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dividend declaration

Deepthi (Chartered Accountant) (40 Points)

01 December 2010

Hi all,

I have a doubt regarding the declaration of dividend? if i am declaring dividends out of my earlier year profit and loss balance (not reserve balance), is there any restriction on the amount that i can declare.? Also, if i do not have sufficient cash, can i borrow money and use that to pay out my dividend?what are the alternatives that i have in the case of insufficient cash balance?

thanks in advance

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3 Replies

Azim Khan ACA,CS,CMA*,LLB* (Proprietor) (1312 Points)
Replied 02 December 2010

Dividend can be declared by a company only out of the profits of the company for that year arrived after providing for depreciation or

out of the profits of the company of any previous year or years arrived after providing for depreciation of that year and

for remaining undistributed profits can be used and

out of money provided by CG/SG for the payment of dividend in pursuance of guarantee given by concerned government.

if company is owing to inadequate profits in any year, a company can declare dividend out of previous years profits and reserves in accordance with the (Declaration of Dividend out of reserves) Rules,1975 or if not following the said rules then obtain a previous approval of CG.

Hence, dividend is paid out of divisible profits, then in my opinion the question of having inadequate cash balance does not arise.

let us see what other members comment on this topic.

Thanks.

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Paresh Rathod (CA) (222 Points)
Replied 02 December 2010

Declaration of Dividend out of Reserves.-
In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that-
(i)
the rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid-up capital, whichever is less;
(ii)
the total account to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilised to set off the lossesincurred in the financial year before any dividend in respect of preference or equity shares is declared ; and
(iii)
the balance of reserves after such drawal shall not fall below fifteen per cent of its paid-up share capital.