DECLARATION OF DIVIDEND

Suresh Prasad (www.aubsp.com) (15630 Points)

27 November 2010  

 

DECLARATION OF DIVIDEND OUT OF RESERVES AND TRANSFER OF PROFITS TO RESERVES RULES

 

     

A. COMPULSORY TRANSFER TO RESERVES

1.    No amount need be transferred to Reserves if the dividend declared does not exceed 10%.

2.    No dividend can be declared and paid in excess of 10% unless minimum amount prescribed as under is transferred to Reserves.

Rate of dividend

% of current profits

exceeding

up to

10.0%

12.5%

2.5%

12.5%

15.0%        

5.0%

15.0%

20.0%

7.5%

20.0%

 10.0%

3.    According to the department, Profits for this purpose, have to be taken as Net after deducting depreciation (including all arrears), statutory transfer to Reserves, taxation etc. and including therein, other adjustments such as transfer from statutory reserves after compulsory period is over, taxation or other provisions pertaining to previous year no longer required etc.

4.    According to the department, transfer to Reserves includes only transfer to free reserves and does not include any other transfer such as investment allowance Reserve etc.

B. VOLUNTARY TRANSFER TO RESERVES

1.    Rules have been prescribed for transferring to reserves in excess of 10% of profits. There is no restriction on transfer up to 10% of profits.

2.    The Rules are as under

a.     Where a dividend is declared and the net profit after tax is lower by 20% or more than the average net profit after tax of the two immediately preceding financial years — no conditions are to be fulfilled.

b.    Where a dividend is declared and not covered under (a) above, the dividend should be at a rate at least equal to the average of the rates at which dividends were declared in the immediately preceding three years, provided that, where bonus shares have been issued in the financial year in which the dividend is declared or in any of the three preceding years, the dividend declared should be an amount at least equal to average amount of dividend declared over the three years immediately preceding the financial year.

c.     Where no dividend is declared, the amount proposed to be transferred to the reserves from the current profits shall be lower than the average amount of dividends declared in the immediately preceding three years.

3.    According to the department, whatever profits are not transferred or could not be transferred to Reserves have to be carried forward in the profit and loss account.

4.    A new company which does not declare any dividend would not be able to transfer any amount to Reserves in excess of 10% of current profits for first three years according to the view expressed by the Department of Company Affairs, on 26-7-1976.

5.    Penalty of up to Rs. 500 with further fine not exceeding Rs. 50 per day for continuing defaults, has been prescribed by the rules, for contravention of the rules.

C. DECLARATION OF DIVIDEND OUT OF RESERVES

1.    Where in any year there is a loss, or the profits are inadequate to declare a dividend, the dividend can be declared, out of the accumulated profits earned by the company in previous years and transferred to reserves, subject to certain rules.

2.    The following conditions have to be fulfilled before declaring dividend out of reserves :

a.     Rate of dividend shall not exceed average of rates of dividend declared in preceding 5 years subject to a max. of 10%. For calculating average, the "no dividend" years have to be included and rate should be taken as NIL.

b.    The total amount to be withdrawn out of reserves shall not exceed 10% of the aggregate of paid-up capital and free reserves and this amount shall first be utilised to set off the losses incurred in the financial year and the balance only may be utilised to distribute dividend as determined in (a) above.

c.     The balance in the Reserves shall not fall below 15% of paid-up share capital after the amount withdrawn necessary for the purpose of dividend and set off of losses of the current year.

3.    The total amount of Reserves shall mean only free Reserves not including any Capital Reserve or Statutory Development Rebate Reserve (amount required by the I.T. Act to be retained in the account). In other words, free Reserves will mean only distributable Reserve.