Declaration of Dividend – Section 123 of Companies Act 2013



1. Conditions for declaration of payment of dividend

No dividend shall be paid or declared by a company for any financial year except;

a) out of the profits of the company arrived at after providing for depreciation, or out of the profits of the company for any previous financial year or years arrived at after providing for deprecation and remaining undistributed, or out of both; or

b) out of the money provided by the CG or a State Government for the payment of dividend by the company in pursuance of a guarantee given by the Government.

2. Transfer of profit to reserves

Company may, before declaration of any dividend in any financial, transfer such percentage of its profits for that financial year as it may considers appropriate to the reserves of the company.

3. Payment of dividend in case of no profits or inadequate profits or out of reserves

Rule 3 of Companies (Declaration and payment of dividend) Rules, 2014:- In the event of adequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfillment of the following conditions:

a) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the 3 years immediately preceding that year.Note: this sub-rule shall not apply to a company, which has not declared any dividend in each of the 3 preceding financial year.

b) The total amount to be drawn from such accumulated profits shall not exceed 1/10th of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

c) The amount so drawn shall be first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity share is declared.

d) The balance of reserves after such withdrawal shall not fall below 15 percentage of its paid up share capital as appearing in the latest audited financial statement.

e) No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profits of the company of the current year the loss or depreciation, whichever is less, in previous year is set off against the profits of the company for the year for which dividend is declared or paid.

Note: any dividend shall be declared or paid out of free reserves only.

4. Depreciation

Depreciation shall be provided as per the provisions of schedule II.

5. Interim Dividend

The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of the profits of the financial year in which such interim dividend is sought to be declared.

6. Declaration of Interim dividend in case of loss

In case where company has incurred the loss in the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, rate of such interim dividend shall not be higher than the average rate of dividend declared by the company during the immediately preceding 3 financial years

7. Depositing of dividend in a separate bank account

The amount of divined including interim dividend shall be deposited in a separate bank account within in 5 days from the declaration.

8. 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.

9. Capitalization of profit for issuing of bonus shares

Companies are allowed to capitalize its profits or reserves for the purpose of issuing of fully paid up bonus shares to its members.

10. Mode of payment of dividend

Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the share holder entitled to the payment of the dividend.

11. A company fails to comply with the provisions of sections 73 and 74 [dealing with prohibition of acceptance deposits and repayment of deposits] shall not, so long as such failure continues, declare any dividend on its equity shares.


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