‘Race against deadline’ for Companies eager to declare interim dividend

The companies suddenly seem to be in a rush to declare interim dividend. The driving reason behind this rush lies in the amendments inserted in the Finance Bill, 2016. Finance Bill, 2016, seems to have caught hold of the income which was getting taxed at a lower rate. As per the provisions of the Income Tax Act, 1961("IT Act"), dividend distributed by companies, are exempt in the hands of the shareholders by way of exemption under section 10(34) IT Act. Thus, companies are liable to pay distribution tax under section 115-O of the IT Act, at the rate of 17.304% (i.e. basic rate of 15% plus surcharge of 12% and cess of 3%). Through the Finance Bill 2016, a new section has been introduced (i.e. 115BBDA) to provide that, where the dividend is to be paid to resident individuals, HUFs and Firms then, there would be an additional tax at the rate of 10% in the hands of the investors. This step by the Hon'bl Finance Minister aims at taxing such portion of income which was getting escaped from the ambit of tax, in the hands of those investors, who are subjected to higher tax rate (i.e. 30%). The above amendment would be made effective from the Assessment Year 2017-18 (i.e. previous year 2016-17), hence the rush to declare the interim dividend. But, amidst all the rush, companies also have the host of regulatory compliance to adhere to, during the process of declaring interim dividend. Be it in terms of the Companies Act, 2013, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 or the Secretarial Standards; companies have to take due care of all the legal requirements. Hence, sensing the need of the hour, an attempt has been made to compile a comprehensive set of FAQs, with regard to interim dividend. The FAQs have been framed to act as "The one stop solution to the sudden rush for interim dividend".

Meaning of interim dividend 1. What is an interim dividend? Dividends which are paid by the board of directors between two annual general meetings without declaring them at an annual general meeting are called interim dividend. 2. Is interim dividend also "dividend" as defined in Section 2 (35) of the Act, 2013 ('Act, 2013')? The term "dividend"as defined in Section 2(35) of the Act, 2013 includes any interim dividend. Hence, the definition as provided under the Act, 2013 is an inclusive definition rather than an exhaustive one. Therefore, interim dividend is also a dividend as per the provisions of the Act, 2013. 3. Is interim dividend also "dividend" as defined in Section 2 (22) of the Income tax Act, 1961? Section 115-O (1) of the Income Tax Act, 1961 provides that companies in addition to their tax liability would be required to pay distribution tax where any dividend (whether interim or otherwise) is paid, distributed or declared by the company. Thus the term dividend includes interim dividend as well.

Legal provisions for declaration of interim dividend 4. What are the provisions of law pertaining to interim dividend? While declaring interim dividend the following provisions of law shall have to be taken into consideration: a) Provisions of theAct, 2013: Section 2(35), 24, 51, 70, 73, 74, 123, 126, 127, 128, 134(3)(k), the Companies (Declaration and Payment of Dividend) Rules, 2014 and Table- F; b) Provisions of the Act, 1956: 205A, 205B and 205C; and c) Articles of Association (AOA) of the company. 5. Who can declare an interim dividend? An interim dividend can be declared by the board of directors of a company at any time before the closure of the financial year. However, final dividend is declared by the shareholders of a company at its annual general meeting based on the recommendation of the board of directors of the company. 6. What are the sources for declaration of interim dividend? Section 123 of the Act, 2013 states that: "The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: xxx." [Emphasis Supplied]

Therefore, in line with the above, it is clear that there are basically two sourcesfor declaration of an interim dividend. They are: a) Current year's profit: Out of profits of the financial year in which such interim dividend is proposedto be declared - In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. b) Accumulated surplus lying to the credit of profit and loss account: Out of the profits of the company for any previous financial year or years remaining undistributed; 7. Can interim dividend be paid out of the free reserves? While going through the language of Section 123 (3) it seems that the board of directors has the power to declare interim dividend only either out of the surplus fund or out of current year's profit. Section 123 (3) do not permit declaration of interim dividend out of the free reserve. However, in case of inadequacy or absence of profits in any financial year, company may declare interim dividend by transferring the amount lying in free reserve account to the surplus account. In such case the compliance of Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 needs to be ensured.

8. Is the declaration of interim dividend by the Board a "declaration" or a mere advance payment? a) Properly speaking, dividend refers to distribution of profits of the company. The profits of the company are determined only when the financial statements are adopted by the company in general meeting. Therefore, the payment of the interim dividend is merely an advance payment in expectation of profits for the year. Therefore, the declaration of interim dividend is done in view of i. performance of the company for the quarters already completed; and ii. Likely performance for the quarters yet to be completed. b) Should it so happen that there are losses in the quarters remaining to be completed, and therefore, the aggregate profits of the company fall short of the dividend already declared, the Board shall be responsible to ensure that the interim dividend already paid by the board is retrieved. The board remains liable to make good any losses incurred by the company on this account. c) In this sense, interim dividend is merely "paid", it is not declared by the Board. However, Section 123 of the Act, 2013 and Section 205 of the 1956 Act, post Amendment Act, 2000, use the expression "declaration" in respect of interim dividend - which is inappropriate in our view. 9. Does interim dividend require declaration by the company in general meeting as well? a) In our view, declaration of dividend is the exclusive domain of the members in general meeting. The board recommends dividends; the general meeting declares the same. Therefore, even in case of interim dividend, the general meeting must declare it. b) Sometimes, there is an interim as well as a final dividend. In that case, the general meeting should declare both. Sometimes, the company may have an interim dividend, but not a final dividend; in that case, the general meeting may adopt the interim dividend as the final dividend.

10. Can the directors rescind the interim dividend once declared 10. Can the directors rescind the interim dividend once declared? While the Act, 2013 does not provide any express bar on the directors to rescind the decision of interim dividend once declared before the actual payment is done, however, the directors cannot be flip-flopping on the decision already made by them. Instead, they should bear utmost care while approving the resolution of the interim dividend. This has to be understood by the directors approving the agenda in question that declaration of interim dividend has significant impact on the prices of the shares of the company. In case the declaration is reverted, the same may lead to unusual change in the price of the shares. Also allowing the dividend once and then disallowing the same thereafter would be like playing with the sentiments of an investor which may lead to public displeasure. Also this is an established fact that the law should not be only adhered in letter but also in its spirit and the spirit of the law can never be to prejudice the shareholders.

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