[The following guest post is contributed by Pavit Singh Kochar, a legal associate (corporate) with KNM & Partners Law Offices, New Delhi]
The term “dividend” has been defined under section 2(35) of the Companies Act, 2013 (“Act”), and it includes interim dividend.
Dividend is a return on the investment of shareholders in companies payable for a financial year after the final accounts are settled and the amount of distributable profits are available. Dividend is payable by a public/private company only when the balance sheet and profit and loss account are presented to the shareholders at the annual general meeting (“AGM”), and the shareholders after a consideration of the amount recommended by the directors approve the same or such lesser amount as may appear to them to be reasonable and proper. It is thus the prerogative of the board of directors to recommend the amount of dividend to be distributed and the right of the shareholders at the AGM to approve the recommended rate of dividend or lower the same, but in no case increase the amount. There may be situations when the board of directors pay dividend at their discretion where the company’s profits warrant such payment before the holding of the AGM. The former concept is called “final dividend” and latter as “interim dividend”.
As a statutory obligation, no dividend can be declared or paid by a company except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of the Act or out of the profits of the company for any previous financial year(s) arrived at after providing depreciation.
The distinction between interim and final dividend is that unlike interim dividend, a final dividend once declared by the company is a debt and creates an enforceable obligation. A mere resolution declaring an interim dividend does not create any liability and may be rescinded at any time before actual payment.
Right to waive dividend by shareholders
There may be situations when a company would like to distribute profits to its shareholders in the form of dividends and shareholders of the company would like to waive their right of share in the company profits. Dividend waivers may be exercised by the shareholders to be remunerated via large dividends in successive years or the waived dividends can be utilized in day-to-day affairs of the company for the ultimate benefit of the shareholders. Presently, there is no legislation in India which deals with such a scenario. However, certain companies like Sun Pharmaceutical Industries Limited (“Sun Pharma”) have exercised the option of dividend waivers. The form of communication for waiving right to receive dividend by Sun Pharma is available here.
A dividend waiver is considered to be a gratuitous act and should be executed without in return for anything. The Articles of Association of the company must contain a clause in regard to this where the shareholder has the right to waive the right to receive dividend, either final or interim, to which it is entitled, on some or all the shares held in the company. Now, the question arises as to when can a shareholder exercise his right to waive dividend in case of final or interim dividends.
In the case of interim dividend, right to claim dividend will only arise once it has been declared by the board of directors of the company. Normally the directors have authority to pay an interim dividend without reference to the shareholders. If the directors resolve to pay an interim dividend, that resolution gives no rights to the shareholders. An interim dividend is of no effect until the money is actually paid to the shareholders. Hence, shareholders of the company can waive their right to receive dividend once the same is declared by the company. In case of final dividend, board of directors recommend the payment of dividend after complying with the statutory provisions, and the same is then approved by the shareholders of the company at the AGM. Hence, shareholders of the company can waive their right to receive dividend once the same is proposed by the board of directors of the company but before it is declared. The difference between the two waivers exercised at different point of time is because in case of unclaimed interim dividend, which has been declared, creates no debt or liability upon the company but such is not the case when it comes to declared unclaimed final dividend. An important point to note is that the dividend waiver must be formally executed and signed by all the shareholders who wish to waive their share of dividend and waiver provisions should have mention in the Articles of Association of the company for shareholders who want to waive the right to receive dividends in respect of any financial year as mentioned above.
- Pavit Singh Kochar