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Rules for Declaring Dividend by Private Limited Company

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Rules for Declaring Dividend by Private Limited Company

Dividend is a shareholder's share in the profits of a company. As per Section 2(35) of Companies Act, 2013 dividend includes any interim dividend. A company can use both of its revenue as well as capital profits to distribute dividend. As per sub-section  (1) of Section 123 dividend can be distributed from out of profits of current year provided depreciation has been charged.

It can also be distributed out of profits of previous years but only after deducting accumulated depreciation of previous years. It can also be paid out of money received from Central or State Government against guarantee given. As per sub-section (4) of the Section a company is required to deposit the amount of dividend in a separate account at a scheduled bank within 5 days of date of declaration of dividend.

Dividend out of accumulated profits

Where a company wants to declare dividend in year but has inadequate profits then it can distribute them out of accumulated profits and free reserves provided it follows the rules prescribed by Ministry of Corporate Affairs. As per Companies (Declaration and Payment of Dividend) Rules, 2014 a company shall not declare dividend at a rate higher than the average rate of dividend declared in the 3 preceding financial years.

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However, this is not applicable to the company that declares dividend for the first time. Secondly, amount exceeding one-tenth of the total of paid-up share capital and free reserves cannot be withdrawn from the company's accumulated profits.

The amount so withdrawn shall first be used to set off loss of the previous year in which dividend is declared. However, the balance of reserves should not fall below 15% of the paid-up share capital after such withdrawal.

The Companies Act strictly enshrines that a company shall only declare dividend if its accumulated depreciation and losses are set off against the profits of current year.

Section 123(6) of the Act specifically prohibits a company to declare dividends on equity shares if it fails to comply with the Sections 73 and 74 of the Act. It shall not do so until the failure continues.

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