Class 12 Secretarial Practice Chapter 10: Dividend and Interest

Key concepts: Dividend and Interest

Dividend

The part of a company's profits that is distributed among its shareholders, equity and preference. It is paid only after it is formally declared, and once declared it becomes a debt that cannot be revoked.

Final dividend

Recommended by the Board of Directors and declared by shareholders through an ordinary resolution at the Annual General Meeting, after the accounts of the year are finalised.

Interim dividend

Dividend declared by the Board between two AGMs, before the annual accounts are finalised. The Articles must permit it and it cannot be paid out of reserves.

Unpaid and unclaimed dividend

Dividend not paid or claimed within 30 days of declaration. It goes to an Unpaid Dividend Account, and after 7 years to the Investors Education and Protection Fund (IEPF).

Dividend warrant and dividend mandate

A warrant is a dividend cheque posted to the shareholder. A mandate is a request in the prescribed form asking the company to credit dividend directly to the shareholder's bank account.

Book closure and record date

Book closure is the period when the company does not process share transfers or changes in the Register. The record date is the cut-off for deciding who gets dividend and bonus shares.

Interest

The price paid for using another person's money. A company pays it to creditors such as debenture holders and depositors at a fixed rate, even if it makes no profit, and it is a charge against profit.

Dividend versus interest

Dividend goes to owners (shareholders), is paid only out of profits at a varying rate and is an appropriation of profit. Interest goes to creditors, is compulsory at a fixed rate and is a charge on profit.

Quick revision: important points

• Dividend cannot be paid out of capital; it can come from current profits, past profits, free reserves or Government money.
• Dividend goes into a separate bank account within 5 days and must be paid within 30 days of declaration.
• Unpaid dividend goes to the Unpaid Dividend Account within 37 days (30 + 7); after 7 years to the IEPF.
• Default in paying dividend: directors punished and simple interest of 18% p.a. payable during the default.
• Listed company: notify the exchange 2 days before the Board meeting and give 7 working days' notice of book closure.
• Interim dividend: declared by the Board only, Articles must authorise it, and it cannot be paid from reserves.

Practice MCQs with answers

1. Dividend is best described as

   1. Money borrowed by the company from creditors
   2. A fee paid to the Registrar of Companies
   3. The part of company profits distributed among its shareholders
   4. The amount collected from shareholders as calls
   Show answer

   Answer: C. The part of company profits distributed among its shareholders
   A dividend is a share in the distributable profits of the company, paid to shareholders once it is declared.

2. The word dividend comes from the Latin word Dividendum, which means

   1. That which is to be divided
   2. That which is to be borrowed
   3. That which is to be saved
   4. That which is to be redeemed
   Show answer

   Answer: A. That which is to be divided
   Dividendum means that which is to be divided, that is, the profit shared among shareholders.

3. Dividend can be declared only on the recommendation of the

   1. Company Secretary
   2. Board of Directors
   3. Debenture holders
   4. Auditors
   Show answer

   Answer: B. Board of Directors
   The Board of Directors recommends the rate and amount, and shareholders approve it at the AGM.

4. A final dividend is declared by

   1. The Board of Directors alone
   2. The Company Secretary
   3. The debenture trustees
   4. The shareholders at the AGM through an ordinary resolution
   Show answer

   Answer: D. The shareholders at the AGM through an ordinary resolution
   The Board only recommends; the shareholders approve and declare the final dividend at the Annual General Meeting.

5. At the AGM, shareholders may approve a dividend rate that is

   1. Lower than or equal to the rate recommended by the Board, but not higher
   2. Higher than the Board's recommendation
   3. Any rate they wish
   4. Fixed by the Registrar of Companies
   Show answer

   Answer: A. Lower than or equal to the rate recommended by the Board, but not higher
   Shareholders can reduce the recommended dividend but cannot increase it.

All Class 12 Secretarial Practice chapters

• Chapter 1: Introduction to Corporate Finance
• Chapter 2: Sources of Corporate Finance
• Chapter 3: Issue of Shares
• Chapter 4: Issue of Debentures
• Chapter 5: Deposits
• Chapter 6: Correspondence with Members
• Chapter 7: Correspondence with Debentureholders
• Chapter 8: Correspondence with Depositors
• Chapter 9: Depository System
• Chapter 10: Dividend and Interest
• Chapter 11: Financial Market
• Chapter 12: Stock Exchange

Class 12 Secretarial Practice notes: all chapters