Declare and Pay Dividend in case of Loss or Inadequate Profits

In order to declare and pay a dividend to its shareholder, a company does not necessarily have to earn sufficient profit in the financial year in which the dividend is being declared.

Even though a company has suffered losses or has earned very low profit in a particular financial year, it still can declare and pay a dividend to its members for that financial year.

Reference

Section 123(1) of the Companies Act, 2013
Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014

Conditions to Declare and Pay Dividend

In case the company has inadequacy or absence of profits in any financial year, the company may declare dividend after fulfillment of the following conditions:

• A company may declare dividend out of the accumulated profits earned by it in previous years and transferred to the free reserves.

• Dividends can not be declared or paid from any reserves other than free reserves.

• A company can declare dividend only after setting off the carried over previous losses and depreciation (not provided in previous years) against the profit for the current year.

• Rate of dividend declared - not to exceed the average of the dividend rates declared in the immediately 3 preceding years.

This condition will not apply to a company which has not declared any dividend in the immediately 3 preceding years.

• Total amount to be drawn from accumulated profits - not to exceed 1/10th of the total of paid-up share capital plus free reserves amount.

Figures appearing in the latest audited financial statement for paid up share capital and free reserves are to be taken for this purpose.

• The amount so drawn from accumulated profits - at first utilise it to set off the losses incurred in the financial year in which the dividend is declared and then only declare any dividend for equity shares.

• Balance of reserves shall not fall below 15% of the paid up share capital.

Balance of reserves - reserves left after setting off the losses and total dividend amount.
Paid up share capital - figure from the latest audited annual financial statement is to be taken.