Declaration and Payment of Dividend

Declaration of Dividend – Corporate Procedure

1. Check Articles of Association (AOA): Ensure the company’s AOA authorises the declaration of dividends and if not amend the articles as per provisions of the Companies Act, 2013 will apply. 2. Financial Criteria: Dividend can only be declared out of:

• Current year’s profits after providing for depreciation, or
• Past profits transferred to reserves, or
• Money provided by Government for dividend payment in case of guarantees.
• Cannot declare dividend out of capital.

3. Board Meeting for Recommendation: Notice: Send notice to directors as per Section 173 and Secretarial Standards. Agenda:

• Approve financial statements (if year-end).
• Recommend dividend amount and record date/book closure.
• Fix date for shareholders’ meeting (if final dividend).

Outcome:

• For final dividend: Board recommends, shareholders approve in general meeting.
• For interim dividend: Board can directly declare without shareholders’ approval.

4. Shareholders’ Approval (for Final Dividend)

• Convene AGM or EGM.
• Pass an ordinary resolution declaring dividend as recommended by the Board (cannot increase beyond recommendation).
• Record proceedings in minutes.

5. Compliance after Declaration

• Deposit: Transfer the total dividend amount into a separate bank account within 5 days of declaration.
• Payment Timeline: Distribute dividend to shareholders within 30 days of declaration.

FEMA / RBI Compliance – Dividend to Foreign Shareholder

Since the subsidiary or shareholder is located outside India, dividend payment will involve foreign remittance under FEMA rules. 1. Mode of Payment :Only through normal banking channels in freely convertible foreign currency and no payment in cash or by cheque payable abroad. 2. FEMA Guidelines: No prior RBI approval is generally needed if:

• Shares are held on a repatriation basis under the automatic route.
• Dividend is declared out of current or accumulated profits.
• If the remittance is to a country identified under RBI’s caution list, prior approval may be required.

3. Bank Documentation (AD Category-I Bank)

• Form A2 (Application for Remittance).
• Shareholder details (name, address, country, shareholding %).
• Board/Shareholders’ resolution for declaration of dividend.

Auditor’s certificate:

• Certifying compliance with Section 123 of Companies Act, 2013.
• Confirming that the dividend is paid out of current year profits or free reserves.
• Confirming applicable TDS has been deducted.
• Form 15CA (online filing with Income Tax) – by remitter.
• Form 15CB (issued by CA) – certifying TDS compliance and nature of remittance.

Income Tax Compliance

TDS under Section 195:

• Deduct tax at applicable DTAA rate if treaty benefits claimed (obtain TRC + Form 10F from shareholder).
• If no DTAA benefits, deduct at domestic rate (20% plus surcharge & cess).
• File TDS returns within due date.

Step-by-Step Practical Timeline

1. Check AOA and financial position.
2. Hold Board Meeting to approve/recommend dividend.
3. Hold General Meeting (if final dividend).
4. Transfer funds to separate dividend bank account within 5 days.
5. File 15CA/15CB with Income Tax Department.
6. Approach Bank (AD-I) with required documents for remittance.
7. Remit funds in foreign currency through bank.
8. Update Register of Members with payment details.
9. Maintain records for 8 years as per Companies Act.