Answer the following questions.
(1) Define Dividend and explain its features.
Ans. Meaning and Definitions of Dividend:
(1) The term dividend is derived from Latin word ‘Dividendum’ which means ‘to be divided’.
(1) Dividend refers to that portion of profit, which is distributed amongst the shareholders of the company.
(2) The Institute of Chartered Accountants of India has defined Dividend as, “a distribution to shareholders out of profits or reserves available for this purpose.”
(3) The Supreme Court has defined it as, “In case of going-concern, it means portion of profits of a company, which is allotted to the holders of shares in a company.”
Features of dividend are as follows:
(1) It is the portion of profits of the company paid to its shareholders.
(2) Dividend cannot be declared out of capital. It is payable out of the profits of the company.
(3) Dividend can be declared only on recommendation of the Board of Directors.
(4) Dividend recommended by Board of Directors is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
(5) Dividend must be paid in cash and not in kind. Dividend is to be paid on paid-up value of shares and cannot be paid on calls paid in advance. (6) Dividend once approved and declared by shareholders creates a debt. It cannot be revoked (cancelled).
(7) Dividend is an unconditional payment made by the company.
(8) Company can pay dividend only to only equity and preference shareholders.
(9) If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern rights of shareholders about receiving the dividend.
(10) Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
(2) What is Interest? Explain its features.
Ans. Meaning and Definition of Interest:
(1) In simple meaning interest is a payment made by a borrower to the lender for the money borrowed and is expressed as a rate percent per year.
(2) It is usually expressed as an annual rate in terms of money and is calculated on the principal of the loan.
(3) Company has to pay interest if it has borrowed money from creditors like Debentures holders, Depositors, Bond holders, etc. (4) It can be defined as, “interest is the payment made by borrower for the use of a loan.”
Features of interest are as follows:
(1) Interest is the price paid for the productive services rendered by capital.
(2) It is directly related to risk. Higher the risk, higher is the interest.
(3) Rate of Interest is expressed as annual percentage of Principal.
(4) Rate of interest is determined by various factors like money supply, fiscal policy, volume of borrowings, rate of inflation etc.
(5) It is payable at a fixed and generally predetermined rate.
(6) Interest is charged against the profit of the company. Even if company makes no profit, interest should be paid.
(7) The amount of interest paid depends on the terms of the loan, worked out between the lender and the borrower. (8) Interest can be calculated as simple interest and compound interest:
• Simple interest is calculated only on the principal amount of the loan.
• Compound interest is calculated on the principal and on interest earned.
(3) Discuss legal provisions for declaration of dividend.
Ans. Dividend refers to that portion of profit, which is distributed amongst the shareholders of the company. Legal Provisions for declaration of Dividend are as follows:
(1)Board Meeting: -Dividend can be declared only on recommendation of Board of Directors at the Annual General Meeting (AGM).
– Board Meeting should be called to pass resolution about:
• Approving the annual accounts (balance sheet and profit and loss account of the company for the year ended),
• Recommending the final amount of dividend,
• Determining the date of book closure • Fixing the Day, Date, Time and Venue of AGM,
• Approving the notice of AGM,
• Authorizing the Company Secretary/Director to issue the notice of AGM.
(2) Shareholders’ Approval: – Dividend is approved by shareholders by passing an Ordinary Resolution at the Annual General Meeting.
– Shareholders can declare dividend at lower rate than what is recommended by the Board but not higher than that.
– Once the dividend is declared at the General meeting it cannot be revoked.
– The company cannot declare further dividend after declaration of dividend at Annual General Meeting. In other words, company cannot declare it second time in that year.
(3) Separate Bank Account: – The Company must deposit the dividend amount within five (5) days of its declaration in a separate bank account opened in a scheduled bank called as “Dividend Account’.
– In case of listed company, it has to express the dividend on per share basis only. It must use electronic mode for payment of dividend such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved by the Reserve Bank of India (RBI).
(4) Prohibition to Pay Dividend: — A company cannot declare any dividend on its equity shares, if it has failed to repay deposit or any interest on deposit. –
– A company cannot declared dividend if company has defaulted on:
– Redemption of Debentures or payment of interest,
– Redemption of Preference shares,
– Payment of interest to financial institution, etc.
(4) Explain Interim Dividend.
Ans. Meaning of Interim Dividend:
(1) Interim dividend is the dividend which is declared between two annual general meetings of a company.
(2) Interim dividend is declared when the company makes good profit in the first half of the financial year, i.e. declared before the end of the financial year.
(3) Opinion of the company’s Auditors should be taken before declaring Interim Dividend. Features of Interim Dividend are as follows:
(1) Interim dividend is declared by the Board by passing a resolution.
(2) Articles of Association of the company must authorize the Board of Directors to declare Interim Dividend.
(3) Interim Dividend is only a payment on account of the whole dividend for the year.
(4) Company should provide depreciation for the entire year and not proportionately for a part of the year before declaring Interim Dividend.
(5) Interim dividend cannot be paid out of any reserves. It can be paid out of company’s profit.
(6) The amount to be given as Interim Dividend must be credited in a separate Bank account in a scheduled bank within 5 (five) days of its declaration.
(7) Interim Dividend should be paid within 30 days of its declaration.
(8) Unpaid / Unclaimed Interim Dividend should be transferred to ‘Unpaid Dividend Account within 7 days of the expiry of 30 days of declaration i.e. 37 days its declaration.
(9) Any amount remaining unpaid/Unclaimed in the unpaid Dividend A/c for 7 (Seven) years should be transferred to IEPF.