[Opinion] Delayed Dividends Draw Heavy Fines | A Day’s Lapse Costs Company, CEO, CFO & CS Dearly
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- Last Updated on 2 September, 2024
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Prof R Balakrishnan – [2024] 165 taxmann.com 814 (Article)
1. A small brief about this case
Dividend means the portion of the profit received by the shareholders from the company’s net profit, which is legally available for distribution among the members. Therefore, a dividend is a return on the share capital subscribed for and paid to its shareholders by a company. The dividend is defined under section 2(35) of the Companies Act, 2013 and includes any interim dividend. In the case of the declaration of the final dividend, the board of directors makes the recommendation to the shareholders after the books of accounts are audited. The shareholders approve and declare the dividend recommended by the board of directors. In the case of interim dividend, the same is declared by the board of directors in between the two annual general meetings and it does not call for the approval of the shareholders. It is paid to the members of the company as and when declared.
As and when the dividend is declared either a final dividend or interim dividend, the company needs to open a separate bank account titled “dividend/interim dividend account with a scheduled bank and transfer the entire amount of dividend payable to this account within five days of declaration and give a copy of the board resolution containing instructions regarding the opening of the account and give the authority to bank to honour the dividend warrants when presented. The company must ensure that the amount of dividend payable is transferred to a separate bank account within five days of the declaration of the dividend and that the company does not commit any default in transferring the amount.
In this particular case which is pertaining to M/s. Multi Commodity Exchange of India Limited, the company had declared the dividend on 29th September 2022, and the dividend amount was to be transferred to a separate bank account opened for this purpose on or before 2nd October 2022, whereas the company could transfer it only on 3rd October 2022. The delay of transferring one day constituted a violation of section 123 (4) of the Companies Act 2013, and therefore, the Adjudicating Officer initiated a process against the company and its directors, which ultimately resulted in a penalty of Rs. 44,000 for the offence. Let us go through this case in detail in order to understand the rationale behind the order, the relevant facts of the case, and the provisions of the law.
2. Relevant provisions of the Companies Act 2013
The following are the relevant provisions under the Companies Act 2013.
| Companies Act 2013 Chapter VIII– Declaration and Payment of Dividend Section 123 – Declaration of dividend. |
|
| Section | Provision |
| 123 (1) | No dividend shall be declared or paid by a company for any financial year except— |
| 123 (1) (a) | out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both; |
| Proviso | Provided in computing profit, any amount representing unrealised gains, notional gains, or revaluation of assets and any change in the carrying amount of an asset or of liability on measurement of the asset or liability at fair value shall be excluded or |
| 123 (1)(b) | out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government: |
| Proviso | Provided that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company: |
| Proviso | Provided further that where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare a dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf: |
| Proviso | Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves: |
| Proviso | Provided also that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year. |
| 123(2) | For the purposes of clause (a) of sub-section (1), depreciation shall be provided in accordance with the provisions of Schedule II. |
| 123(3) | The Board of Directors of a company may declare an interim dividend during any financial year or at any time during the period from the closure of the financial year till the holding of the annual general meeting out of the surplus in the profit and loss account and out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend. |
| Proviso | Provided that in case the company has incurred a loss during the current financial year up to 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 dividends declared by the company during the immediately preceding three financial years. |
| 123 (4) | The amount of the dividend, including the interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. |
| 123 (5) | No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash: |
| Proviso | Provided that nothing in this sub-section shall be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company: |
| Proviso | Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend. |
| 123 (6) | A company that fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares. |
| Penal section for non-compliance/default if any | |
| Companies Act 2013 Chapter XXIX – Miscellaneous 450 – Punishment where no specific penalty or punishment is provided |
|
| 450 | If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues. |
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