LEGAL AND SOCIAL ASPECTS OF DIVIDENDS

EP JOHNSEC B

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A dividend is money paid directly to an investor in a company's stock. Some publicly owned companies offer a dividend with their stock, while others do not.

The choice of buying and owning a stock that pays a dividend is up to the individual investor, as there are both positive and negative aspects to consider.

A company that offers a dividend with its stock is often a larger, more stable business in a field with little growth or a slow, steady growth potential.

When a company offers a dividend to its stock holders, it is taking money that could be reinvested into the company, and distributing it to shareholders as a benefit of investing in the company.

Receiving a dividend is good for investors, because they get a guaranteed return on their investment in the form of the money from the dividend.

A stock that returns a dividend is good as an income investment or a long term growth investment. This is because these stocks tend to remain stable, and offer a tangible monetary benefit to investors.

•Legal: dividends must be paid out of firm’s earnings/ current earnings•Financial: a firm can pay dividend only to the extent that it has cash to disburse•Economic constraints•Nature of business conducted by a company•Existence of the company: length of existence of the company.

DETERMINANTS OF DIVIDEND POLICY

•Type of company Organization: Pvt. Or Public•Financial needs of the company.•Market conditions•Financial arrangements•Change in government policies

DETERMINANTS OF DIVIDEND POLICY

1.Dividends to be paid only out of profits: •It is necessary for a company to declare and pay dividend only out of profits for that year arrived at after providing for depreciation in accordance with the provisions of section 205(2) of the act.

LEGAL ASPECTS OF DIVIDENDS

•A dividend could be declared out of profits of the company for any previous financial year or years arrived after providing for depreciation in accordance with those provisions and remaining undistributed.

LEGAL ASPECTS OF DIVIDENDS

•The dividend can also be declared out of moneys provided by the central govt. or a state govt. for the payment of dividend in pursuance of guarantee given by that govt.

LEGAL ASPECTS OF DIVIDENDS

•The company is required to transfer to the reserves such percentage of its profits for that year not exceeding 10% in addition to providing for depreciation as required under section 205(2A) of the Act.

LEGAL ASPECTS OF DIVIDENDS

• Unpaid dividend to be transferred to special dividend account:•Dividends are to be paid within 30 days from the date of the declaration•If they are not paid the company is required to transfer the unpaid dividend to unpaid account within 7 days of the expiry of the period of 30 days.

LEGAL ASPECTS OF DIVIDENDS

•The company is required to open this account in any scheduled bank as required under section 205-A of the Companies Act, 1956

• Dividend is to be paid only to registered shareholders or to their order or their bankers

LEGAL ASPECTS OF DIVIDENDS

Any money transferred to the unpaid dividend account of a company in pursuance of section 205A(5) which remains unpaid or unclaimed for a period of 7 years from the date of such transfer to unpaid dividend account, shall be transferred by the company to the investor education and protection fund established under sub-section (1) of section 205C

TRANSFER OF UNPAID/ UNCLAIMED DIVIDEND TO INVESTOR EDUCATION AND

PROTECTION FUND

Sub-section (1A) of section 205 stipulates that the board of directors may declare interim dividend and the amount of dividend including interim dividend is to be such deposited in a separate bank account within 5 days from the date of depreciation.

TRANSFER OF UNPAID/ UNCLAIMED DIVIDEND TO INVESTOR EDUCATION AND

PROTECTION FUND

Failure to do so, every director of the company, shall, if knowingly a party to the default, be punishable with simple imprisonment for a term which may extend to 3 years and shall also liable to a fine of rupees for everyday during which such default continues

TRANSFER OF UNPAID/ UNCLAIMED DIVIDEND TO INVESTOR EDUCATION AND

PROTECTION FUND

The company shall be liable to pay simple interest at a rate of 18% p.a. during the period for which such default continues.

TRANSFER OF UNPAID/ UNCLAIMED DIVIDEND TO INVESTOR EDUCATION AND

PROTECTION FUND

• Most state securities regulations prevent firms

from paying out dividends from any portion of the

company’s “legal capital” which is measured by

the par value of common stock -- or par value

plus paid-in-capital.

• Dividends are also sometimes limited to the sum of the firm’s most recent and past retained earnings -- although payments in excess of current earnings is usually permitted.

• Most states also prohibit dividends when firm’s

have overdue liabilities, is legally insolvent, or

bankrupt.

LEGAL CONSTRAINTS

INTERNAL CONSTRAINTS• A company’s ability to pay dividends is

usually constrained by the amount of

available cash rather than the level of

retained earnings against which to charge

them.

• Although it is possible to borrow to pay

dividends, lenders are usually reluctant to

grant them because using the funds for this

purpose produces not operating benefits that

help to repay them.

GROWTH PROSPECTS• Newer, rapidly-growing firms generally pay

little or no dividends.

• Because these firms are growing so quickly,

they must use most of their internally

generated funds to support operations or

finance expansion.

• On the other hand, large, mature firms

generally pay cash dividends since they have

access to adequate capital and may have

limited investment opportunities.

OWNER CONSIDERATIONS

• As mentioned earlier, empirical evidence

supports the notion that investors tend to

belong to “clienteles” -- where some prefer

high dividends, while others prefer capital

gains.

• They tend to sort themselves in this way

for a variety of reasons, including:– tax status– investment opportunities– potential dilution of ownership

MARKET CONSIDERATIONS• The most important aspect of

dividend policy is that the firm

maintain a level of predictability,

• Stockholders that prefer

dividend-paying stocks prefer a

continuous stream of fixed or

increasing dividends.

MARKET CONSIDERATIONS

• Shareholders also view the firm’s

dividend payment as a “signal”

of the firm’s future prospects.

• Fixed or increasing dividends are

often considered a “positive”

signal, while erratic dividend

payments are viewed as

“negative” signals.

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