THE DEFINITION
Dividend is the return on the share capital subscribed for and paid to a company by its shareholders. The dictionary meaning of the term “dividend” is sum payable as interest on loan or as profit of a company to the creditors of an insolvent’s estate or an individual’s share of it. In commercial parlance, however, dividend is the share of the company’s profit distributed among the members.
THE DIFFERENCE BETWEEN DIVIDEND AND INTEREST
- While dividend is paid on preference and equity shares, interest is paid on debentures and long term and short term loans/borrowings including fixed deposits.
- Interest is a debt that like all debts is paid out of the company’s assets generally. A dividend however, becomes a debt only after the company has declared it.
- Dividend cannot be paid out of the assets of the company, generally it can be declared only out of the profit available for the purpose.
- Interest is a charge on profits while dividend is an appropriation of profits.
- The power to pay dividend is inherent in a company and is not derived from the Companies Act nor the Memorandum or Articles of Association, although the Act and the Articles generally regulate the manner in which dividends are to be declared.
- Right to claim dividend will only arise after the company in general meeting declares a dividend and until and unless it is so declared, the shareholder has no claim against the company in respect of it.
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