Dividends are a portion of a company’s profits distributed to its shareholders as a return on their investment. While dividends reward investors, the law ensures fairness, timely distribution, and accountability by the company’s management.

The Companies Act, 2013 regulates dividend-related activities through:

• Section 123: Conditions for declaration of dividend
• Section 124: Treatment of unpaid or unclaimed dividend
• Section 127: Penalty for failure to distribute dividend

Together, these sections ensure financial discipline, shareholder protection, and penal consequences in case of non-compliance.

    Declaration of Dividend

1. Sources for declaring dividend:

1. • From current year’s profit after depreciation.
   • From past reserves/profits (subject to rules).
   • Out of both current and past profits.
2. No declaration if company has losses:
   • If company has incurred losses in current or previous years, dividend cannot be declared unless these losses are set off.
3. Depreciation adjustment:
   • Depreciation must be provided as per Schedule II before dividend is declared.
4. Transfer to reserves (optional):
   • Companies may voluntarily transfer a portion of profits to reserves.
5. Dividend on equity shares only after:
   • Paying dividend on preference shares (if any).
6. Declaration only by the Board and approved in AGM:
   • Board recommends, shareholders approve.

 Illustrative Example:

If a company earns ₹10 Cr profit in FY 2024-25 and wants to declare dividend:

• Deduct depreciation (say ₹1 Cr).
• Adjust losses (say ₹2 Cr).
• Net profit for dividend = ₹7 Cr.

Unpaid Dividend Account

1. Transfer to Unpaid Dividend Account (UDA):
   • If dividend is not claimed/paid within 30 days, the company must transfer the amount to a separate bank account called the Unpaid Dividend Account within 7 days from expiry of 30 days.
2. Disclosure on Website:
   • Within 90 days of transfer to UDA, a statement must be placed on company’s website and MCA website containing:
     • Names of shareholders
     • Unclaimed amounts
3. Transfer to IEPF:
   • Amounts lying in UDA for 7 years must be transferred to the Investor Education and Protection Fund (IEPF).
   • Along with the dividend, shares on which dividend has not been claimed for 7 consecutive years must also be transferred to IEPF.
4. Claim from IEPF:
   • Shareholders can file Form IEPF-5 to claim their dividend and shares back.

🕒 Timeline Summary (Section 124):

Punishment for Failure to Distribute Dividend

⚖️ When this section applies:

If dividend is declared in a general meeting and the company fails to pay it within 30 days, penal action is triggered.

🚫 Penalties:

1. Every director (knowingly responsible) shall:
   • Be punished with imprisonment up to 2 years AND
   • Fine of ₹1,000 for every day of default (subject to maximum ₹1 lakh).
2. Exemptions from penalty:
   No penalty applies if failure to pay dividend is due to:
   • Operation of law (e.g. court stay)
   • Shareholder instructions (e.g. wrong bank details)
   • Dispute over ownership
   • Adjustment of dividend against dues
   • Other reason beyond control of company