Key Provisions Relating to Dividend Distribution in Companies

Dividend is often the first real connection students make between company law and personal finance – it is that small credit in a demat account that turns a share certificate into actual money. But before a company can put that money in your account, it has to walk through a fairly strict checklist under the Companies Act, 2013. Miss a step, and the company is not just breaking a rule; it is inviting penalties on itself and its officers. Let’s break down exactly what the law requires.

Where these rules come from 🔗

The provisions governing dividend are spread across Chapter VIII of the Companies Act, 2013 – specifically Sections 123 to 127, along with the Companies (Declaration and Payment of Dividend) Rules, 2014. Together, these sections cover everything from where the money for a dividend can come from, to how quickly it must reach shareholders, and what happens if it doesn’t. The full text of these sections is available on the Ministry of Corporate Affairs website, and it’s worth skimming at least once if you’re studying company law seriously.

It helps to remember that under Section 2(35), the term dividend legally includes interim dividend as well. So unless a provision says otherwise, whatever applies to a final dividend (declared at the AGM) generally applies to an interim dividend (declared by the board mid-year) too.

Authorisation by the articles of association 🔗

A company cannot simply decide one day to pay a dividend. The power to declare dividend, and the process for doing so, must be rooted in the company’s articles of association – the internal rulebook that governs how the company functions. In practice, the board of directors first recommends a dividend rate based on the year’s profits, and this recommendation is then approved by shareholders through an ordinary resolution at the annual general meeting. Once approved, the dividend becomes final, and interestingly, shareholders can approve a lower rate than what the board recommends, but never a higher one.

Where can the money come from? 🔗

Section 123(1) restricts the sources of dividend to three: current year’s profits after providing for depreciation, accumulated profits of previous years after depreciation, or money specifically provided by the Central or State Government for this purpose. A company cannot dip into unrealised or notional gains, such as those from asset revaluation, to fund a payout – this restriction exists precisely to prevent companies from distributing money that doesn’t actually exist in liquid, distributable form, as explained in this detailed breakdown of Section 123.

Depositing the dividend in a separate bank account 🔗

This is where the law starts getting very time-sensitive. Under Section 123(4), once a dividend – whether final or interim – is declared, the company must deposit the entire amount into a scheduled bank in a separate account within five days of the declaration. This isn’t optional paperwork; it’s a safeguard. It ensures the company actually sets aside the money rather than declaring a dividend on paper while continuing to use those funds for operations. As one analysis of the provision notes, a company cannot use the declared dividend amount even for the thirty-day window it has to make payment – the money has to sit untouched in this earmarked account.

There is a narrow exemption here: wholly government-owned companies that haven’t defaulted on filing financial statements are not required to comply with this specific sub-section, as clarified by an MCA notification from June 2015.

Dividend can only be paid in cash or by electronic transfer 🔗

Section 123(5) is unambiguous about the mode of payment: dividend must be paid only to the registered shareholder, or to their bank, and must be in cash. Here, “cash” doesn’t mean physical currency handed over – it includes payment by cheque, dividend warrant, or any RBI-approved electronic mode such as NEFT, RTGS, or ECS. What the section firmly rules out is payment in kind. A company cannot decide to pay shareholders in goods, services, or assets instead of money.

There is one carve-out worth knowing: this cash-only rule doesn’t stop a company from capitalising its profits or reserves to issue fully paid-up bonus shares, or to pay up any partly-paid amount on existing shares. Bonus shares are treated differently from a cash dividend payout.

The thirty-day payment deadline 🔗

Once declared, the dividend must actually reach shareholders within thirty days from the date of declaration. This obligation flows from Section 127, which also lays out the consequences if a company fails to meet it. If the company doesn’t pay within this window, every director who is knowingly a party to the default can face imprisonment of up to two years along with a fine, and the company itself becomes liable to pay interest at 18% per annum for the period of delay, as detailed in this overview of Sections 123 and 127.

That said, Section 127 also recognises genuine, non-fault situations where non-payment within thirty days isn’t treated as an offence – for instance, when a shareholder has given the company standing instructions that can’t be complied with, when there’s a dispute over who is entitled to the dividend, when the dividend has lawfully been adjusted against a debt the shareholder owes the company, or when the delay is caused by something outside the company’s control, like an operation of law.

What happens to dividends that go unpaid or unclaimed 🔗

Not every shareholder claims their dividend immediately – bank details might be outdated, or a shareholder might simply not have noticed the credit. Section 124 addresses exactly this scenario. If, after the thirty-day payment window closes, a dividend remains unpaid or unclaimed by a shareholder, the company must transfer that amount, within seven days of the expiry of the thirty-day period, into a special account called the Unpaid Dividend Account, opened with a scheduled bank. In effect, this means the money has to be shifted into this account within roughly 37 days of the original declaration, as confirmed in the official text of Section 124.

The company doesn’t just quietly move the money and forget about it. Within 90 days of making this transfer, it must prepare and publish a statement listing the names, last known addresses, and unclaimed dividend amounts of the concerned shareholders – usually on the company’s own website and the MCA’s website, as noted in this explanation of the Unpaid Dividend Account norms. This transparency requirement exists so shareholders can still track down and claim what’s owed to them.

The final stop: Investor Education and Protection Fund 🔗

If money sitting in the Unpaid Dividend Account remains unclaimed for seven consecutive years, Section 124(5) requires the company to transfer it to the Investor Education and Protection Fund (IEPF), a fund set up under Section 125 to promote investor awareness and protect investor interests. Along with the unpaid dividend, the corresponding shares also get transferred to the IEPF Authority under Section 124(6), although shareholders retain the right to claim these back later by following the prescribed procedure. It’s a good reminder for anyone holding old, forgotten shares to check whether any dividends or shares have quietly ended up in this fund.

A quick timeline view 🔗

Why the penalties matter 🔗

Company law rarely leaves compliance to goodwill alone, and dividend provisions are no exception. Non-compliance with Section 124 can attract monetary penalties on both the company and its defaulting officers, in addition to the imprisonment and interest liability under Section 127 for delayed payment. These aren’t token penalties – they’re designed to make sure companies treat shareholder money as exactly that: shareholder money, not working capital to be held back indefinitely. For students of company law, this is a good example of how the Act blends corporate flexibility (in deciding how much dividend to declare) with strict procedural discipline (in how quickly and safely that dividend must reach the people it belongs to).

What do you think? If you held shares in a company that consistently delayed dividend payments beyond thirty days, would the 18% interest compensation feel like adequate protection, or would you want stronger safeguards? And do you think the seven-year window before unclaimed dividends move to the IEPF is long enough for shareholders to notice and claim what’s theirs?

References

1. http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17507
2. https://ibclaw.in/section-123-of-the-companies-act-2013-declaration-of-dividend/
3. https://www.vjmglobal.com/blog/how-is-the-dividend-of-a-company-to-be-declared
4. https://corporatelawreporter.com/companies_act/section-123-of-companies-act-2013-declaration-of-dividend/
5. https://blog.ipleaders.in/section-123-of-companies-act-2013/
6. https://www.incometaxindia.gov.in/w/section-124-84
7. https://corpbiz.io/learning/unpaid-dividend-account/