How Dividends Are Declared in Public Limited Companies

Introduction
Dividends represent a portion of a company’s profits distributed to its shareholders as a return on their investment. In Public Limited Companies, the declaration and payment of dividends are governed by the Companies Act, 2013, and SEBI regulations (for listed companies). Dividends reflect the company’s profitability, financial health, and commitment to shareholder value. This article outlines the procedures, legal requirements, and types of dividends declared by Public Limited Companies.

Types of Dividends
Public Limited Companies can declare the following types of dividends:

• Interim Dividend: Declared by the Board of Directors between two Annual General Meetings (AGMs), typically based on quarterly or half-yearly profits.
  
• Final Dividend: Recommended by the Board but declared and approved by shareholders at the AGM after reviewing the full financial year’s results.
  

Both forms must be paid only out of profits and in accordance with legal procedures.

Eligibility for Declaring Dividends
Dividends can only be declared when a company has:

• Profits for the current financial year, or
  
• Accumulated profits from previous years (free reserves), and
  
• Complied with all applicable accounting standards and regulatory requirements.
  

A company must also have no defaults in repayment of deposits, interest, or debt obligations at the time of dividend declaration.

Board Resolution and Shareholder Approval
For a final dividend, the Board of Directors must recommend the amount and propose it in the notice for the AGM. It is then subject to approval by the shareholders through an ordinary resolution. In the case of an interim dividend, the Board alone can approve and declare it without shareholder approval.

Payment Timelines and Modes
Once a dividend is declared, it must be paid to the eligible shareholders within 30 days of declaration. Failure to pay within this timeframe (without lawful reason) attracts penalties. Dividends are usually credited electronically to shareholders’ bank accounts linked to their Demat accounts or sent through cheques or demand drafts.

Declaration from Reserves
If current profits are inadequate, dividends can be declared from accumulated free reserves under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014. However, this is subject to certain limits and conditions to protect the company’s financial stability.

Dividend Distribution Tax (Earlier Provision)
Prior to April 1, 2020, companies had to pay Dividend Distribution Tax (DDT) before distributing dividends. However, this provision has been abolished, and dividends are now taxed in the hands of shareholders as per their income tax slab.

Disclosure and Compliance
The company must disclose the amount of dividend in the financial statements and report the declaration to the Registrar of Companies using Form MGT-7 (Annual Return). Listed companies must also inform stock exchanges and adhere to SEBI’s disclosure and investor protection norms.

Unpaid Dividend and Transfer to IEPF
Any dividend that remains unpaid or unclaimed for 30 days must be transferred to an Unpaid Dividend Account. If it remains unclaimed for seven years, the amount, along with related shares, must be transferred to the Investor Education and Protection Fund (IEPF) maintained by the central government.

Conclusion
The declaration of dividends in Public Limited Companies is a structured process governed by legal norms and financial prudence. It is an important tool to reward shareholders and signal corporate stability and profitability. By following due process and ensuring timely payments, companies reinforce investor confidence and uphold good corporate governance practices.

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