The Indian Contract Act, of 1872 primarily governed the employment contract in India. An employment agreement is a mutual contract between the Employee and the employer that rules the terms of employment. Like any other agreement under the standard law system, the vital requirements of the employment contract letter include an offer, consideration, acceptance, lawful object, competent parties, and free consent.
What is Interim Dividend?
Interim dividend meaning: It is a cash payment given by a firm to its shareholders on a regular basis. Depending on how frequently financial statements are released, they can be paid quarterly or annually. They are often less than dividend payments issued at the conclusion of a fiscal year; these large distributions are typically paid once per quarter during an earnings report known as dividend day.
The most frequent interim dividend amount is roughly 10% of shares held in any one payout period.
However, because companies do not always keep all of their cash reserves in liquid assets like stock market securities, such dividends may also include stock options or new shares issued by certain companies.
These types of dividends can also be used to predict whether a firm will achieve analyst expectations when it discloses full-year earnings later in the year. Insider trading occurs when non-public information about a company’s finances is released prior to official statements.
Calculation and Interim Dividend Example Explained
Dividends can be calculated as a proportion of earnings and paid out per share.
The interim dividend formula is as follows:
(Earnings of the company* Dividend payout ratio)/Number of shares |
Company X Ltd., for example, allocates 40% of its earnings to its stockholders. So if they earn Rs. 10 lakhs and have 20 lakhs shares outstanding, each share will be worth Rs.
(10,00,000*40%) divided by 20,00,000 shares equals a dividend payout of Rs.0.2 per share.
Interim Dividend as Per Companies Act
Section 2(35) of the Companies Act, 2013 describes the interim dividend as follows:
- The dividend for a financial year of the company which is called as a final dividend is payable only if the company declares it at its annual general meeting on the recommendation of the Board of directors.
- The Board of Directors of a firm can declare interim dividend during any financial year or at any time during the period from the closure of the fiscal year till holding of the annual general meeting.
An interim dividend will be declared by the board of directors at any time before the closure of fiscal year, whereas a final dividend is reported by the members of a company at its annual general meeting
Payment of Interim Dividend by Board of directors
An interim dividend will be paid by the Board of directors of the private limited company. The interim dividend will be paid out of the surplus in the profits and loss accounts or out of profits of the fiscal year for which such dividend is sought to be declared or out of profit generated in the fiscal year till the quarter preceding the date of declaration of the interim dividend.
In case the private limited company has incurred a loss during the current financial year up to the end of the quarters immediately preceding the date of declaration of the interim dividend, such interim dividend will not be declared at a rate higher than the average dividends declared by the firm during the immediately preceding three financial years.
Procedure for Declaration of Interim Dividend
Note on Record Date
Before knowing about the procedure for declaration of interim dividend, you should familiarise with the Record Date. The record rate will be decided for ascertaining who are eligible to receive the interim dividend and to pay the interim dividend. The shareholders who are members as on the record rate will be eligible to receive the dividend as approved by the company.
Step 1: The private limited company will have to be authorised by its articles for the payment of the dividend.
Issue Notice for Holding Meeting
Step 2: According to section 173 of the companies act, the company is required to issue notice for holding the meeting of the board of directors of the company to consider the matter.
Holding the Meetings
Step 3: The company is required to consider the following matters while holding the meetings:
- Ascertain whether the financial position of the Company allows the payment of Interim dividend out of profits available for distribution.
- Recommending the rate and quantum of dividend
- Deciding a record date
- Pass a Board Resolution for approving the payment of dividend
- Pass a Resolution for the opening of an account in the name of the private limited company
Open Account
Step 4: Open the separate account in the name of the company with a scheduled bank and deposit the dividend payable in the prescribed account within five days of the declaration of the dividend.
Payment of Dividend
Step 5: Dividend payable in cash will be paid by or warrant or Cheque or through any other electronic mode to the shareholder entitled for the payment of the dividend.
- The dividend will not be paid by a company in respect of any share except to the registered shareholders of such share or to his order or his banker.
- The dividend will be paid within 30 days from the date of declaration of dividend.
Punishment for Failure to Distribute Dividends
A dividend has been declared by a private limited company but has not been paid or the warrant has not been posted within thirty days from the date of declaration to any shareholder entitled, every director of the company will be punishable with imprisonment of two years and with a fine of thousand rupees for every day during which such default continues, and the company will be liable to pay an interest at the rate of eighteen per cent per annum.
In the following cases, no offence under this section 127 of companies act will be deemed to have been committed:
- If the dividend could not be paid because of the operation of any law;
- Directions of the shareholders regarding the payment of dividend cannot be complied with, and the same has been communicated to him
- In case any a dispute regarding the right to receive the dividend
- If the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
- For any other reason, if the dividend is not paid or to post the warrant within the period was not due to any default on the part of the firm.
FAQs
Who is eligible for an interim dividend?
It is a distribution to the shareholders that are issued and paid before a company’s full-year earnings are calculated. Dividends of this type are typically paid to holders of a company’s common stock on a quarterly or semi-annual basis.
Does interim dividend mean profit or loss?
Like a final dividend, it is a profit appropriation that must be recorded on the debit of the profit or loss appropriation account.