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Payment of dividend out of reserves

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Payment of dividend out of reserves  

Section 205A(3) of the Companies Act, 1956 read with the Companies (Declaration of Dividend out of Reserves) Rules, 1975 deals with the power of a company to declare dividend out of reserves.

In case of inadequacy or in the absence of profits in any year, if any company proposes to declare dividend out of the accumulated profits earned by the company in any previous years and transferred by it to the reserves, such declaration or dividend shall be made in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975. The company must observe the following conditions in such case:—

(i) There is either absence or inadequacy of profits in the year for which dividend is proposed to be declared.

(ii) 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 10% of its paid-up capital, whichever is less.

(iii) The total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to 1/10th 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 are declared.

(iv) The balance of reserves after such drawal shall not fall below 15% of its paid-up share capital.

"Profits earned by a company in previous years and transferred by it to the reserves" shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared. In computation of the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve at the expiry of the period specified under the Income-tax Act, 1961 shall be included and all items of Capital Reserves including reserves created by revaluation of assets shall be excluded.

Where, the declaration of dividend out of reserves is not in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975, previous approval of the Central Government has to be obtained by the company. (See Chapter 1 of Part 18 for specimen of application and relevant Rules)

Section 205A(8) of the Companies Act contains penalty provisions in case of failure to comply with any of the requirements of section 205A. Accordingly, the company and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees for every day during which the failure continues.

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 mukesh nayar November 18, 2012
A private limited company holding authorised capital of Rs.1Lac(10000 shares of Rs.10 each) earning profit every year is holding Rs.50Lac in it's Reserve and Surplus account in the balance sheet and wants to declare dividend Rs.500 on each share.Before paying the dividend to shareholders under which provision the company will seek permission from ROC and thereafter which forms will be submitted to ROC.
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