Declaration and Payment of Dividend under the Companies Act, 2013

Introduction 

Dividend is the share of profits distributed by a company to its shareholders in proportion to their shareholding. Under the Companies Act, 2013, the declaration and payment of dividend is governed by Sections 123, 124, and 127, which together prescribe the permissible sources for declaration, the procedure for handling unclaimed dividends, and the penal consequences for default. The framework ensures that dividends are paid only from legitimately earned profits and that directors are personally accountable for deliberate non-payment.

Section 123 — Declaration of Dividend 

• A company may declare or pay dividend only from the following sources: profits of the current financial year after providing for depreciation as per Schedule II; undistributed profits of previous financial years similarly computed; both of the above; or money provided by the Central or State Government pursuant to a guarantee. Unrealised gains, notional gains, revaluation of assets, and fair value adjustments are expressly excluded from profit computation for this purpose. 
• Before declaring a dividend, a company may transfer any portion of its profits to reserves — this is discretionary, not mandatory. Where a company proposes to declare dividend from accumulated profits transferred to free reserves due to inadequacy of current profits, it must follow prescribed rules. No dividend may be declared from any reserves other than free reserves. Further, carried-over losses and depreciation not provided in previous years must be set off against current year profits before any dividend is declared. 
• The Board of Directors may declare interim dividend during the financial year or between closure of the financial year and the AGM, out of surplus in the profit and loss account or profits of the relevant period. Where the company has incurred a loss during the current financial year up to the quarter preceding declaration, interim dividend cannot be declared at a rate exceeding the average of dividends declared in the immediately preceding three financial years. 
• The dividend amount must be deposited in a separate scheduled bank account within five days of declaration, and must be paid only to the registered shareholder — by cheque, warrant, or electronic mode.

Section 124 — Unpaid Dividend Account 

• Where a declared dividend remains unpaid or unclaimed for thirty days from the date of declaration, the company must, within seven days of the expiry of that period, transfer the total unpaid amount to a special account in a scheduled bank called the Unpaid Dividend Account. 
• Within ninety days of such transfer, the company must prepare and publish a statement containing the names, last known addresses, and amounts due to each unclaiming shareholder — on its own website and any other website approved by the Central Government. Any person entitled to the money may apply to the company for its payment. 
• If default is made in transferring amounts to the Unpaid Dividend Account, the company must pay interest at 12% per annum from the date of default, which accrues to the benefit of the members in proportion to unpaid amounts. 
• Money remaining unpaid or unclaimed in the Unpaid Dividend Account for seven years is transferred — along with accrued interest — to the Investor Education and Protection Fund (IEPF). Correspondingly, shares in respect of which dividend has not been paid or claimed for seven consecutive years or more are also transferred to the IEPF. Claimants may recover such shares from the IEPF through the prescribed procedure. Notably, if dividend is paid or claimed even once during the seven-year period, the shares are not transferred to the IEPF. 
• For non-compliance with Section 124, the company faces a penalty of ₹1 lakh, with a further ₹500 per day for continuing default, up to ₹10 lakh. Each defaulting officer is liable to ₹25,000, with ₹100 per day for continuation, up to ₹2 lakh.

Section 127 — Punishment for Failure to Distribute Dividends 

• Where a declared dividend is not paid — or the warrant is not posted — within thirty days of declaration, every director knowingly a party to the default is punishable with imprisonment up to two years and a fine of not less than ₹1,000 per day of continuing default. The company is additionally liable to pay simple interest at 18% per annum for the period of default. 
• However, no offence is deemed committed where: dividend could not be paid due to operation of law; the shareholder's own payment directions could not be complied with and this was communicated to them; there is a dispute regarding the right to receive dividend; the dividend was lawfully adjusted against a sum owed by the shareholder to the company; or the failure was not due to any default on the part of the company.

Key Timelines at a Glance 

Conclusion 

Sections 123, 124, and 127 of the Companies Act, 2013 form a cohesive framework governing dividend distribution — from permissible sources and conditions for declaration, to the safeguarding of unclaimed amounts and personal criminal liability for directors. The provisions reflect a clear legislative intent: once declared, a dividend is an indefeasible obligation toward shareholders, and any deliberate default attracts serious legal consequence.