TYPES OF DIVIDEND

FINAL DIVIDEND
The Board of Directors in its report recommends final dividend to the shareholders, as per the requirements of the Articles of Association and Companies Act that are attached to the balance sheet for the relevant financial year. The shareholders at the annual general meeting declare it. Usually Articles of Association of companies provide that the shareholders cannot increase the rate or amount of dividend than the one recommended by the Board. The shareholders may, however, declare the payment of dividend on equity shares at a rate lower than the one recommended by the directors in their report.

It is the discretion of the Board of Directors to recommend or not to recommend the declaration of final dividend that has to be exercised in good faith in the interest of the company. The shareholders have no power to declare final dividend in the absence of a recommendation of the Board of Directors in this regard.

INTERIM DIVIDEND
The Board of Directors may declare interim dividend. The interim dividend is paid between two annual general meetings of the company.

A company can normally estimate its profits for the current financial year on a fairly reasonable basis and in that event it can allocate to the reserves the prescribed percentage of profits on the basis of its estimated profits. As a measure of precaution, the company may allocate to the reserves a higher amount than the actual amount based on the prescribed percentage of its estimated profits.

Further, it should also provide for depreciation in full. It should transfer to the reserves an amount based on estimated profits after the end of the financial years and before the finalization of the amounts for the financial year and thereafter decide to pay an interim dividend to its shareholders.

Before, a mere resolution for declaration of an interim dividend did not create any liability and could be rescinded at any time before actual payment. This was so even if the cash to cover the proposed dividend had been placed into a separate account. However, now both interim and final dividend when declared become debt and are payable within 30 days of declaration.

DIVIDEND ON PREFERENCE SHARES
A Preference share carries a preferential right as to dividend in accordance with the term of issue and the articles of association, subject to the availability of distributable profits. The preferential right to a dividend could either be a fixed amount or an amount calculated at a fixed rate. It may be cumulative or non-cumulative. Preference shares carry dividend of a fixed amount, before any dividend is paid on the equity shares. If there are two or more classes of preference shares, the shareholders of the class that has priority are similarly entitled to their preferential dividend before any dividend is paid in respect of the other class. But these rights in respect of dividends are subject to three conditions.

Firstly, preference shares are part of the company’s share capital, consequently preference shares preference dividends can be paid only if the company has earned sufficient profits.

Secondly, a dividend becomes payable to the shareholders only when it is declared in the manner laid down in the Act and by the company’s Articles.

Thirdly, there should have been a formal declaration. Preference shareholders are not entitled to treat the preference dividend as a debt and sue for its payment in the first instance. Though, if the articles specify that the company’s profit shall be applied, by way of payment of the preference dividend, the preference shareholder can sue for it even thought is has not been declared.

DIVIDEND ON EQUITY SHARES
Dividend on equity shares is to be paid in accordance with the rights of the respective classes of shares. Equity shareholders are entitled to be paid dividend on their shares only after all dividends on preference shares have been paid to date. Although the equity shareholder stands second in preference to preference shareholders, he enjoys a privilege of a higher dividend as the preference dividend is fixed and cannot be increased, however large the company’s profits may be, unless the preference shares carry the right to participate in surplus profits. Except in that case, therefore, the whole of the residual profits of the company after paying the preference dividend may be paid out as dividend to the equity shareholders either immediately or in later years.

Note: The profits of a business means the net proceeds of the concern after deducting the necessary expenses without which those proceeds could not be earned.

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