Question

Study the following case: XYZ Company Ltd. decides to declare dividend for the financial year 2021-22 in which it has earned profits less than their expectations. (a) Is Board right in recommending a dividend of rupee 5/- per share out of free reserves? (b) Can Board declare the dividend though it is not approved by Annual General Meeting? (c) Can the Board give dividend in the form of gifts?

Hint:

Dividend Mantra: Board {recommends}, Shareholders {declare} (at AGM), and it must always be paid in {cash}. When using past reserves, the dividend rate is restricted by the average of the last

Answer 1

Analysis: This case deals with the rules and regulations governing the declaration and payment of dividends by a company. Legal Position:

[(a)] Dividend from Free Reserves: Yes, the Board is right in \textit{recommending} a dividend out of free reserves if the current year's profits are inadequate. However, this is subject to specific conditions under the Companies (Declaration and Payment of Dividend) Rules, 2014. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. So, if the rupee 5/- dividend is within that average rate, the recommendation is valid.
[(b)] Approval of Annual General Meeting (AGM): No, the Board of Directors can only \textit{recommend} a final dividend. The power to \textit{declare} this final dividend rests solely with the shareholders, who approve it at the company's AGM. Shareholders can approve the recommended rate or suggest a lower rate, but they cannot increase the rate recommended by the Board.
[(c)] Dividend in the form of Gifts: No, this is not permitted. As per the Companies Act, 2013, a dividend must be paid in cash. This can be done through cheque, warrant, or any electronic mode. It cannot be paid in kind, such as in the form of gifts or assets. The principle is that the return to shareholders must be a cash distribution from profits.