Dividends and the prohibition on buy-back

1. Meaning of dividend

A dividend is the portion of the company's profits distributed among its members in proportion to their shareholding. The Act says only that “dividend” includes interim dividend (section 2(35)). A shareholder has no right to a dividend until it is declared; once declared, it becomes a debt due from the company. Dividend may be paid in proportion to the amount paid up on each share if the articles so provide (section 51).

2. Sources of dividend: section 123(1)

No dividend shall be declared or paid for any financial year except:

• out of the profits of that year, arrived at after providing for depreciation under Schedule II;
• out of the undistributed profits of previous years, after providing for depreciation; or out of both; or
• out of money provided by the Central or a State Government for payment of dividend under a guarantee.

Further conditions:

• Unrealised gains, notional gains, revaluation of assets and fair value changes are excluded from profits available for dividend (added in 2018).
• The company may transfer such percentage of profits as it thinks fit to reserves before declaring dividend.
• Where profits are inadequate and the company proposes to pay out of accumulated profits transferred to free reserves, it must follow the rules; no dividend may be paid from reserves other than free reserves.
• Carried-over previous losses and unprovided depreciation must first be set off against current profits (proviso inserted in 2015).
• A company in default in repaying deposits under sections 73 and 74 cannot declare dividend on equity shares while the default continues (section 123(6)).

The rule against paying dividend out of capital is old. In Flitcroft's Case (1882) directors who paid dividends out of capital, on the basis of false accounts, were made personally liable to replace the money.

3. Interim and final dividend

• Final dividend is declared by the members at the annual general meeting on the Board's recommendation; under Table F the meeting cannot declare more than the Board recommends.
• Interim dividend is declared by the Board during the financial year, or between its close and the AGM, out of the surplus in the profit and loss account or profits of the year (section 123(3)). If the company has incurred a loss up to the end of the preceding quarter, the rate cannot exceed the average of the three preceding years.

4. Payment

• The amount must be deposited in a separate account in a scheduled bank within five days of declaration (section 123(4)).
• Dividend is payable only to the registered shareholder, his order or his banker, and only in cash (including cheque, warrant or electronic mode); capitalisation of profits for bonus shares is not prohibited (section 123(5)).
• It must be paid, or the warrant posted, within thirty days of declaration. Otherwise every director knowingly a party is punishable with imprisonment up to two years and fine of at least one thousand rupees a day, and the company pays simple interest at eighteen per cent (section 127). It is not an offence where payment was prevented by law, the shareholder's directions could not be complied with, there was a dispute about the right to receive it, it was lawfully adjusted against a sum due from the shareholder, or the failure was not due to the company's default.

5. Unpaid dividend and IEPF

Dividend not paid or claimed within thirty days must be transferred, within seven days after that, to an Unpaid Dividend Account in a scheduled bank (section 124(1)). Money remaining unpaid or unclaimed there for seven years is transferred to the Investor Education and Protection Fund (section 124(5)), and so are the shares on which dividend has been unpaid or unclaimed for seven consecutive years (section 124(6)). The shareholder can reclaim both from the Fund (section 125).

6. The prohibition: a company cannot buy its own shares

In Trevor v. Whitworth (House of Lords, 1887) a company bought its own shares from a member; on winding up, the member's executors claimed the unpaid price. The claim failed: a company buying its own shares reduces its capital without the safeguards the law requires, and the purchase was ultra vires. The rule is now section 67(1): no company limited by shares or by guarantee with a share capital may buy its own shares unless the resulting reduction is effected under the Act. Section 67(2) further forbids a public company to give financial assistance, by loan, guarantee, security or otherwise, for the purchase of its own or its holding company's shares, except lending by a banking company in the ordinary course, an approved scheme for employees, and loans to employees (not directors or key managerial personnel) up to six months' salary.

7. Buy-back: sections 68 to 70

The exception is buy-back under section 68. A company may buy its own shares or specified securities out of free reserves, the securities premium account, or the proceeds of a fresh issue (but not of an earlier issue of the same kind). Conditions:

• authorised by the articles;
• a special resolution, except that the Board may authorise a buy-back of up to ten per cent of paid-up equity capital and free reserves;
• not more than twenty-five per cent of paid-up capital and free reserves (for equity, twenty-five per cent of paid-up equity capital in that year);
• debt after buy-back not more than twice the paid-up capital and free reserves;
• shares fully paid; listed securities bought under SEBI regulations;
• no buy-back offer within one year of the close of the previous offer;
• completion within one year of the resolution; a declaration of solvency by the directors; the shares bought back extinguished and physically destroyed within seven days; and no fresh issue of the same kind for six months, except bonus issues and conversions.

Where shares are bought out of free reserves or premium, a sum equal to their nominal value goes to the capital redemption reserve account (section 69). Under section 70 no buy-back may be made through a subsidiary or an investment company, or while the company is in default in repaying deposits, debentures, preference shares, dividends or term loans (unless the default has been remedied and three years have passed), or if it has not complied with the provisions on annual returns, dividends and financial statements (sections 92, 123, 127, 129).

How this is examined

June 2025 set a short note on “dividend”; the syllabus also names the “prohibition of buy back”, set as a short note or with a problem where a company buys shares from a member. For dividend: definition, the sources in section 123(1), interim and final, the five-day and thirty-day rules with section 127, and the Unpaid Dividend Account. For buy-back: begin with Trevor v. Whitworth and section 67, then the section 68 conditions with their numbers, and section 70.