Provisions Related to Dividend Under Companies Act, 2013

Tabular comparison of provisions of section 205 of the Companies Act, 1956 (“1956 Act”) and section 123 of Companies Act, 2013 (“2013 Act”)

S No	Issue	1956 Act	2013 Act
1.	Dividend from reserves to be only from free reserves	No such provision.	Third proviso to section 123(1) of the 2013 Act provides that no dividend shall be declared or paid by a company from its reserves other than free reserves.
2.	Declaration of dividend in case of inadequacy or absence of profits	Companies (Declaration of Dividend out of Reserves) Rules, 1975 –Rule 2: In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that- (i) the rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid-up capital, whichever is less; (ii) the total account to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilised to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared ; and (iii) the balance of reserves after such drawl shall not fall below fifteen per cent of its paid-up share capital	Rule 8.1 – A company may declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the reserves, in the event of inadequacy or absence of profits in any year, subject to the fulfillment of the following conditions : (1) The rate of dividenddeclared shall not exceed the average of the rates at which dividend wasdeclared by it inthe three years immediately preceding that year; (2) The total amount to be drawn from such accumulated profits shall not exceed an amount equal to one-tenth of the sum of its paid-up share capital and free reserves; (3) The amount so drawn shall first be utilized to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared; (4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital.
3.	Transfer to reserve	Section 205 (2a) of the 1956 Act prescribes that before any dividend is declared or paid, certain percentage of profits as may be prescribed by the Central Government, but not exceeding 10% will have to be transferred to the reserves of the Company. The company may, however, voluntarily create more than the prescribed percentage and transfer to the reserves of the Company. According to the Companies (Transfer of Profits to Reserves) Rules 1975, before declaration or payment of dividend, profits shall be compulsorily transferred to reserves at the following rates:- Rate of proposed dividend % of  current profits to be transferred to Reserves <10% Nil 10% – 12.5% 2.5% 12.5% – 15% 5% 15% – 20% 7.5%	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. [First proviso to section 123(1)]Transfer of profits to reserves on declaration of dividend is no longer compulsory.
4.	Power of central government to permit declaration of dividend without providing depreciation.	The proviso (c) of Section 205(1) of the Act empowers the Central Government to waive in any particular case, the requirement of providing for depreciation.	No such provision.
5.	Prohibition on declaration of dividend by a company which has defaulted in payment of deposits	No such provision.	A company which fails to comply with the provisions of sections 73 (Prohibition on acceptance of deposits from public) and 74 (Repayment of deposits, etc., accepted before commencement of this Act) of the 2013 Act shall not, so long as such failure continues, declare any dividend on its equity shares. [Section 123(6)]
6.	Set off of losses before declaration of dividend	If the company has incurred any loss in any previous financial year or years, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of subsection (2) of section 205 or against both. [Clause (b) to first proviso to section 205(1)].	Rule 8.2 provides that no company shall declare dividend unless the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.
7.	Payment of dividend through electronic mode	Section 205(3) stipulates that no dividend shall be payable except in cash.  Section 205(5)(b) of the 1956 Act provides that the dividend payable in cash may be paid either by cheque or warrant.	Section 123(5) provides that no dividend shall be paid by a company in respect of any share there in except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash. The second proviso to section 123(5) provides 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. Payment of dividend through electronic mode to registered shareholder is expressly permitted. There was no corresponding provision in the 1956 Act.
8.	Declaration of interim dividend	Section 205(1a) of the 1956 Act provides that the Board of directors may declare interim dividend and the amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend.	Section 123(3) provides that 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 profits of the financial year in which such interim dividend is sought to be declared.  The proviso to section 123(3) provides 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 the immediately preceding three financial years.