Analysis of the Concept of Dividend under the Companies Act 2013

Introduction

The financial operations of a firm can be overseen by the government of the country where the business is listed and concern various aspects, including dividends. In India, dividends are controlled by The Companies Act (TCA) of 2013, which is a modified version of the initial Act of 1956¹. TCA 2013 has significantly redefined the relations between the nation’s enterprises and society, increasing corporate governance practices². For instance, it appears that TCA 2013 resulted in many companies paying significantly higher dividends than prior to the statute’s adoption³. The concept of dividend under TCA 2013 covers such matters as declaration and payment alongside interim dividend.

The Meaning of Dividend

While TCA directly affects the dividends of Indian firms, the Act does not distinctly define the term. TCAs 1956 and 2013 do not explain what a dividend is, but the newer regulation states that the concept “includes any interim dividend”⁴. In general, a dividend is an allocation of some amount of a business’s earnings to shareholders⁵. Notably, a dividend is connected to the ideas of free reserves and preference share capital. The former means reserves available for distribution as dividend, and the latter refers to the portion of the issued share capital that holds a preferential right with respect to the payment of dividend⁶. Accordingly, although the concept of dividend is not clearly defined in TCA 2013, the term represents financial operations.

Declaration and Payment

A significant part of TCA focuses on the process of declaring and paying dividends. Section 123 proposes that a company should not announce or disburse any dividend for any financial year⁷. Exceptions include dividends out of the profits that year or for any prior financial years arrived at after providing for depreciation or out of money delivered by the Central or State Government⁸. When a firm declares a dividend, the money must be paid or claimed within thirty days. Otherwise, the company must transfer the dividend to a special Unpaid Dividend Account within seven days of the expiry date⁹. Furthermore, before reporting any dividend, an enterprise must ensure that it complies with sections 73 and 74, which concern public deposits’ acceptance and repayment¹⁰. Consequently, TCA mandates businesses to follow strict rules when managing their dividends.

Interim Dividend

As mentioned above, TCA 2013 notes that dividend comprises any interim dividend (ID), which has its specifics. A noteworthy distinction of ID is that it is the dividend publicized and distributed before the determination of the final profit position for the monetary period¹¹. Section 123(3) states that ID may be declared by a company’s Board of Directors during any financial year from the profit and loss account’s surplus. In addition, ID may be reported from profits of the financial year in the ID is aimed to be announced¹². Moreover, ID is paid between the firm’s two Annual General Meetings¹³. Accordingly, while being considered within the concept of dividend, ID is managed under distinguishable rules.

Conclusion

To summarize, the concept of dividend under The Companies Act 2013 refers to a portion of a company’s profit that has specific regulations concerning the process of its declaration and payment. While neither version of the Act specifies dividend’s definition, the statute provides a comprehensive description of how the money should be managed. For instance, while interim dividend belongs within the general idea of dividend, the two have distinct rules regarding reporting and disbursing. Overall, The Companies Act 2013 can be considered quite effective at presenting the concept of dividend since companies are documented to be paying significantly higher funds than before the Act.

References

Bergman, M. M., Bergman, Z., Teschemacher, Y., Arora, B., Jyoti, D., & Sengupta, R. (2019). Corporate responsibility in India: Academic perspectives on the Companies Act 2013. Sustainability, 11(21), 1-20. Web.

Jarwal, D. (2018). Declaration of dividend according to the Companies Act 2013 along with applicable provisions of the Companies Act 1956. New Dimensions in E-Governance, 51-60. Web.

Mali, D. B. (2018). A study on impact of dividend policy on shareholder wealth of selected steel manufacturing companies in India. Online Journal of Multidisciplinary Subjects, 12(3), 224-231.

Pahi, D., & Yadav, I. S. (2019). Does corporate governance affect dividend policy in India? Firm-level evidence from new indices. Managerial Finance, 45(9), 1219-1238. Web.

Pahi, D., & Yadav, I. S. (2021). Dividend behavior of Indian firms: New evidence from large data set. Journal of Asia-Pacific Business, 22(1), 4-38. Web.

The Companies Act. (2013). Web.

Footnotes

1. Pahi & Yadav, 2021
2. Bergman et al., 2019; Pahi & Yadav, 2019
3. Pahi & Yadav, 2019
4. Mali, 2018; The Companies Act [TCA], 2013, p. 17
5. Jarwal, 2018; Mali, 2018
6. TCA, 2013
7. TCA, 2013
8. TCA, 2013
9. TCA, 2013
10. Jarwal, 2018
11. Jarwal, 2018
12. TCA, 2013
13. Jarwal, 2018