Shares And Dividends

Analysis: This case deals with the rules and regulations governing the declaration and payment of dividends by a company. Legal Position:

[(a)] Dividend from Free Reserves: Yes, the Board is right in \textit{recommending} a dividend out of free reserves if the current year's profits are inadequate. However, this is subject to specific conditions under the Companies (Declaration and Payment of Dividend) Rules, 2014. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. So, if the rupee 5/- dividend is within that average rate, the recommendation is valid.
[(b)] Approval of Annual General Meeting (AGM): No, the Board of Directors can only \textit{recommend} a final dividend. The power to \textit{declare} this final dividend rests solely with the shareholders, who approve it at the company's AGM. Shareholders can approve the recommended rate or suggest a lower rate, but they cannot increase the rate recommended by the Board.
[(c)] Dividend in the form of Gifts: No, this is not permitted. As per the Companies Act, 2013, a dividend must be paid in cash. This can be done through cheque, warrant, or any electronic mode. It cannot be paid in kind, such as in the form of gifts or assets. The principle is that the return to shareholders must be a cash distribution from profits.