Chapter 8: Declaration and Payment of Dividend - Test 1: answer key

Question 1 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Scenario. Kuber Textiles Limited is an unlisted public company with a paid-up equity share capital of INR 10 crore (face value INR 10 each) and accumulated Free Reserves of INR 6 crore as on 31st March 2026. For the financial year ended 31st March 2026, the company incurred a net loss of INR 50 lakh after providing for depreciation as per Schedule II. In the preceding three financial years, the company declared equity dividends at the rates of 12%, 14%, and 16% respectively. The Board of Directors proposes to declare a dividend of 15% out of accumulated profits earned in prior years. A shareholder questions the legality of declaring dividend during a loss-making year, while another argues that the withdrawal must not exceed 10% of paid-up capital and free reserves.

Under Section 123(1) of the Companies Act, 2013, can Kuber Textiles Limited legally declare a dividend for FY 2025-26 despite incurring a net loss in the current year?

1. Yes, a company may declare dividend out of accumulated profits earned in previous years and transferred to free reserves, subject to compliance with prescribed rules. (correct answer)
2. No, because dividend can only be declared out of current year profits after tax.
3. Yes, but only with the prior written approval of the Central Government.
4. No, unless all secured financial creditors provide unconditional no-objection certificates.

Answer: A — Yes, a company may declare dividend out of accumulated profits earned in previous years and transferred to free reserves, subject to compliance with prescribed rules.

Explanation. Under the second proviso to Section 123(1), in the event of inadequacy or absence of profits in any financial year, a company may declare dividend out of surplus profits earned in previous years and transferred to free reserves, in accordance with Rule 3.

Where it goes wrong. Believing that companies incurring a current loss are absolutely barred from declaring dividends.

Authority. Section 123(1) of the Companies Act, 2013; Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014

Question 2 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

What is the maximum rate of dividend that Kuber Textiles Limited can declare out of accumulated reserves under Condition 1 of Rule 3?

1. 16%, being the highest dividend rate declared in the past three years.
2. 14%, being the arithmetic average of the dividend rates declared in the preceding three years (12%, 14%, 16%). (correct answer)
3. 15%, as proposed by the Board of Directors.
4. 10%, which is the statutory cap on dividend declaration out of reserves.

Answer: B — 14%, being the arithmetic average of the dividend rates declared in the preceding three years (12%, 14%, 16%).

Explanation. Condition 1 of Rule 3 stipulates that the rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the three years immediately preceding that year. Here, (12% + 14% + 16%) / 3 = 14%. The Board's proposal of 15% exceeds this statutory cap.

Where it goes wrong. Permitting the highest rate (16%) or the Board's proposed rate (15%).

Authority. Rule 3(1) of Companies (Declaration and Payment of Dividend) Rules, 2014

Question 3 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

What is the maximum permissible total amount that Kuber Textiles Limited can withdraw from its accumulated free reserves for dividend under Condition 2 of Rule 3?

1. INR 60 lakh, being 10% of free reserves.
2. INR 1.0 crore, being 10% of paid-up equity share capital.
3. INR 1.6 crore, being 10% of the sum of paid-up share capital (INR 10 crore) and free reserves (INR 6 crore). (correct answer)
4. INR 2.4 crore, being 15% of paid-up share capital and free reserves.

Answer: C — INR 1.6 crore, being 10% of the sum of paid-up share capital (INR 10 crore) and free reserves (INR 6 crore).

Explanation. Under Rule 3(2), the total amount to be drawn from accumulated profits shall not exceed 10% of the sum of its paid-up share capital and free reserves as appearing in the latest statutory financial statements. 10% of (10 cr + 6 cr) = INR 1.6 crore.

Where it goes wrong. Applying 10% only to paid-up capital or only to free reserves.

Authority. Rule 3(2) of Companies (Declaration and Payment of Dividend) Rules, 2014

Question 4 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Under Condition 3 of Rule 3, how must the amount drawn from accumulated free reserves be allocated before distributing dividend to equity shareholders?

1. It must be matched with equal capital infusion by the promoters.
2. It can be distributed entirely as dividend, while the current year loss is carried forward to the balance sheet.
3. It must be deposited into the Investor Education and Protection Fund.
4. It must first be utilized to set off the current year loss of INR 50 lakh, and only the balance can be declared as dividend. (correct answer)

Answer: D — It must first be utilized to set off the current year loss of INR 50 lakh, and only the balance can be declared as dividend.

Explanation. Condition 3 of Rule 3 mandates that the amount so drawn from accumulated profits shall first be utilized 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.

Where it goes wrong. Assuming current year losses can be ignored or postponed when drawing from reserves.

Authority. Rule 3(3) of Companies (Declaration and Payment of Dividend) Rules, 2014

Question 5 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

Scenario. Maruti Precision Castings Limited closed its financial year on 31st March 2026 with a profit after tax of INR 2.4 crore. The Board of Directors wishes to declare a final dividend of 10% on its paid-up share capital of INR 15 crore. However, during the internal review, the company secretary noticed that the company had accepted deposits of INR 40 lakh from members in August 2024 under Section 73, and repayment of matured deposits of INR 5 lakh along with interest of INR 60,000 fell due on 15th January 2026, which remained unpaid due to banking disputes. The directors contend that since operational profits are ample and the deposit default is minor, dividend declaration is completely permissible.

In the case of Maruti Precision Castings Limited, does the default in repayment of matured deposits bar the company from declaring dividend?

1. Yes, Section 123(6) prohibits a company from declaring any dividend on equity shares so long as a failure to repay deposits or interest under Section 73 continues. (correct answer)
2. No, because the default is only INR 5 lakh, which is immaterial compared to the INR 2.4 crore profit.
3. No, provided the company creates an earmarked deposit repayment bank account before the AGM.
4. Yes, but only if the National Company Law Tribunal has passed an adverse order against the company.

Answer: A — Yes, Section 123(6) prohibits a company from declaring any dividend on equity shares so long as a failure to repay deposits or interest under Section 73 continues.

Explanation. Under Section 123(6), a company which fails to comply with the provisions of Section 73 (acceptance of deposits) or Section 74 (repayment of deposits) shall not, so long as such failure continues, declare any dividend on its equity shares. The bar is absolute regardless of profit size.

Where it goes wrong. Applying principles of materiality to statutory prohibitions on dividend declaration.

Authority. Section 123(6) of the Companies Act, 2013

Question 6 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

If Maruti Precision Castings Limited cures the default on 20th May 2026 by paying the entire overdue deposit and interest, can the Board declare dividend in the AGM held in September 2026?

1. No, a cooling-off period of five consecutive financial years is mandated following any deposit default.
2. Yes, once the failure to comply with Section 73/74 ceases to continue, the statutory bar under Section 123(6) is lifted. (correct answer)
3. No, Central Government approval is required for a period of two years after curing a default.
4. Yes, but dividend rate cannot exceed 5%.

Answer: B — Yes, once the failure to comply with Section 73/74 ceases to continue, the statutory bar under Section 123(6) is lifted.

Explanation. Section 123(6) uses the phrase 'so long as such failure continues'. Once the default in repayment of deposit and interest is completely cured, the disqualification terminates and the company can declare dividend.

Where it goes wrong. Confusing the immediate lifting of the bar under Section 123(6) with Section 164 disqualifications.

Authority. Section 123(6) of the Companies Act, 2013

Question 7 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Which of the following sources is strictly prohibited from being utilized for declaration of dividend by Maruti Precision Castings Limited?

1. Profits of the company for the current financial year arrived at after providing for depreciation.
2. Profits of the company for previous financial years arrived at after providing for depreciation and remaining undistributed.
3. Revaluation reserve created by writing up the book value of factory land and buildings. (correct answer)
4. Moneys provided by the Central Government in pursuance of a guarantee given by that Government.

Answer: C — Revaluation reserve created by writing up the book value of factory land and buildings.

Explanation. Under the third proviso to Section 123(1), no dividend shall be declared or paid by a company from its reserves other than free reserves. Revaluation reserve represents unrealized capital appreciation and cannot be utilized for dividend.

Where it goes wrong. Believing revaluation reserves form part of free reserves.

Authority. Section 123(1) third proviso of the Companies Act, 2013

Question 8 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Within how many days from the date of declaration of dividend must the company deposit the total dividend amount into a separate bank account?

1. Immediately on the next working day following the AGM.
2. Within 7 days from the date of declaration of dividend.
3. Within 30 days from the date of declaration of dividend.
4. Within 5 days from the date of declaration of dividend in a scheduled bank. (correct answer)

Answer: D — Within 5 days from the date of declaration of dividend in a scheduled bank.

Explanation. Under Section 123(4), the amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

Where it goes wrong. Confusing the 5-day deposit rule with the 7-day transfer to Unpaid Dividend Account or the 30-day payment rule.

Authority. Section 123(4) of the Companies Act, 2013

Question 9 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

Scenario. Vardhman Power Equipment Limited has a paid-up equity share capital of INR 20 crore and free reserves of INR 12 crore as on 31st March 2026. Due to severe market disruptions, the company suffered an operating loss of INR 1.2 crore in FY 2025-26. The Board desires to declare an interim dividend of 8% by drawing funds from the accumulated reserves. The statutory auditor points out that declaration from reserves must satisfy all four cumulative conditions laid down under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, including reserve balance and loss absorption.

Can the Board of Directors of Vardhman Power Equipment Limited declare an interim dividend out of accumulated reserves during FY 2025-26 under Section 123(3)?

1. No, interim dividend can only be declared out of surplus in profit and loss account or profits of the current financial year, and not out of accumulated free reserves. (correct answer)
2. Yes, interim dividend can be declared out of free reserves without any restrictions.
3. Yes, provided the rate is certified by the statutory auditor.
4. Yes, if authorized by an ordinary resolution passed via postal ballot.

Answer: A — No, interim dividend can only be declared out of surplus in profit and loss account or profits of the current financial year, and not out of accumulated free reserves.

Explanation. Under Section 123(3), interim dividend may be declared during any financial year or at any time during the period from close of financial year till holding of the AGM out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared. Declaration out of reserves under Rule 3 applies only to final dividends.

Where it goes wrong. Assuming Rule 3 withdrawal from reserves is available for interim dividends.

Authority. Section 123(3) of the Companies Act, 2013

Question 10 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

In the case of Vardhman Power Equipment Limited, what is the minimum balance of reserves that must remain after any withdrawal under Condition 4 of Rule 3?

1. Not less than 10% of its paid-up share capital (INR 2.0 crore).
2. Not less than 15% of its paid-up share capital as appearing in the latest statutory financial statements (INR 3.0 crore). (correct answer)
3. Not less than 25% of its free reserves before withdrawal (INR 3.0 crore).
4. Not less than 50% of the current year loss.

Answer: B — Not less than 15% of its paid-up share capital as appearing in the latest statutory financial statements (INR 3.0 crore).

Explanation. Condition 4 of Rule 3 provides that the balance of reserves after such withdrawal shall not fall below 15% of its paid-up share capital as appearing in the latest statutory financial statements. 15% of INR 20 crore = INR 3.0 crore.

Where it goes wrong. Computing 15% on free reserves instead of paid-up share capital.

Authority. Rule 3(4) of Companies (Declaration and Payment of Dividend) Rules, 2014

Question 11 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

If Vardhman Power Equipment Limited had declared interim dividend in February 2026, within what timeframe must the interim dividend be paid or warrants dispatched to members?

1. Within 7 days from the close of the financial year.
2. Within 45 days from the date of declaration.
3. Within 30 days from the date of declaration of interim dividend. (correct answer)
4. At the upcoming Annual General Meeting.

Answer: C — Within 30 days from the date of declaration of interim dividend.

Explanation. Under Section 127, where a dividend has been declared by a company, it must be paid or the warrant in respect thereof must be posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend. This applies to interim dividend as well.

Where it goes wrong. Thinking interim dividend payment timeline is flexible until the AGM.

Authority. Section 127 of the Companies Act, 2013

Question 12 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

If the company incurred a loss during the current quarter up to the end of the quarter immediately preceding the date of declaration of interim dividend, what rate cap applies under Section 123(3)?

1. The rate is restricted to 10% of nominal capital.
2. The rate cannot exceed 5% under any circumstances.
3. No interim dividend can be declared if there is a loss in the preceding quarter.
4. The rate shall not be higher than the average rate of dividends declared by the company during the immediately preceding three financial years. (correct answer)

Answer: D — The rate shall not be higher than the average rate of dividends declared by the company during the immediately preceding three financial years.

Explanation. The proviso to Section 123(3) provides that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average rate of dividends declared by the company during the immediately preceding three financial years.

Where it goes wrong. Believing interim dividend declaration is prohibited upon a single quarter loss.

Authority. Section 123(3) proviso of the Companies Act, 2013

Question 13 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

Scenario. Kuber Textiles Limited is an unlisted public company with a paid-up equity share capital of INR 10 crore (face value INR 10 each) and accumulated Free Reserves of INR 6 crore as on 31st March 2026. For the financial year ended 31st March 2026, the company incurred a net loss of INR 50 lakh after providing for depreciation as per Schedule II. In the preceding three financial years, the company declared equity dividends at the rates of 12%, 14%, and 16% respectively. The Board of Directors proposes to declare a dividend of 15% out of accumulated profits earned in prior years. A shareholder questions the legality of declaring dividend during a loss-making year, while another argues that the withdrawal must not exceed 10% of paid-up capital and free reserves.

Where a company has not declared dividend in each of the three preceding financial years, how does Condition 1 of Rule 3 (average rate of dividend) operate?

1. The condition of average dividend rate does not apply, and the company can declare dividend from reserves subject to the remaining conditions. (correct answer)
2. The company is completely prohibited from drawing from reserves to declare dividend.
3. The company can declare dividend at a default statutory rate of 10%.
4. The company must obtain prior permission from the Regional Director.

Answer: A — The condition of average dividend rate does not apply, and the company can declare dividend from reserves subject to the remaining conditions.

Explanation. The proviso to Rule 3(1) states that this sub-rule shall not apply to a company which has not declared any dividend in each of the three preceding financial years.

Where it goes wrong. Assuming non-declaration in past years completely bars declaration from reserves.

Authority. Rule 3(1) proviso of Companies (Declaration and Payment of Dividend) Rules, 2014

Question 14 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Scenario. Maruti Precision Castings Limited closed its financial year on 31st March 2026 with a profit after tax of INR 2.4 crore. The Board of Directors wishes to declare a final dividend of 10% on its paid-up share capital of INR 15 crore. However, during the internal review, the company secretary noticed that the company had accepted deposits of INR 40 lakh from members in August 2024 under Section 73, and repayment of matured deposits of INR 5 lakh along with interest of INR 60,000 fell due on 15th January 2026, which remained unpaid due to banking disputes. The directors contend that since operational profits are ample and the deposit default is minor, dividend declaration is completely permissible.

Which of the following items must be deducted before arriving at profits available for distribution of dividend under Section 123(1)(a)?

1. Revaluation gains on investment property.
2. Depreciation provided in accordance with the provisions of Schedule II to the Companies Act, 2013. (correct answer)
3. Capital reserves arising from amalgamation.
4. Securities premium account balance.

Answer: B — Depreciation provided in accordance with the provisions of Schedule II to the Companies Act, 2013.

Explanation. Section 123(1)(a) mandates that dividend shall be declared out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Schedule II.

Where it goes wrong. Believing depreciation can be postponed or ignored if profits are low.

Authority. Section 123(1)(a) of the Companies Act, 2013

Question 15 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Scenario. Vardhman Power Equipment Limited has a paid-up equity share capital of INR 20 crore and free reserves of INR 12 crore as on 31st March 2026. Due to severe market disruptions, the company suffered an operating loss of INR 1.2 crore in FY 2025-26. The Board desires to declare an interim dividend of 8% by drawing funds from the accumulated reserves. The statutory auditor points out that declaration from reserves must satisfy all four cumulative conditions laid down under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, including reserve balance and loss absorption.

Is a company required to transfer a mandatory statutory percentage of its current year profits to reserves before declaring dividend under the Companies Act, 2013?

1. Yes, at least 5% if dividend declared exceeds 10%.
2. Yes, mandatory transfer of at least 10% of net profits to general reserves is required under Section 123.
3. No, a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company, and there is no mandatory minimum percentage. (correct answer)
4. Yes, 2.5% in case of public companies and 5% for listed companies.

Answer: C — No, a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company, and there is no mandatory minimum percentage.

Explanation. Under the first proviso to Section 123(1), transfer of profits to reserves is entirely discretionary. A company may transfer such percentage as it considers appropriate, and unlike the 1956 Act, there is no mandatory minimum percentage.

Where it goes wrong. Applying the old mandatory transfer rules (up to 10%) from the 1956 Companies Act.

Authority. Section 123(1) first proviso of the Companies Act, 2013

Question 16 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Scenario. Kuber Textiles Limited is an unlisted public company with a paid-up equity share capital of INR 10 crore (face value INR 10 each) and accumulated Free Reserves of INR 6 crore as on 31st March 2026. For the financial year ended 31st March 2026, the company incurred a net loss of INR 50 lakh after providing for depreciation as per Schedule II. In the preceding three financial years, the company declared equity dividends at the rates of 12%, 14%, and 16% respectively. The Board of Directors proposes to declare a dividend of 15% out of accumulated profits earned in prior years. A shareholder questions the legality of declaring dividend during a loss-making year, while another argues that the withdrawal must not exceed 10% of paid-up capital and free reserves.

Can dividend be paid by a company in kind, such as distributing debentures, goods, or vouchers to members instead of cash?

1. Yes, in case of unlisted private companies having fewer than 50 members.
2. Yes, if approved by a special resolution in the general meeting.
3. Yes, Section 8 companies can distribute vouchers in lieu of dividend.
4. No, Section 123(5) mandates that no dividend shall be paid by a company in respect of any share except by cheque or warrant or in any electronic mode to the shareholder entitled to payment. (correct answer)

Answer: D — No, Section 123(5) mandates that no dividend shall be paid by a company in respect of any share except by cheque or warrant or in any electronic mode to the shareholder entitled to payment.

Explanation. Under Section 123(5), dividend can only be paid by cheque, warrant, or electronic mode to the shareholder entitled or to his order or banker. Payment in kind or vouchers is strictly prohibited.

Where it goes wrong. Assuming private companies can distribute dividends in kind with unanimous shareholder consent.

Authority. Section 123(5) of the Companies Act, 2013

Question 17 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Scenario. Maruti Precision Castings Limited closed its financial year on 31st March 2026 with a profit after tax of INR 2.4 crore. The Board of Directors wishes to declare a final dividend of 10% on its paid-up share capital of INR 15 crore. However, during the internal review, the company secretary noticed that the company had accepted deposits of INR 40 lakh from members in August 2024 under Section 73, and repayment of matured deposits of INR 5 lakh along with interest of INR 60,000 fell due on 15th January 2026, which remained unpaid due to banking disputes. The directors contend that since operational profits are ample and the deposit default is minor, dividend declaration is completely permissible.

Can shareholders in an Annual General Meeting declare a dividend at a rate higher than the rate recommended by the Board of Directors?

1. No, shareholders in general meeting may reduce or approve the rate recommended by the Board, but cannot increase the rate recommended by the Board. (correct answer)
2. Yes, shareholders have supreme sovereign authority in the AGM and can increase the rate by special resolution.
3. Yes, provided the increased rate is approved by all institutional financial investors.
4. Yes, if the company's free reserves exceed paid-up capital by at least two times.

Answer: A — No, shareholders in general meeting may reduce or approve the rate recommended by the Board, but cannot increase the rate recommended by the Board.

Explanation. Under company law principles and standard Articles of Association (Table F), shareholders in general meeting cannot declare a dividend higher than that recommended by the Board of Directors; they can only accept or reduce it.

Where it goes wrong. Assuming AGM shareholders can override the Board recommendation and increase the dividend rate.

Authority. Section 123 of the Companies Act, 2013; SS-2 / Standard Articles

Question 18 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

Scenario. Vardhman Power Equipment Limited has a paid-up equity share capital of INR 20 crore and free reserves of INR 12 crore as on 31st March 2026. Due to severe market disruptions, the company suffered an operating loss of INR 1.2 crore in FY 2025-26. The Board desires to declare an interim dividend of 8% by drawing funds from the accumulated reserves. The statutory auditor points out that declaration from reserves must satisfy all four cumulative conditions laid down under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, including reserve balance and loss absorption.

What is the consequence under Section 123 if a company declares dividend out of profits without providing for current depreciation?

1. The declaration remains valid, but ROC imposes a nominal compounding fee.
2. The declaration is invalid and ultra vires Section 123(1), rendering directors who knowingly paid it personally liable to restore the capital. (correct answer)
3. The dividend is automatically converted into bonus shares.
4. The depreciation can be adjusted retrospectively over the next five years.

Answer: B — The declaration is invalid and ultra vires Section 123(1), rendering directors who knowingly paid it personally liable to restore the capital.

Explanation. Dividend paid without providing for depreciation amounts to paying dividend out of capital, which is illegal and ultra vires Section 123(1). Directors participating in such breach are liable to replace the fund.

Where it goes wrong. Treating failure to provide depreciation as a minor technical irregularity.

Authority. Section 123(1) of the Companies Act, 2013

Question 19 · 2 marks · Chapter 8: Declaration and Payment of Dividend · hard

Scenario. Kuber Textiles Limited is an unlisted public company with a paid-up equity share capital of INR 10 crore (face value INR 10 each) and accumulated Free Reserves of INR 6 crore as on 31st March 2026. For the financial year ended 31st March 2026, the company incurred a net loss of INR 50 lakh after providing for depreciation as per Schedule II. In the preceding three financial years, the company declared equity dividends at the rates of 12%, 14%, and 16% respectively. The Board of Directors proposes to declare a dividend of 15% out of accumulated profits earned in prior years. A shareholder questions the legality of declaring dividend during a loss-making year, while another argues that the withdrawal must not exceed 10% of paid-up capital and free reserves.

Can a company capitalize its reserves for issuing fully paid bonus shares even if it is in default of repayment of deposits under Section 73?

1. Yes, provided the bonus ratio does not exceed 1:1.
2. Yes, because bonus issue does not involve cash outflow.
3. No, Rule 14 of Companies (Share Capital and Debentures) Rules bars bonus issue if the company defaults in payment of interest or principal in respect of fixed deposits or debt securities. (correct answer)
4. Yes, with permission of the NCLT.

Answer: C — No, Rule 14 of Companies (Share Capital and Debentures) Rules bars bonus issue if the company defaults in payment of interest or principal in respect of fixed deposits or debt securities.

Explanation. Under Section 63(2)(c), no company shall capitalize its profits or reserves for the purpose of issuing fully paid-up bonus shares unless it has not defaulted in respect of the payment of interest or principal in respect of fixed deposits or debt securities issued by it.

Where it goes wrong. Believing bonus shares are exempt from deposit default prohibitions because they do not reduce liquidity.

Authority. Section 63(2)(c) of the Companies Act, 2013

Question 20 · 2 marks · Chapter 8: Declaration and Payment of Dividend · medium

Scenario. Maruti Precision Castings Limited closed its financial year on 31st March 2026 with a profit after tax of INR 2.4 crore. The Board of Directors wishes to declare a final dividend of 10% on its paid-up share capital of INR 15 crore. However, during the internal review, the company secretary noticed that the company had accepted deposits of INR 40 lakh from members in August 2024 under Section 73, and repayment of matured deposits of INR 5 lakh along with interest of INR 60,000 fell due on 15th January 2026, which remained unpaid due to banking disputes. The directors contend that since operational profits are ample and the deposit default is minor, dividend declaration is completely permissible.

Under Section 123(5), to whom may dividend be lawfully paid by the company?

1. To the pledgee of shares without order of the registered member.
2. To any person who produces share certificates physically at the registered office.
3. Directly to an undisclosed beneficial owner who has not filed MGT-5.
4. To the registered holder of shares or to his order or to his banker. (correct answer)

Answer: D — To the registered holder of shares or to his order or to his banker.

Explanation. Section 123(5) specifically provides that dividend shall be payable to the registered shareholder or to his order or to his banker. A company is neither bound nor entitled to recognize claims from unregistered third parties.

Where it goes wrong. Believing beneficial ownership claims override the official Register of Members without statutory intimations.

Authority. Section 123(5) of the Companies Act, 2013