Section 123: Declaration of dividend
This section is for regulating the declaration and payment of dividends by companies, including the sources of funds and the procedures for payment.
The section, clause by clause
What the section says
In plain terms
(1)No dividend shall be declared or paid by a company for any financial year except—
A company can only declare or pay a dividend for a financial year out of its profits for that year, or out of undistributed profits from previous years, after providing for depreciation, and it can also transfer a percentage of its profits to its reserves before declaring a dividend.
(1)(a)out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of 3[both:] 1[Provided that in computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded; or]
(1)(b)out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government:
provisoProvided that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company:
provisoProvided further that where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and 2[transferred by the company to the free reserves], such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf:
provisoProvided also that no dividend shall be declared or paid by a company from its reserves other than free reserves:
proviso3[Provided also that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.]
(2)For the purposes of clause (a) of sub-section (1), depreciation shall be provided in accordance with the provisions of Schedule II.
Depreciation must be provided in accordance with the provisions of Schedule II when calculating profits for dividend purposes.
(3)The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend:
provisoProvided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.]
(4)The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.
The declared dividend amount must be deposited in a separate account in a scheduled bank within 5 days from the date of declaration.
(5)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:
Dividends can only be paid to the registered shareholder of a share, or to their order or banker, and must be paid in cash, although they can be paid by cheque, warrant, or electronic mode.
provisoProvided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company:
provisoProvided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.
(6)A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares.
A company that fails to comply with certain provisions cannot declare a dividend on its equity shares until it complies.
The right-hand column is written from the section text, not quoted from it, and it has no legal force. Where the two differ, the left-hand column is the law.
Amendment notes
- 1. The words and figures “within the time as specified, under section 403” omitted by Act 1 of 2018, s. 31 (w.e.f. 7-5-2018).
- 2. Subs. by Act 22 of 2019, s. 19, for sub-section (3) (w.e.f. 2-11-2018).
- 3. Subs. by Act 1 of 2018, s. 32, for “both; or” (w.e.f. 9-2-2018).
- 1. The proviso ins. by Act 1 of 2018, s. 32 (w.e.f. 9-2-2018).
- 2. Subs. by s. 32, ibid., for “transferred by the company to the reserves” (w.e.f. 9-2-2018).
- 3. The Proviso ins. by Act 21 of 2015, s. 10 (w.e.f. 29-5-2015).
- 4. Subs. by Act 1 of 2018, s. 32, for sub-section (3) (w.e.f. 9-2-2018).
This section refers to
Referred to by
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Reproduced from the official India Code print for reference. Check the current text on India Code before you rely on it, and read the section alongside its Rules. Nothing here is legal advice.