Ch9 Distribution of Profits - Sheet1 Flashcards
DECLARATION OF DIVIDEND
Implied power to declare dividend
Dividends are payments made to members by a company, out of its distributable profits.
Unless there are specific restrictions in the company’s memorandum and articles (e.g. association not for profit prohibits the payment of dividend to its members), every company has an implied power to use its profits to pay dividends to its shareholders.
Certain restrictions on declaration of dividend [Section 240]
Not to exceed amount recommended by directors
The company in general meeting may declare dividends; but no dividend shall exceed the amount recommended by the board.
Restriction on distribution of certain gains
No dividend shall be declared or paid by a company for any financial year out of the profits of the company made from the sale or disposal of any immovable property or assets of a capital nature comprised in the undertaking or any of the undertaking of the company, unless the business of the company consists, whether wholly or partly, of selling and purchasing any such property or assets, except after such profits are set off or adjusted against losses arising from the sale of any such immovable property or assets of a capital nature.
The investment properties may be carried at fair value with unrealized gain recognised in profit or loss as per IAS 40 Investment property, but Companies Act requires that no dividend shall be declared or paid out of unrealized gain (i.e. gain related to unsold property) on investment property credited to profit and loss account.
PAYMENT OF DIVIDEND
Dividend to be paid only out of profits [Section 241]
Form of payment
Any dividend may be paid by a company either in cash or in kind only out of its profits.
Payment in kind
The payment of dividend in kind shall only be in the form of shares of listed company held by the distributing company.
Provisions relating to payment
Provisions relating to payment
To be paid only to registered shareholders [Section 242]
Any dividend declared by a company must be paid to its registered shareholders or to their order within such period and in such manner as may be specified and in this regard the Commission has issued the Companies (Distribution of Dividends) Regulations, 2017.
Period of payment [Regulation 3 & 2(viii)]
Except when it is allowed under the law to withhold the payment of dividend, the chief executive officer of every company is responsible to make the payment of cash dividend within a period of 10 working days (any day on which banks are open for business) from the date of:
a) its declaration in case of final dividend;
b) its declaration in case of interim dividend without announcement of book closure; or
c) start of book closure in case of interim dividend when book closure in announced.
Further, every listed company shall ensure that book closure must be started for determination of interim dividend entitlement within 15 days of the date on which such dividend is approved by the board
Manner of payment – listed company [Section 242]
In case of a listed company, any dividend payable in cash shall only be paid through electronic mode directly into the bank account designated by the entitled shareholders.
Manner of payment – other than listed company [Regulation 4]
A company, other than a listed company, shall obtain cash dividend distribution mandate at the time of becoming a shareholders of the company comprising of following three modes from their registered shareholders, namely:-
i. direct transfer into the designated bank account; or
ii. dividend warrant (a document that shows that a shareholder is entitled to a dividend, it functions like a cross cheque); or
iii. cross cheque:
The shareholder can change the mandate at any time during the year through a written request containing all requisite details to the company.
Manner of payment - General [Regulation 4 & 2(vi)]
A company may appoint a paying agent for distribution of dividend payable in cash.
“paying agent” means a bank or any entity including a share registrar and a central depository appointed by a company and having relevant approval of SBP for making payment of cash dividend directly into the designated bank account of entitled shareholder.
The banks may not be required to appoint a paying agent and may itself assume functions and responsibility of paying agent themselves.
Book closure [Section 125]
Purpose
The closure of register of members (or debenture-holders) means a time period during which a company will not handle requests to transfer shares (or debentures). This is done to identify the cut-off date for determining which members (or debenture-holders) on record will receive a notice of a meeting or dividend (or interest) payment for that period.
Power to close register [Section 125]
A company may, on giving not less than 7 days‘ previous notice close its register of members, or the part of it relating to members holding shares of any class, for any period or periods not exceeding in the whole 30 days in each year.
The Commission may, on the application of the company extend the 30 days’ period for a further period of 15 days.
The same provision shall also apply for the purpose of closure of register of debenture-holders of a company.
Additional requirement for listed company [Section 125]
In the case of listed company, notice for closure of the register, must be given by advertisement in English and Urdu languages at least in one issue each of a daily newspaper of respective language having wide circulation.
Penalty [Section 125]
Any contravention or default in complying with above requirements shall be an offence liable to a penalty of level 2 on the standard scale.
Directors not to withhold declared dividend [Section 243]
Requirement
When a dividend has been declared, it shall not be lawful for the directors of the company to withhold or defer its payment and the chief executive of the company shall be responsible to make the payment within specified period from the date of declaration.
Declaration of final dividend
The final dividend is proposed by directors and approved by members in AGM. Dividend shall be deemed to have been declared on the date of the general meeting in case of a dividend declared/approved in the general meeting.
Declaration of interim dividend
The directors may propose and pay interim dividend before end of year. Interim dividend shall be deemed to have been declared on:
the date of commencement of closing of share transfer for purposes of determination of entitlement of dividend;
the date on which dividend is approved by the board (in case of no book closure).
Consequences of delay in payment
Where a dividend has been declared by a company but is not paid within the period specified, the chief executive of the company shall be punishable with imprisonment for a term which may extend to two years and with fine which may extend to five million rupees.
Chief executive convicted shall from the day of the conviction cease to hold the office of chief executive of the company and shall not, for a period of five years from that day, be eligible to be the chief executive or a director of that company or any other company.
No offence deemed to be committed
No offence shall be deemed to have been committed in the following cases if the Commission has, on application by company within 45 days from the date of declaration of the dividend, and after providing an opportunity to the shareholder/other person, permitted the company to withhold or defer payment:
where the dividend could not be paid by reason of the operation of any law;
where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with;
where there is a dispute regarding the right to receive the dividend;
where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
where, for any other reason, the failure to pay the dividend or to post the warrant within the period aforesaid was not due to any default on the part of the company.
Lawful withholding
A company may withhold the payment of dividend of a member where the member has not provided the complete information or documents as specified by the Commission (Approval of SECP is not required in this case).
