Section 123 of CA 2013 : Section 123: Declaration Of Dividend

Explanation using Example

Imagine XYZ Pvt. Ltd. had a profitable year in 2022 and wishes to declare a dividend in 2023. According to Section 123 of The Companies Act, 2013, the company must first calculate its profits after accounting for depreciation as per Schedule II. Let's say the profit after depreciation is $100,000. The company decides to transfer $20,000 to its reserves and declares a dividend from the remaining $80,000.

However, XYZ Pvt. Ltd. also had an unprovided depreciation from 2021 of $5,000. Before declaring the 2023 dividend, the company must set off this amount against the current year's profits. Therefore, the available profit for dividend distribution is now $75,000.

If XYZ Pvt. Ltd. wants to declare an interim dividend before the annual general meeting, it can only do so from the profits of the current financial year or the surplus in the profit and loss account. Also, if the company incurred a loss in the quarter before declaring the interim dividend, it cannot declare an interim dividend higher than the average of the last three years' dividends.

Once the dividend is declared, the company must deposit the dividend amount into a separate scheduled bank account within five days. Dividend payments to shareholders must be in cash, unless it involves issuing bonus shares or paying unpaid amounts on existing shares.

If XYZ Pvt. Ltd. has not complied with certain sections related to accepting deposits from the public (sections 73 and 74), it is prohibited from declaring any dividend on its equity shares until it rectifies the non-compliance.