MCA Newsletter January 2024

The Ministry of Corporate Affairs (MCA) has released the MCA Newsletter January 2024.

This Newsletter gives the insight of various changes incorporated into the corporate sector to enhance the ease of doing business.

Declaration and Payment of Dividend in Light of Corporate Governance

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation of his companies.

– Benjamin Graham

The importance of dividends should be emphasized as a source of stability and income for investors. Dividends provide a tangible return on investment, making them a crucial factor for income-oriented investors.

A company’s financial stability and dedication to giving shareholders their profits back are demonstrated by its steady dividend payment. In this sense, the idea of cautious and logical investing methods that strive for long-term financial success is consistent with dividend payments.

Furthermore, the father of modern economics and a renowned political economist of the eighteenth century, Adam Smith, discussed dividends in his ground breaking book “The Wealth of Nations.”

He believed that dividends are a crucial component of a well-functioning market economy and argued that dividends serve as a fair and just reward for those who invest their capital in a business venture.

The provisions for declaration and payment of dividend are covered under Chapter VIII of the Companies Act, 2013 (CA-13). These provisions, inter alia, provide for manner of declaration and payment of dividend to shareholders, transfer of any unpaid or unclaimed dividend, after 30 days, to a separate bank account of the company and subsequent transfer to the Investor Education and Protection Fund (IEPF) the amount of dividend which remains unpaid or unclaimed for a period of seven years.

The declaration of dividends under CA-13 involves several key steps to ensure compliance and fairness. The process begins with a board of directors meeting where the financial health of the company is assessed to determine if there are sufficient profits for dividend distribution. Once the board approves, the next step is the resolution at a shareholders’ meeting, where shareholders approve the dividend declaration. Once declared, the company is legally obliged to pay the declared dividend within 30 days from the date of declaration. The dividend which remains unpaid or unclaimed after 30 days is required to be transferred to a separate Unpaid Dividend Account (UDA) to be opened by the company as per section 124.

The companies need to pay an interest of 12% p.a. when they default in transferring the amount to UDA. Entitled shareholders can apply for payment of amount from UDA. Unpaid or unclaimed dividends gets transferred to Investor Education and Protection Fund (IEPF) after the expiry of seven years from the date of such transfer to UDA.

All shares in respect of which dividend has not been paid or claimed for seven consecutive years are also transferred by company in name of Investor Education and Protection Fund.

Section 123 is an important provision that governs the declaration and distribution of dividends by companies in India.

The legal standards that corporations must follow when declaring dividends are outlined in this section. It highlights that dividends can only be paid from earnings once depreciation has been taken into account. Additionally, Section 123 states that a business may transfer a certain portion of its income to reserves prior to declaring a dividend. A company is not permitted to declare dividends on its equity shares if it violates sections 73 and 74 (deposits). In light of this, Section 123 plays a crucial role in protecting the interests of businesses and shareholders by providing precise standards for the ethical declaration and distribution of dividends in compliance with Indian corporate law.

To Read More Download PDF Given Below: