and section 123(4) of companies act 2013, contains provision regarding interim dividend. Further, interim dividends may be declared by the board of directors at any time during the period from the closure of the financial year till holding of general meeting.
The declaration of this is done out of profits before the final adoption of the accounts by the shareholders and therefore the it is said to be declared and paid between two AGMs.
The sources of declaring interim dividends include:
- Surplus in profit and loss account; or
- Profits of the financial year in which such dividends is sought to be declared; or
- Profits generated in financial year till the quarter preceding the date of declaration of interim dividend.
Declaration of this shall be ratified at ensuing AGM by the members.
Further, if the company has incurred loss during the current financial year up to the end of the quarter immediately the date of preceding the date of declaration of interim dividend , such interim dividend shall not be declared at the rate higher than the average dividend declared by the company during the immediately preceding three financial years.
What is final Dividend?
When dividend is declared at the annual general meeting of a company , it is known as ‘final dividend’.
The rate is recommended by the board cannot be increased by the members .
Lets summaries the concept in tabular form.
| Basis for comparison | Interim dividend | Final dividend |
| Definition | Interim dividend is declared and paid during an accounting year i.e. before the finalization of accounts. | Final dividend is the dividend recommended by the board of directors, and approved by the shareholders at the company’s annual general meeting , after close of financial year. |
| Announcement | Announced by the board of directors. | Recommended by the board of directors and approved by the shareholders. |
| Time of declaration | Before preparation of financial statements. | After preparation of financial statements. |
| Revocation | It can be revoked with the consent of all shareholders. | It cannot be revoked. |
| Provision in article of association | It is declared when only articles specially permit the declaration. | It does not require specific provision in the articles. |
ii) Classification of dividend based on nature of shares
Classification is based on nature of shares does not require any specific provision in the articles.
Further, shares can be further divided into two categories i.e. a) Preference shares b) Equity shares.
a) Preference shares
According to the section 43 of companies act 2013, shareholders holding preference shares are assured of preferential dividend at fixed rate during the life of a company.
Preference dividend unless otherwise agreed is non-cumulative in nature and need not be paid in any year where there is deficiency of profits.
Classification of preference shares on the basis of payment of dividend is as follows:
A) Cumulative preference shares:
Cumulative preference shares is a one in respect of which dividends gets accumulated and any arrears of such dividend arising due to insufficiency of profits during the current year is payable from the profits earned in the later years.
Further, until and unless dividend on cumulative preference shares is paid in full , including arrears , if any, no dividends is payable on equity shares.
B) Non-cumulative preference shares:
Non-cumulative preference shares is one where dividends is payable only in the year of profit.
There is no accumulation of profit as in the case of cumulative preference shares. In any case no dividends is declared in a year due to any reason , the right to receive dividends for that year expires and holder of such shares is not entitled to be paid arrears of dividends out of future years.
b) Equity shares
Equity shares are those shares which are not preference shares . It means they do not enjoy the preferential rights in the matter of payment of dividend or repayment of capital.
Further, the rate of dividend on equity shares is recommended by the board of directors and may vary from year to year. The rate is depends on dividend policy and availability of profits after satisfying the preference shareholders .
