# Declaration of Dividend when Profits are Inadequate or Absent
Where a company has insufficient or no profits in a financial year but still wishes to declare a dividend, it may do so out of accumulated profits of previous years transferred to free reserves, subject to four conditions (all must be satisfied).
## The Four Conditions
### Condition 1 — Rate Cap
The rate of dividend declared shall not exceed the average of rates at which dividend was declared in the immediately preceding 3 years.
$$ \text{Rate of Dividend} \leq \frac{RD_1 + RD_2 + RD_3}{3} $$
Exception: This condition does NOT apply if the company has not declared any dividend in each of the three preceding financial years.
### Condition 2 — Amount Cap
Total amount drawn from accumulated profits shall not exceed 10% of (Paid-up Share Capital + Free Reserves) as per the latest audited financial statement.
$$ \text{Maximum Drawal} \leq 10\% \times (\text{Paid-up Capital} + \text{Free Reserves}) $$
### Condition 3 — Set-off Current Loss First
The amount drawn shall first be utilised to set off losses incurred in the financial year in which dividend is declared. Only the balance is available for dividend on equity shares.
### Condition 4 — Reserve Floor
The balance of reserves after withdrawal shall not fall below 15% of paid-up share capital (as per latest audited financial statement).
## Application Steps (Memory Aid)
1. Compute average rate of last 3 years' dividends → cap.
2. Compute 10% drawal limit → cap.
3. Deduct current year loss from drawal.
4. Check reserve floor ≥ 15% of paid-up capital after withdrawal.
5. Lowest of the limits = maximum permissible dividend.