‘Race against deadline’ for Companies eager to declare interim dividend

1
Race against deadline for Companies eager to
declare interim dividend
2

• The companies suddenly seem to be in a rush to
  declare interim dividend. The driving reason
  behind this rush lies in the amendments inserted
  in the Finance Bill, 2016.
• Finance Bill, 2016, seems to have caught hold of
  the income which was getting taxed at a lower
  rate. As per the provisions of the Income Tax
  Act, 1961("IT Act"), dividend distributed by
  companies, are exempt in the hands of the
  shareholders by way of exemption under section
  10(34) IT Act. Thus, companies are liable to pay
  distribution tax under section 115-O of the IT
  Act, at the rate of 17.304 (i.e. basic rate of
  15 plus surcharge of 12 and cess of 3).
• Through the Finance Bill 2016, a new section has
  been introduced (i.e. 115BBDA) to provide that,
  where the dividend is to be paid to resident
  individuals, HUFs and Firms then, there would be
  an additional tax at the rate of 10 in the hands
  of the investors. This step by the Hon'bl Finance
  Minister aims at taxing such portion of income
  which was getting escaped from the ambit of tax,
  in the hands of those investors, who are
  subjected to higher tax rate (i.e. 30).
• The above amendment would be made effective from
  the Assessment Year 2017-18 (i.e. previous year
  2016-17), hence the rush to declare the interim
  dividend.
• But, amidst all the rush, companies also have the
  host of regulatory compliance to adhere to,
  during the process of declaring interim dividend.
  Be it in terms of the Companies Act, 2013, the
  SEBI (Listing Obligations and Disclosure
  Requirements) Regulations, 2015 or the
  Secretarial Standards companies have to take due
  care of all the legal requirements. Hence,
  sensing the need of the hour, an attempt has been
  made to compile a comprehensive set of FAQs, with
  regard to interim dividend. The FAQs have been
  framed to act as "The one stop solution to the
  sudden rush for interim dividend".

3
Meaning of interim dividend

• 1. What is an interim dividend?
• Dividends which are paid by the board of
  directors between two annual general meetings
  without declaring them at an annual general
  meeting are called interim dividend.
• 2. Is interim dividend also "dividend" as defined
  in Section 2 (35) of the Act, 2013 ('Act, 2013')?
• The term "dividend"as defined in Section 2(35) of
  the Act, 2013 includes any interim dividend.
  Hence, the definition as provided under the Act,
  2013 is an inclusive definition rather than an
  exhaustive one. Therefore, interim dividend is
  also a dividend as per the provisions of the Act,
  2013.
• 3. Is interim dividend also "dividend" as defined
  in Section 2 (22) of the Income tax Act, 1961?
• Section 115-O (1) of the Income Tax Act, 1961
  provides that companies in addition to their tax
  liability would be required to pay distribution
  tax where any dividend (whether interim or
  otherwise) is paid, distributed or declared by
  the company. Thus the term dividend includes
  interim dividend as well.

4
Legal provisions for declaration of interim
dividend

• 4. What are the provisions of law pertaining to
  interim dividend?
• While declaring interim dividend the following
  provisions of law shall have to be taken into
  consideration
• a) Provisions of theAct, 2013 Section 2(35), 24,
  51, 70, 73, 74, 123, 126, 127, 128, 134(3)(k),
  the Companies (Declaration and Payment of
  Dividend) Rules, 2014 and Table- F
• b) Provisions of the Act, 1956 205A, 205B and
  205C and
• c) Articles of Association (AOA) of the company.
• 5. Who can declare an interim dividend?
• An interim dividend can be declared by the board
  of directors of a company at any time before the
  closure of the financial year. However, final
  dividend is declared by the shareholders of a
  company at its annual general meeting based on
  the recommendation of the board of directors of
  the company.
• 6. What are the sources for declaration of
  interim dividend?
• Section 123 of the Act, 2013 states that
• "The Board of Directors of a company may declare
  interim dividend during any financial year out of
  the surplus in the profit and loss account and
  out of profits of the financial year in which
  such interim dividend is sought to be declared
• xxx."
• Emphasis Supplied

5

• Therefore, in line with the above, it is clear
  that there are basically two sourcesfor
  declaration of an interim dividend. They are
• a) Current year's profit Out of profits of the
  financial year in which such interim dividend is
  proposedto be declared - In case the company has
  incurred 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.
• b) Accumulated surplus lying to the credit of
  profit and loss account Out of the profits of
  the company for any previous financial year or
  years remaining undistributed
• 7. Can interim dividend be paid out of the free
  reserves?
• While going through the language of Section 123
  (3) it seems that the board of directors has the
  power to declare interim dividend only either out
  of the surplus fund or out of current year's
  profit. Section 123 (3) do not permit declaration
  of interim dividend out of the free reserve.
  However, in case of inadequacy or absence of
  profits in any financial year, company may
  declare interim dividend by transferring the
  amount lying in free reserve account to the
  surplus account. In such case the compliance of
  Rule 3 of the Companies (Declaration and Payment
  of Dividend) Rules, 2014 needs to be ensured.

6

• 8. Is the declaration of interim dividend by the
  Board a "declaration" or a mere advance payment?
• a) Properly speaking, dividend refers to
  distribution of profits of the company. The
  profits of the company are determined only when
  the financial statements are adopted by the
  company in general meeting. Therefore, the
  payment of the interim dividend is merely an
  advance payment in expectation of profits for the
  year. Therefore, the declaration of interim
  dividend is done in view of
• i. performance of the company for the quarters
  already completed and
• ii. Likely performance for the quarters yet to be
  completed.
• b) Should it so happen that there are losses in
  the quarters remaining to be completed, and
  therefore, the aggregate profits of the company
  fall short of the dividend already declared, the
  Board shall be responsible to ensure that the
  interim dividend already paid by the board is
  retrieved. The board remains liable to make good
  any losses incurred by the company on this
  account.
• c) In this sense, interim dividend is merely
  "paid", it is not declared by the Board. However,
  Section 123 of the Act, 2013 and Section 205 of
  the 1956 Act, post Amendment Act, 2000, use the
  expression "declaration" in respect of interim
  dividend - which is inappropriate in our view.
• 9. Does interim dividend require declaration by
  the company in general meeting as well?
• a) In our view, declaration of dividend is the
  exclusive domain of the members in general
  meeting. The board recommends dividends the
  general meeting declares the same. Therefore,
  even in case of interim dividend, the general
  meeting must declare it.
• b) Sometimes, there is an interim as well as a
  final dividend. In that case, the general meeting
  should declare both. Sometimes, the company may
  have an interim dividend, but not a final
  dividend in that case, the general meeting may
  adopt the interim dividend as the final dividend.

7

• 10. Can the directors rescind the interim
  dividend once declared?
• While the Act, 2013 does not provide any express
  bar on the directors to rescind the decision of
  interim dividend once declared before the actual
  payment is done, however, the directors cannot be
  flip-flopping on the decision already made by
  them. Instead, they should bear utmost care while
  approving the resolution of the interim dividend.
  This has to be understood by the directors
  approving the agenda in question that declaration
  of interim dividend has significant impact on the
  prices of the shares of the company. In case the
  declaration is reverted, the same may lead to
  unusual change in the price of the shares. Also
  allowing the dividend once and then disallowing
  the same thereafter would be like playing with
  the sentiments of an investor which may lead to
  public displeasure. Also this is an established
  fact that the law should not be only adhered in
  letter but also in its spirit and the spirit of
  the law can never be to prejudice the
  shareholders.

8
To read more, please click here