10 July 2014
ABC,Pvt Ltd company wants to declare dividend from both current year profits (entire profits subject to 10% transfer to reserves) and from accumulated profits.
Is it possible to declare so? If yes, please tell how much (10% of Paid up cap + accumulated profits)?
20 July 2024
In India, a private limited company like ABC Pvt Ltd can declare dividends from both current year profits and accumulated profits, subject to certain rules and restrictions under the Companies Act, 2013. Here’s how it typically works:
### Dividend Declaration Process:
1. **Current Year Profits**: Dividends can be declared out of profits earned in the current financial year. According to Section 123 of the Companies Act, 2013, dividends can only be declared out of: - Profits of the company for that financial year after providing for depreciation and transfer to reserves as per law, and - Free reserves (which are reserves not specifically set aside for any purpose).
2. **Accumulated Profits**: Accumulated profits are the profits earned by the company in previous years that have been retained and not distributed as dividends or transferred to reserves. Dividends can also be declared out of these accumulated profits.
### Restrictions and Requirements:
- **Transfer to Reserves**: As per Section 123(1) of the Companies Act, 2013, before declaring dividends out of current year profits, at least 10% of the profits for that financial year must be transferred to the general reserve. This is mandatory unless the company’s articles of association provide for a higher percentage or the company has insufficient profits.
- **Maximum Dividend**: The total amount of dividend (including interim dividends) declared in any financial year cannot exceed the amount recommended by the board of directors. It cannot exceed the amount paid or declared as dividends out of profits of the company for that financial year plus reserves of the company as per its latest audited financial statement.
**Step-by-Step Calculation:** - Calculate 10% of Paid-up capital: ₹1,00K * 10% = ₹1000K - Determine the maximum permissible dividend: Current year profits + free reserves + accumulated profits - (10% of Paid-up capital)
Let’s assume the current year profits are ₹2000K and there are no free reserves for simplicity: - Maximum dividend = ₹2000K (current year profits) + ₹5000K (accumulated profits) - ₹1000K (10% of Paid-up capital) = ₹6000K
ABC Pvt Ltd can declare dividends up to ₹60,00,000, subject to complying with the transfer to reserves requirement and ensuring the total does not exceed the amount recommended by the board and permissible under the Companies Act.
### Conclusion:
Yes, ABC Pvt Ltd can declare dividends from both current year profits (after transfer to reserves) and accumulated profits, subject to the conditions and limits specified under the Companies Act, 2013. It’s important to adhere to these regulations to ensure compliance and proper utilization of company funds.
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