Interin dividend paid out of security premium

This query is : Resolved

karan parveen gupta (Querist)
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16 June 2015 What are the consequences of Payment of Interim Dividend out of Security Premium.
Please reply as it is very urgent.

CA. Sunil Gokhale

CA. Sunil Gokhale (Expert)
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16 June 2015 Dividend cannot be paid out of securities premium. How was it determined that it was paid out of securities premium in the first place? Was securities premium account debited to provide for it?

karan parveen gupta

karan parveen gupta (Querist)
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07 July 2015 when the interim dividend was declared the balance in the profit and loss was insufficient. The client had only Profit and loss balance and Security premium in the reserves.

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Asha Kanta Sharma online

Asha Kanta Sharma

(Expert)
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01 August 2024 Paying an interim dividend out of the security premium rather than from profits can have legal and financial consequences. Here's a detailed look:

### **1. Legal Consequences:**

**1. **Provisions of the Companies Act:**
- **India:** According to Section 123 of the Companies Act, 2013, a company is not allowed to pay dividends from sources other than the profits of the company. The section specifically states that dividends should be declared from the profits of the company for the financial year, or from any profit carried forward from previous financial years, and not from reserves or security premium.
- **Security Premium:** Security premium is a reserve created from the amount received over and above the face value of shares issued by the company. This reserve is meant for specific purposes such as issuing bonus shares, writing off preliminary expenses, or issuing shares at a discount, but not for paying dividends.

**2. **Consequences of Incorrect Payment:**
- **Legal Action:** Paying an interim dividend out of the security premium is a violation of the Companies Act. The company might face legal action or penalties from regulatory authorities for non-compliance with statutory requirements.
- **Directors' Liability:** The directors of the company may be held liable for any legal consequences or penalties resulting from such unauthorized payments. They are responsible for ensuring that dividends are paid in accordance with legal provisions.

### **2. Financial Consequences:**

**1. **Incorrect Accounting Treatment:**
- **Accounting Errors:** If an interim dividend is paid out of security premium, it could lead to incorrect accounting entries. The security premium is meant to be used for specific purposes outlined by the Companies Act and cannot be used to pay dividends. This can lead to misleading financial statements and affect the company's financial health.
- **Impact on Reserves:** Using security premium for dividends reduces the amount available for its intended purposes, such as issuing bonus shares or covering preliminary expenses.

**2. **Restatement of Accounts:**
- **Correction Required:** The company may need to restate its financial statements to correct the error. This could involve reclassifying the dividend payments and adjusting the accounts to reflect proper usage of reserves.

**3. **Tax Implications:**
- **Tax Penalties:** If the payment of dividends from security premium results in non-compliance with tax laws, the company might face additional penalties or interest on any taxes that are found to be due.

### **3. Remedies and Corrective Actions:**

**1. **Rectification:**
- **Reversal of Dividend:** If the interim dividend was incorrectly paid from security premium, it may need to be reversed, and the correct accounting treatment applied. This might involve adjusting the company's reserves and ensuring that future dividend payments are made from profits.
- **Disclosure:** Proper disclosure in the financial statements regarding the error and its correction will be required.

**2. **Consultation with Professionals:**
- **Legal and Accounting Advice:** It is advisable for the company to consult with legal and accounting professionals to address the issue and ensure compliance with all statutory requirements.

**3. **Regulatory Communication:**
- **Informing Authorities:** The company might need to communicate with regulatory authorities to rectify the situation and avoid any further legal complications.

### **Summary:**

**Paying interim dividends out of security premium is not allowed under the Companies Act, and doing so can result in legal and financial consequences.** The company should take corrective measures to address the issue, ensure compliance with statutory requirements, and seek professional advice to resolve any complications arising from this incorrect payment.