Legal Provisions for Declaration and Payment of Dividend & IEPF | 12th HSC S.P. Chapter 10

The questions on Legal Provisions for Sources and Declaration of Dividend, Legal Provisions for Payment of Dividend, and Unpaid / Unclaimed Dividend & Investor Education and Protection Fund (IEPF) are the most important 4-mark brief questions from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 10: Dividend and Interest. In the HSC Board Examination, at least one of these statutory questions is regularly asked in Question 5 (Answer in Brief - 4 Marks), Question 3 (Case Study - 3 Marks), or Question 6 (Justify Statements - 4 Marks). Below are the complete, textbook-accurate solutions strictly aligned with the latest Balbharati Textbook.

Board Examiner Marking Scheme (4 Marks):
1. Meaning of Dividend & Governing Legal Section (Section 123 / 124): 1 Mark
2. Any 4 to 5 Statutory Provisions with Exact Timelines: 3 Marks
Topper's Tip: Memorizing the 5-Step Statutory Timeline Ladder (5 Days → 30 Days → +7 Days [37 Days] → 90 Days → 7 Years) guarantees full marks in both Case Studies (Q.3) and Brief Answers (Q.5)!

Quick Revision Chart: Statutory Timelines for Dividend (Sections 123 to 127)

Timeline	Statutory Action Required by the Company
Within 5 Days of Declaration	Deposit the total dividend amount in a Separate Bank Account in a Scheduled Bank.
Within 30 Days of Declaration	Pay dividend (or post Dividend Warrants / ECS / NEFT) to entitled shareholders.
Within 7 Days after 30 Days (i.e., Within 37 Days of Declaration)	Transfer any unpaid / unclaimed dividend to the "Unpaid Dividend Account" in a Scheduled Bank.
Within 90 Days of Transfer	Put up a statement on the company's website showing names, addresses, and unpaid amounts.
After 7 Consecutive Years	Transfer any amount still remaining unpaid in the Unpaid Dividend Account (along with underlying shares) to the Investor Education and Protection Fund (IEPF).

Part A: Legal Provisions for Sources and Declaration of Dividend [Section 123]

1. Meaning of Dividend

The term "Dividend" is derived from the Latin word "Dividendum", which means "that which is to be divided". It is that part of the annual net profits of the company which is distributed among its shareholders as a return on their investment in share capital.

2. Legal Provisions for Sources of Dividend [Section 123(1)]

A company may declare and pay dividend for any financial year out of the following three permissible sources:

Current Year's Profits: Out of the profits of the company of that financial year, arrived at after providing for depreciation and transferring a prescribed percentage to reserves.
Previous Years' Undistributed Profits (Free Reserves): Out of the profits of the company of any previous financial year(s) arrived at after providing for depreciation and remaining undistributed (i.e., out of Free Reserves).
Money Provided by Government: Out of money provided by the Central Government or State Government for the payment of dividend in pursuance of a guarantee given by that Government.

Key Prohibitions on Sources:
- Capital Profits: Dividend can be paid out of capital profits only if such capital profits are actually realized in cash, the Articles of Association permit such distribution, and it remains as profit after revaluation of all assets and liabilities.
- Cannot Be Paid Out of Capital: Dividend can never be paid out of Capital or out of Securities Premium Account / Capital Redemption Reserve Account / Revaluation Reserve.

3. Legal Provisions for Declaration of Dividend

Board Meeting (Recommendation): Dividend can be declared only on the recommendation of the Board of Directors. The Board passes a resolution regarding the rate of dividend, book closure date/record date, and date of the Annual General Meeting (AGM).
Shareholders' Approval at AGM (Ordinary Resolution): Dividend is formally declared by the Shareholders by passing an Ordinary Resolution at the Annual General Meeting (AGM).
- Restriction on Shareholders: Shareholders at the AGM can declare a rate of dividend lower than what is recommended by the Board, but they cannot declare a dividend at a rate higher than that recommended by the Board of Directors.
- Cannot Be Declared at EOGM: Once final dividend is declared at an AGM, a company is not permitted to declare it a second time in that year at an Extra-ordinary General Meeting (EOGM).
Cannot Be Revoked: Once a dividend is validly declared at the AGM, it becomes a statutory debt against the company and cannot be revoked (cancelled) generally.
Separate Bank Account (Within 5 Days): The company must deposit the total dividend amount in a separate account opened in a Scheduled Bank called the "Dividend Account" within 5 days of its declaration.
Intimation to Stock Exchange: A listed company must notify the Stock Exchange where its securities are listed at least 2 working days in advance of the Board Meeting in which the declaration of dividend is to be considered.
Prohibition on Declaration of Dividend: A company that has failed to comply with Sections 73 and 74 (i.e., defaulted in repayment of Public Deposits or interest thereon) cannot declare any dividend on its equity shares until such default is made good.

Part B: Legal Provisions for Payment of Dividend [Sections 123 & 127]

Once dividend is declared, the company has to follow these strict statutory provisions for its payment:

Payable Only in Cash: Dividend must be paid only in cash and not in kind (e.g., goods or gifts). It may be paid by Cheque, Dividend Warrant, or by any Electronic Mode (ECS, NEFT, RTGS) directly to the shareholder's bank account.
Paid Only to Registered Shareholders: Dividend shall be paid only to the registered shareholder of such share, or to his order, or to his banker (or to the Beneficial Owner as per the statement provided by the Depository for Demat shares).
Paid Only on Paid-up Value [Section 51]: In the case of partly paid-up shares, dividend is payable in proportion to the amount actually paid-up on each share (if authorized by the Articles of Association).
Time Limit for Payment (Within 30 Days): It is obligatory for the company to pay the dividend or post the Dividend Warrants within 30 days from the date of declaration of dividend.
Penalty for Default in Payment [Section 127]: If the company fails to pay the declared dividend within 30 days of declaration:
- Every Director who is knowingly a party to the default is punishable with imprisonment up to 2 years and a fine of not less than Rs. 1,000/- per day for every day during which the default continues.
- The company shall be liable to pay simple interest at the rate of 18% per annum during the period for which the default continues.

Part C: Unpaid / Unclaimed Dividend & Investor Education and Protection Fund (IEPF) [Sections 124 & 125]

1. Unpaid / Unclaimed Dividend Account [Section 124]

The dividend declared by the company which has not been paid by the company or claimed by the entitled shareholder within 30 days of its declaration is termed as "Unpaid and Unclaimed Dividend". The company has to follow these rules:

Transfer to Unpaid Dividend Account (Within 7 Days / 37 Days): The total amount of dividend which remains unpaid or unclaimed at the end of 30 days must be transferred by the company to a special bank account opened in a Scheduled Bank called the "Unpaid Dividend Account" within 7 days from the date of expiry of the 30-day period. In other words, this transfer must happen within 37 days (30 + 7 days) from the declaration of dividend.
Website Statement (Within 90 Days): Within 90 days of transferring the amount to the Unpaid Dividend Account, the company is required to put up on its website (or any website approved by the Central Govt.) a statement showing the names, last known addresses, and the unpaid dividend amount payable to each person.
Interest for Delay (12% p.a.): If the company defaults in transferring the amount to the Unpaid Dividend Account within 7 days, it must pay interest on the defaulted amount at the rate of 12% per annum from the date of default.
Claim by Shareholder: Any claimant to the Unpaid Dividend Account may apply to the company for payment of the money claimed by him during the 7-year period.

2. Transfer to Investor Education and Protection Fund (IEPF) [Section 125]

Transfer After 7 Years: Any money transferred to the "Unpaid Dividend Account" of a company which remains unpaid or unclaimed for a period of 7 (seven) consecutive years from the date of such transfer shall be transferred by the company to the "Investor Education and Protection Fund" (IEPF) established by the Central Government.
Transfer of Underlying Shares Also: Along with the unpaid dividend, all shares in respect of which dividend has not been paid or claimed for 7 consecutive years or more shall also be transferred by the company in the name of the IEPF.
Refund from IEPF: Any claimant of the transferred money or shares remains entitled to reclaim the shares and unclaimed dividend from the IEPF Authority by submitting an online application in the prescribed form along with necessary documents.
Utilization of IEPF Funds: The IEPF is utilized by the Central Government for promoting investor awareness, education, and protection, as well as refunding unclaimed dividends, matured deposits, and matured debentures to rightful claimants.

Quick Memory Trick to Remember the Statutory Numbers

Memory Shortcut (Chapter 10 Number Ladder — "5 → 30 → 37 → 90 → 7"):
• 5 Days: Deposit dividend in a Separate Bank Account
• 30 Days: Pay dividend to shareholders (Default Penalty: 18% p.a. interest + Rs. 1,000/day fine)
• +7 Days (37 Days): Transfer unpaid dividend to "Unpaid Dividend Account" (Default Interest: 12% p.a.)
• 90 Days: Upload statement of unpaid dividend on Company Website
• 7 Years: Transfer unpaid dividend & shares to IEPF