Question

Study the following case/situation and express your opinion:

XYZ Company Ltd. decides to declare dividend for the financial year 2021-22 in which it has earned profits less than their expectations.

1. Is Board right in recommending a dividend of 5/- per share out of free reserves?
2. Can Board declare the dividend though it is not approved by Annual General Meeting?
3. Can the Board give dividend in the form of gifts?

Answer 1

1. Yes, the board of directors can recommend the declaration of dividends from free reserves, as companies are permitted to pay final dividends from their free reserves. However, as per the Companies Act 2013, it is necessary to ensure that doing so does not endanger the financial stability of the company.
2. No, the approval of the annual general meeting is required for declaring the final dividend. However, the board of directors can declare an interim dividend itself if the company is making profit.
3. No, as per the Companies Act 2013, dividends can be paid only in cash or in the form of bonus shares. Dividends cannot be paid in the form of gifts or in any other form.