Declaration and Payment of Dividend
1. No dividend shall be declared or paid by a company for any financial year except—
a. out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2 ), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both; or
b. out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government:
Provided that: a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company:
Provided further that: where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf:
Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves.
2. For the purposes of clause (a ) of sub-section (1 ), depreciation shall be provided in accordance with the provisions of Schedule II.
3. 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:
Provided that: 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.
4. The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.
5. No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash:
Provided that: nothing in this sub-section shall be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company:
Provided further that: any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.
6. A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares.
Legal Commentary & Landmark Judgments: Section 123
Section 123 regulates the declaration and payment of dividends, establishing statutory profit calculations, mandatory depreciation deductions, and restrictions on dividend distribution during deposit defaults.
This statutory framework establishes clear operational guidelines, balancing legal compliance with procedural safeguards.
Section 123 protects corporate solvency and creditor security. Once declared at an AGM, a dividend becomes an irrevocable corporate debt that must be paid within thirty days under Section 127. Corporate boards declaring interim dividends must verify that profits are available up to the quarter preceding the declaration; if losses occur in the current year, interim dividends cannot exceed the average dividend rate of the preceding three years.