# Declaration of Dividend — Section 123
## Core Idea
Dividend is a distribution of profits to shareholders. The Act tightly controls what money can be used to pay dividend, so that the company is not bleeding capital while pretending to pay returns.
## Permissible Sources
Dividend for any financial year may be declared/paid only out of one or more of the following:
| Source | Condition |
|---|---|
| (a) Profits of the company for the current year | After providing for depreciation as per Schedule II |
| (b) Profits of the company for any previous FY(s) | After providing for depreciation and remaining undistributed |
| (c) Money provided by the Central or State Government for payment of dividend in pursuance of a guarantee given by such Government | — |
## What Profits Must EXCLUDE
While computing profits for the above purposes, the following must be excluded:
- Notional / unrealised gains.
- Revaluation gains (i.e., change in carrying amount of asset or liability on measurement at fair value).
This prevents the company from paying real cash dividend out of paper profits.
## Transfer to Reserves
- Under the 2013 Act, transfer to reserves before declaring dividend is voluntary (not mandatory).
- The company may transfer such percentage of profits to reserves as it considers appropriate before declaring dividend.
## Set-off of Past Losses and Depreciation
Before declaring dividend out of current year's profit:
- Carried forward losses of previous years; AND
- Unprovided depreciation of previous years,
must be set off against the current year's profit.
## Capital Profits and Capital Reserves
- Capital profits cannot be used for dividend (unless realised in cash and other conditions are met).
- Capital reserves cannot be used to pay dividend — only free (revenue) reserves can be used (subject to Rule 3 below).
## Dividend out of Free Reserves — Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014
If there is inadequacy/absence of profits and the company proposes to declare dividend out of accumulated profits transferred to free reserves:
1. Rate of dividend shall not exceed the average of the rates at which dividend was declared in the immediately preceding 3 financial years.
- Not applicable to a company which has not declared any dividend in each of the preceding 3 FYs.
2. The total amount drawn from accumulated profits shall not exceed 1/10th of (paid-up share capital + free reserves).
3. The amount so drawn shall first be used to set off losses in the FY in which dividend is declared.
4. The balance of reserves after such withdrawal shall not fall below 15% of paid-up share capital.
## Procedural Requirements (S.123(4)–(5))
1. Deposit dividend amount into a separate bank account within 5 days of declaration.
2. Pay dividend to the registered shareholder (or to his order / banker) by cheque, warrant or any electronic mode.
3. Dividend must be paid within 30 days of declaration.
## Capitalisation of Profits
Nothing in Section 123 prohibits a company from capitalising profits or reserves (e.g., issuing bonus shares).
## Section 123(6) — Bar in Case of Section 73/74 Default
A company which has failed to comply with Sections 73 and 74 (relating to acceptance/repayment of deposits) shall not declare any dividend so long as the failure continues.
## Types of Dividend — Interim vs Final
| Particular | Interim | Final |
|---|---|---|
| Declared by | Board | Shareholders (at AGM, on recommendation of Board) |
| Paid in | Course of FY | After closure of FY |
| Article of Association | Can be declared even if AoA is silent (no specific provision needed) | Generally requires AoA permission |
| Revocability | Revocable with consent of all shareholders | Cannot be revoked once declared |
## Definition
Under Section 2(35), "Dividend" includes any interim dividend. Dividend essentially means distribution of profits.