A Company, to declare and pay dividend to its shareholder, does not necessarily to have profit in the financial year for which dividend is to be declared. Even though a company has suffered losses in a year, it still can declare dividend.
The provisions relating to declaration of dividend in case of inadequacy or absence of profit (i.e. loss) is prescribed under the 2nd & 3rd proviso of the section 123 of the Companies act 2013 and Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.
In case the company inadequacy or absence of profits in any year, the company may declare dividend after fulfillment of the following conditions.
- Dividend has to be declared /paid out of free reserves;
- Rate of dividend - not exceed average of the rates at which dividend was declared by it in the 3 years immediately preceding that year (this condition shall not apply to a company, which has not declared any dividend in each of the three preceding financial year);
- Total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement;
- The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared;
- Balance of reserves after such withdrawal shall not fall below 15% of the paid up share capital (latest audited financial statement);
- No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.