# Other Provisions Related to Dividend

## 1. Prohibition on Declaration of Dividend

### Section 123(6) — Deposit Defaulters

A company that has failed to comply with:

Section 73 (acceptance of deposits from members), or
Section 74 (repayment of deposits accepted before commencement of the 2013 Act),

shall not declare any dividend on equity shares until such failure continues.

### Section 8 Companies

A Section 8 company (formed for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, environment protection, etc.) is completely prohibited from declaring dividend. Profits, if any, are applied only towards promoting the objects of the company.

## 2. Transfer to Reserves — Section 123(1)

Under the 2013 Act, transfer of profits to reserves before declaration of dividend is entirely at the company's discretion.

Company may transfer any percentage it deems fit to reserves.
Company may even decide not to transfer any amount to reserves.

This is a major departure from the earlier 1956 Act regime, which mandated minimum transfers in certain cases.

## Snapshot

Provision	What it Does
Section 8	Bars Section 8 companies from declaring dividend
Section 123(6)	Bars dividend on equity until deposit default cured
Section 123(1)	Makes transfer to reserves voluntary

Worked example

### Example 1

Example: A Ltd. has accepted deposits but failed to repay matured deposits on the due date. The company cannot declare dividend on its equity shares until this default is fully cured.

### Example 2

Example: ChildHope (a Section 8 company) earns a surplus of ₹5 crore. It cannot distribute any portion as dividend; the surplus is ploughed back to charitable objects.

⚠️ Common exam mistakes

Thinking transfer to reserves is mandatory before dividend — under the 2013 Act it is purely voluntary.
Forgetting that the Section 123(6) bar is on equity dividend specifically (preference dividend may not be barred by this section, but check other restrictions).
Assuming Section 8 companies just have to follow special procedures — they are outright prohibited from declaring dividend.

Bare-Act text Sections 8 and 123(1), 123(6) · Companies Act, 2013 · click to expand

Company which fails to comply with section 73 (Deposits from members) & 74 (Repayment of deposits accepted before commencement of companies act) shall not declare dividend on equity shares [till failure continues]. Section 8 company shall not declare dividend. Transfer of profit to reserves [before declaration of dividend] is left to the discretion of company. It may also decide not to transfer any amount to reserves.

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Other dividend provisions — prohibition and transfer to reserves (Sections 8 and 123)

Worked example

⚠️ Common exam mistakes