In case of absence or inadequacy of profits, dividend can be declared out of the accumulated profits earned by the company in the previous years and transferred by it to reserves. Such declaration should be in accordance with the rules prescribed in this regard by the Government. If such a declaration does not conform to the rules, the declaration of dividend will require the previous approval of the Government. Under these rules dividend can be declared from amounts drawn from reserves (that is free reserves only and not from any specific reserves) in case of absence or inadequacy of profits subject to the following conditions:
- the rate of dividend declared shall not exceed the average of the rates of dividend declared by it during the immediately preceding last five years or 10% of the paid-up capital, whichever is less
- the amount to be drawn shall not exceed 10% of its paid-up capital and free reserves and the amount so drawn should be first utilized to set off the losses incurred in the financial years before any dividend in respect of preference as equity shares is declared
- the balance of reserves after such drawal shall not fall below 15% of the paid-up share capital
It should be notes that this rule will not apply to declaration of dividend out of the profits/surplus carried forward to the Balance Sheet by a company. It will apply only to declaration of dividend out of the profits of the previous years transferred to the reserves.
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