Dividend out of reserves

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

16 December 2013 Sir/mam

my query is in Companies(declaration of dividend out of reserves) rules, one of the conditions is

the balance of reserves after such drawal shall not fall below fifteen per cent of its paid-up share capital.

What if my free reserves before withdrawal are less than 15 percent of paid up? the company should not declare dividend out of reserves, right?

Ajay Mishra

Ajay Mishra (Expert)
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16 December 2013 Hi

Profits earned by a company in previous years and transferred by it to the reserves" shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared. In computation of the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve at the expiry of the period specified under the Income-tax Act, 1961 shall be included and all items of Capital Reserves including reserves created by revaluation of assets shall be excluded.

Where, the declaration of dividend out of reserves is not in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975, previous approval of the Central Government has to be obtained by the company.

Section 205A(8) of the Companies Act contains penalty provisions in case of failure to comply with any of the requirements of section 205A. Accordingly, the company and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees for every day during which the failure continues.