# Deposit and Payment of Dividend

## 1. Deposit in Separate Bank Account [Sec 123(4)]

The dividend amount must be deposited in a separate bank account (in a scheduled bank) within 5 days from the date of declaration.
Exemption: Not applicable to companies whose entire share capital is held by the Central Government, State Government, or both.

## 2. To Whom Dividend is Payable [Sec 123(5)]

Dividend is payable only to the registered shareholder of the share, or to his order, or to his banker.
A purchaser of shares cannot claim dividend until his name is entered in the register of members.
If a member authorises a bank to receive dividend, payment to the bank is deemed to be payment to the member.

## 3. Dividend on Partly Paid-up Shares

A company may pay dividend proportionate to the amount paid up on each share, if its Articles so permit.

## 4. Mode and Timing of Payment

Dividend shall be paid only in cash — by:
Cheque or dividend warrant, or
Electronic mode to the registered bank account.
Payment must be made within 30 days from the date of declaration.
Warrants/cheques must be posted within the prescribed time to the registered address.

### Exception — Dividend In Kind

The prohibition on payment in kind does not apply to:

Capitalisation of profits or reserves for issue of fully paid bonus shares, or
Payment of any unpaid amount on shares held by members (i.e., conversion of unpaid call into paid-up by reserve transfer).

## 5. Special Rule for Nidhis

A Nidhi company may credit the dividend to the member's account (instead of physical/electronic payment) if it remains unclaimed for 30 days from the date of declaration.

## Logic

Separate bank account insulates the dividend money from the company's general cash, ensuring traceability.
'Only to registered holder' protects the company from competing claims and avoids the need to settle ownership disputes.
Cash-only rule prevents companies from passing off slow-moving inventory or obsolete assets as 'dividend in kind'.
30-day window balances shareholder protection (quick payment) with operational reality (printing and dispatching warrants).

## Key Takeaway

5 days for deposit + 30 days for payment — internalise this two-stage timeline. Cash only, except for bonus shares and call money set-off.

Worked example

### Example 1

Example 1 (Separate Account): ABC Ltd. declares dividend on 25-Sep-2025. It must transfer the entire dividend amount to a separate scheduled bank account by 30-Sep-2025 (within 5 days).

### Example 2

Example 2 (Registered Holder): Mr. X sells his shares to Mr. Y on 10-Sep-2025 but the transfer is not yet registered when the AGM declares dividend on 20-Sep-2025. The dividend goes to Mr. X (the registered holder). Mr. Y has a contractual claim against Mr. X but no claim against the company.

### Example 3

Example 3 (Bonus Shares): XYZ Ltd. capitalises ₹10 crore of free reserves to issue fully paid bonus shares. This is the exception to the 'cash only' rule — bonus issue is a permitted non-cash form of distribution.

### Example 4

Example 4 (Partly Paid Shares): A company's articles permit dividend on amounts paid up. Mr. P holds 1,000 shares of ₹10 each, of which ₹6 has been called and paid. If the dividend rate is 10%, P receives 10% × ₹6 × 1,000 = ₹600 (not 10% × ₹10 × 1,000).

⚠️ Common exam mistakes

Stating 7 days for deposit in separate account — the correct period is 5 days.
Forgetting that the 5-day rule does NOT apply to wholly government-owned companies.
Believing partly paid shares automatically get pro-rata dividend — the AOA must permit it.
Treating bonus issue as a violation of the cash-only rule — bonus shares and call money set-off are statutory exceptions.
Confusing 30-day payment with 30-day transfer to UDA (those are sequential — first 30 days to pay, then 7 days to transfer unpaid amount to UDA).

Bare-Act text Section 123(4) and 123(5) · Companies Act, 2013 · click to expand

Section 123(4): The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. Section 123(5): No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash: Provided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company: Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.

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Deposit and Payment of Dividend [Sec 123(4) & 123(5)]

Worked example

⚠️ Common exam mistakes