An Overview of New Secretarial Standard on Dividend
The Institute of Company Secretaries of India recently issued a new Secretarial Standard - 3 on Dividend applicable from 1st January, 2018. This Standard issued by the Institute prescribes a set of principles relating to the declaration and payment of Dividend on equity and preference shares in accordance with the provisions of the Companies Act, 2013 and the related matters.
The term 'Dividend' has been inclusively defined in the Companies Act to the effect that it includes both Interim and Final Dividend. The Act neither specifically defines the term Dividend nor makes any distinction between Interim and Final Dividend. The Standard is applicable to Final as well as Interim Dividend of corporates. For the purposes of this Standard, capitalization of profits in the form of bonus shares is not a Dividend. Companies licensed under Section 8 of the Companies Act, 2013 are prohibited from paying any Dividend to its Members. This standard is not applicable to companies limited by guarantee not having share capital and to companies under liquidation.
The principles enunciated in this Standard are in conformity with the provisions of the Securities Contracts (Regulation) Act, 1956 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 that are applicable to listed companies. In addition, any specific provision in regard to distribution of dividend under Income Tax Act, 1961 or any other statute shall also be applicable. The Standard on Dividend is aimed at ensuring transparency and good governance in Board rooms of corporates. Though the Standard is not mandatory for corporate, but its adherence would boost the confidence of investors.
The article throws light on the key provisions enunciated in the Standard on Dividend [SS-3] issued by the Council of Institute of Company Secretaries of India, in a concise manner.
Scope and applicability of New Secretarial Standard on Divident
This Standard shall come into effect from 1-January-2018. The principles set out in the Standard relate to declaration and payment of dividend on: (a) Equity Share Capital and (b) Preference Share Capital. These are applicable to Interim Dividend and Final Dividend. The standard shall not apply to a company limited by guarantee not having share capital and does not deal with Dividend, if any, declared by companies under liquidation.
Dividend - a distribution of any sum to Members out of profits and wherever permitted out of free reserves available for the purpose. In other words, Dividend is a return on the investment made in the share capital of a company, as distinct from the return on borrowed capital, which is in the form of interest.
Final Dividend - the Dividend recommended by the Board of Directors and declared by the Members at an Annual General Meeting.
Interim Dividend - the Dividend declared by the Board of Directors at their meeting.
Free Reserves - such reserves which, as per the latest audited balance sheet of a company, are available for distribution as Dividend. However, the following amount shall not be treated as free reserve:
(i) any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value.
Member - in relation to a company, means –
(i) The subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members
(ii) Every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
(iii) Every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.
Preference Shareholder – a holder of such shares which carry a preferential right, in respect of payment of Dividend, of a fixed amount or an amount calculated at a fixed rate and in respect of capital, to repayment of capital.
Sources for Payment of Dividend
A company may pay Dividend, out of one or more of the following ways.
♦ Profit of the current year after providing of the depreciation; or
♦ Profit of the previous financial year or years after providing for depreciation for previous years; or
♦ Out of the money provided by the Central or the State Government for payment of dividend in pursuance of guarantee given the company, if any.
However, a company shall not declare any Dividend, if it has defaulted in:-
♦ Compliances of provisions relating to the acceptance of deposits under the Act;
♦ Redemption of debentures or payment of interest thereon or creation of debenture redemption reserve;
♦ Redemption of preference shares or creation of capital redemption reserve;
♦ Payment of Dividend declared in the current or previous financial year(s); or
♦ Repayment of any term loan to a bank or financial institution or interest thereon, till such time the default is subsisting.
Sources which cannot be used for distribution
Dividend shall not be declared out of:-
• Securities Premium Account;
• The Capital Redemption Reserve or Revaluation Reserve;
• Amalgamation Reserve;
• Out of profits on re-issue of forfeited shares;
• Out of profits earned prior to incorporation of the company.
Interim Dividend shall be declared and paid out of the surplus in the profit and loss account and/or out of profits of the financial year in which such Dividend is sought to be declared.
Interim Dividend shall be declared at a meeting of the Board. For declaration of Interim Dividend approval of members is not required. If a company has an Audit Committee, it shall consider the financial results which shall thereafter be submitted to the Board for its consideration and declaration of Interim Dividend.
Dividend is said to be an Interim Dividend, if it is declared by the Board of Directors at its meeting between two annual general meetings of the company. By and large Interim Dividend shall be paid in the middle of the financial year.
Pursuant to Section 123 of the Companies Act, 2013 and pursuant to Table F of Schedule I of the Act, Board of Directors alone can declare Interim Dividend out of surplus in the profit and Loss account and out of the profits of the financial year in which such interim dividend is sought to be declared. An important point to be noted is that Interim Dividend shall not be declared or paid out of Free Reserves of a company.
Equity shares with differential rights as to Dividend:
Interim Dividend may, at the option of the Board, be declared on all or any one or more of the classes of such shares in accordance with the terms of issue:
■ Board shall ensure that the profit shown in the financial results is adequate to meet the Dividend that would have to be paid on the other classes of equity shares;
■ In case of equity shares with differential rights as to voting only, no differentiation shall be made in the declaration of Interim Dividend on such shares, unless the terms of issue provide otherwise.
In case Company has incurred losses in current financial year:
In the event of a loss or inadequacy of profits during a financial year, no interim dividend shall be paid out of Free Reserves.
In terms of Section 123(3) of the Act, if the company has incurred loss during the current financial year upto the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividend by the company during the immediately preceding 3 financial year.
Declaration of Dividend
Dividend shall be declared only on the recommendation of the Board made at a meeting of the Board. Where a company has an Audit Committee, that Committee shall consider the annual financial statements before submission to the Board. Dividend shall be recommended by the Board of Directors on consideration and approval of said financial statements. Unless the Dividend has been recommended by the Board of Directors of a Company, Members in Annual General Meeting cannot on their own declare any Dividend.
Dividend shall be declared only at an Annual General Meeting. Dividend shall relate to a financial year and shall be declared by the Members at the Annual General Meeting of the company after adoption of the financial statements of the company.
♦ Members may declare a lower rate of Dividend than the rate recommended by the Board. Members have no power to increase the rate of Dividend recommended by the Board.
♦ The Members may also decide not to declare the Dividend recommended by the Board.
♦ The Dividend as per share basis should be disclosed by the company.
♦ No Dividend to be declared for the year in respect of which annual financial statements have already been adopted at Annual General Meeting.
♦ Arrears of Dividend on cummulative preference shares for previous years may, however, be declared and paid.
♦ No Dividend shall be declared on equity shares for previous years in respect of which annual financial statements have already been adopted at the respective Annual General Meetings.
Entitlement to dividend
Dividend is to be paid only to the registered holders of shares entitled to Dividend or to their order or to their bankers. Dividend shall be paid:
(i) in respect of shares held in electronic form - to those Members whose names appear as beneficial owners in the statement of beneficial ownership furnished by the Depository(ies) as on the record date fixed by the company for this purpose;
(ii) in respect of shares held in physical form - to those Members whose names appear in the company's Register of Members after giving effect to all valid share transfers in physical form lodged with the company before the date of book closure or as on the record date, as the case may be
(iii) in respect of share warrants - to the holders of such warrants.
The dividend may also be paid to the order of the Member or to his banker.
Dividend in Abeyance
The amount of Dividend in respect of shares for which an instrument of transfer has been delivered to the company, which has not been registered for a valid reason shall be transferred to the Unpaid Dividend Account.
In case of shares which have not been transferred because the ownership thereof is in dispute, or where specific prohibitory orders have been passed by a court or statutory authority, Dividend shall be kept in abeyance and shall be transferred to the 'Unpaid Dividend Account', as and when it becomes due.
Payment of Dividend
Dividend shall be deposited in a separate bank account within 5 days from the date of declaration and shall be paid within 30 days of declaration. The intervening holidays, if any, falling during such period shall be included.
The requirement of deposit of Dividend amount in a separate bank account within 5 days from the date of its declaration, shall not apply to a Government Company in which the entire paid-up share capital is held by the Central Government or the State Government(s) or jointly by both or by one or more Government Company.
Mode of Payment
In pursuance of Section 123(5) of the Companies Act, 2013, the modes permissible for payment of Dividend are as follows:
(a) Cash and not in kind
(c) Dividend Warrant
(d) Any electronic mode
To curb the practices of fraudulent encashment of Dividend, the company shall endeavour to pay Dividend directly to the bank accounts of the Members through electronic modes specified by the RBI.
The Cheque or Dividend Warrant shall be sent to the Registered Address of the Members.
Distribution of discount coupons to all the Shareholders of a company shall not be treated as deemed Dividend.
A company is prohibited to issue Bonus shares in lieu of Dividend.
In case the amount of Dividend exceeds Rs.1, 500/- the Company shall ensure to despatch such Dividend Warrant or at par Cheque either by Speed Post or ley registered post to the concerned Member at his registered address.
A cheque or warrant for payment of Dividend shall be valid for 3 months from the date of issue.
A duplicate Dividend cheque or warrant shall be issued only after obtaining requisite indemnity or declaration from the concerned Member and after ascertaining the encashment status of the original Dividend cheque or warrant.
The Dividend cheque or warrant shall be accompanied by a statement in writing showing the amount of Dividend paid, Folio Number or DP ID and Client ID number, Number of shares held by the concerned Member as on the record date, amount paid up on each share and the financial year to which the Dividend pertains.
Unless the Articles provide otherwise, Dividend shall be paid in proportion to the amount paid-up on the shares and for the portion of the period of the financial year in respect of which it is paid.
Calls in arrears and any other sum due from a Member in relation to the shares of the company may be adjusted against Dividend payable to the Member.
The amount of Dividend which remains unpaid or unclaimed after 30 days from the date of its declaration shall be transferred to a special bank account titled as 'Unpaid Dividend Account' to be opened by the company in that behalf with any scheduled bank. Such transfer shall be made within 7 days from the date of expiry of the 30 days period from the date of declaration of Dividend.
Any amount in the Unpaid Dividend Account of the company which remains unpaid or unclaimed for a period of 7 years from the date of transfer of such amount to the Unpaid Dividend Account, along with interest accrued, if any, shall be transferred to the 'Investor Education and Protection Fund'.
Prior to transferring any unclaimed or unpaid Dividend to the IEPF, the Company shall have to send individual intimation about such transfer to the Members concerned, at least 3 months before due date of such transfer.
Preservation of records
Dividend cheques or warrants returned by the Bank, after payment thereof, and the Dividend Registers shall be preserved by the company for a period of 8 years
Where the company has given an undertaking to the Bank for preservation or safe keeping of paid Dividend cheques or warrants for a specified period, the said instruments shall be preserved for such specified period or 8 years from the date of the instrument, whichever is longer.
The aforementioned Dividend Warrants or Cheques so preserved shall be destroyed only with the approval of the Board or in terms a policy approved in this regard by the Board.
Disclosure about Dividend distribution shall be made by a Company:
■ Notes to Accounts – Aggregate of Dividend proposed to be distributed.
■ Balance Sheet – "Current Liabilities and Provisions" Amount lying in Unpaid Dividend Account with accrued interest.
■ Directors Report – Interim Dividend paid and Final Dividend proposed.
■ Annual Report – Total amount lying in Unpaid Dividend account in respect of last 7 years and when such unpaid Dividend is due for transfer to IEPF. Amount of Dividend, if any, transferred to Investor Education and Protection Fund during the year.
Additional compliances for the listed companies
A listed company shall conform to following:
■ The equity shares allotted by the company shall rank pari passu with the existing equity shares for the purpose of payment of Dividend, if the same are in existence as on the record date or book closure.
■ No issue of shares conferring any superior rights as to voting or Dividend on any person.
■ The company has to send intimation to the Stock Exchange/(s):
(a) At least 2 working days in advance-intimation about the Board meeting in which Dividend is proposed to be recommended/declared.
(b) At least 7 working days in advance intimation about the record date fixed for the purpose of payment of Dividend.
(c) Within 30 minutes of closure of the meeting of Board held to consider the Dividend and its outcome.
■ The company shall recommend or declare Dividend at least 5 working days before the record date fixed for the purpose. The period of 5 working days is excluding the date of declaration or recommendation of Dividend and the record date fixed for the purpose.
■ The Company shall have to make declaration and disclosure on per share basis only.
■ The Company shall not forfeit unclaimed dividends before it becomes barred by law.
■ Top five hundred Listed Companies, based on market capitalization as on 31st March every financial year, shall formulate Dividend Distribution Policy covering the prescribed parameters by the SEBI and shall disclose it in the Annual Report and placed on the company's website.
■ Disclosure in Corporate Governance Report about Dividend payment date, under the 'General Shareholder information' section.
The provisions of Secretarial Standard [SS-3] on Dividend issued by the Council of Institute of Company Secretaries of India are 'not mandatory' but only 'recommendatory' effective from 1st January, 2018. Its adherence would enhance the image of the corporate from the governance point of view. Adoption of these Standards will lead to more clarity in the proceedings at Board Meeting while considering and recommending or declaring dividends. The confidence of investors will also be increased when the corporate adopts the Secretarial Standard on Dividend. The principles enunciated in the Secretarial Standard-3 are applicable to declaration and payment of Dividend on equity and preference share capital, which are in conformity with the provisions of the Companies Act, 2013. In view of effectiveness of the Standard on Dividend, corporates would voluntarily adopt it and is shall boost the confidence of its investors.