What is interim dividend & final dividend

Interim and Final Dividend

• Companies rely on capital to successfully run their Business or commercial operations. Shareholders in a company play an important role in obtaining capital, and as a result, they become stakeholders in the company.
• They have control over the proportion of profits that they receive in relation to the amount of money they invest.
• The share of earnings distributed to shareholders is referred to as a dividend.
• Shareholders are also considered company owners, and as such, they are entitled to a dividend.

What is Dividend?

• According to Section 2(35) of the Companies Act of 2013, the term “Dividend” refers to the amount of profit that has not been retained in the business and has been distributed among the company’s shareholders in proportion to the number of shares held by them.
• Dividend definition covers all interim dividends. Profit capitalization in the form of bonus shares is not considered a dividend for this purpose.
• Companies controlled by Section 8 of the Companies Act, 2013 are forbidden from paying dividends to their shareholders, and so their profits are used to promote their objectives.

Types of Dividends:

• Cash Dividend:

  This is the most common technique of Dividend payment. In this case, the company pays a dividend to its shareholders, and the funds are deposited in the bank accounts of all shareholders.

• Stock Dividend:

  The company issues new shares without consideration to the shareholders in this type of dividend.

• Property Dividend:

  Instead of paying dividends in cash or shares, the company pays its shareholders other assets such as physical assets, real estate, and so on. This is not a common occurrence.

• Scrip Dividend:

  When a company pays a dividend in the form of a promissory note to be paid to shareholders at a later date because it lacks the money to do so at this time.

• Liquidating Dividend:

  The Board of Directors shall return the capital invested by the shareholders when the company intends to discontinue its business. The company is referred to as liquidating dividend.

A. Meaning of Interim Dividend

• The term ‘interim dividend’ is the dividend declared by the Board of Directors in accordance with secretarial standards issued by the Institute of Secretaries of Companies of India. This dividend shall be declared in two Annual General Meetings by the Board of Directors.
• It is advisable to take a view of the Company Auditor before the declaration and payment of the interim dividend, since the interim dividend is paid prior to preparation and conclusion of the final company accounts.
• Interim Dividends, unlike Final Dividends, can be paid more than once within a Financial Year. The majority of corporations pay such dividends on a quarterly or half-yearly basis. The Interim Dividend rate is usually lower than the Final Dividend rate.
• The Board of Directors has the ability to declare and pay Interim Dividends, but Shareholders of the company have the power to overturn the Board’s decision and refuse Interim Dividend payment. The Board of Directors frequently declares an interim dividend when the company’s earnings are higher than planned.

Features of Interim Dividend:

Some features of Interim Dividend are as follows:

• Declared by the Board: The authority for declaring and paying the provisional dividend rests solely with the Board of Directors.

• Articles shall authorize: Articles of association shall authorize the Board to declare an interim dividend, as set out in Articles of Association of a company. If articles do not then facilitate it, it must be revised before declaring it.

• Pass Board Resolution: In the meeting of the Board convened to declare an interim dividend, the Board will adopt the Resolution of the Board of Directors.

• Free Reserves: Free Reserves are not permitted to pay the interim dividend.

• Provide Depreciation: Before announcing an Interim Dividend, the company must provide depreciation for the entire year, not just a portion of it.

• Time Period: Dividends must be paid to shareholders within 30 days after their declaration.

• Transfer to Unpaid Dividend Account: If a dividend is not claimed or paid within seven days after the expiration of the thirty-day period following its declaration, the money is transferred to the “Unpaid Dividend Account.”

• Transfer to IEPF: If a dividend is not claimed following seven years, it will be transferred to the Investor Education and Protection Fund.

• Separate bank account: The amount to be given as a dividend will be transferred to a separate bank account within five days of the declaration of a dividend.

Interim Dividend distribution sources:

The sum of the provisional dividend is paid out of.

• Profits and losses surplus.
• Profit from the current financial year where such an interim dividend is payable.
• Profit generated in the preceding quarter in the financial year in which the dividend is declared.

The interim dividend usually includes the non-distributed profits from the previous financial years, based on the retained earnings.

If the company has incurred a loss until the end of the quarter immediately preceding the date of declaration of the Interim Dividend,

The dividend rate on such shares shall not be higher than the average dividend rate during the immediately preceding three Financial Years.

The Board of Directors shall take into account when declaring an Interim Dividend:

• A year-long depreciation.
• Tax includes the company’s deferred tax for the entire year.
• Losses that are expected for the financial year.
• Fixed dividend rate that must be paid on preference shares.

Read our articles :

• What s the Process to get back shares from IEPF
• CLOSURE OF SUBSIDIARY COMPANY
• Compliance for Foreign Subsidiary Companies in India

Difference between Interim and Final Dividend:

	Interim Dividend	Final Dividend
1.	It shall be declared and paid by the Board of Directors of the company.	It is recommended by the Board of Directors and declared by the Shareholders.
2.	It shall be declared at any time before closure of Financial Year.	It is declared in the Annual General Meeting at the end of the Year.
3.	It is declared before the preparation of final accounts.	It is declared after preparation of final accounts.
4.	Authorization of Articles of association is required for the declaration of payment of Interim Dividend.	No such authorization is required in the Articles for payment of Final Dividend.
5.	Board Resolution shall be passed in the Board Meeting for the payament of Interim Dividend.	At the AGM of the company, Ordinary Resolution shall be passed for declaring Final Dividend.

Interim Dividend Procedures for Declaring and Paying:

• For the declaration and payment of dividends, the following procedure must be followed:
• At least seven days’ notice of a Board meeting shall be given to each and every director of the company in order to call a Board meeting for the purpose of declaring an Interim Dividend.
• A Board meeting shall be convened, and all matters related to the payment of the Interim Dividend shall be considered, which includes.
• Establishing the company’s financial status .
• Amount to be declared as a dividend.
• Recording date has been set.
• Opening a bank account to receive dividends.
• Printing and authorising the signing of dividend warrants.
• Pass a Board Resolution authorising the declaration and payment of dividends.
• After the Board resolution is passed, a separate bank account must be opened with the designated bank.
• Deposit the amount of Dividend payable in that account within five working days of the dividend’s declaration.
• The dividend shall be paid to the registered shareholders or the banker within thirty days of the dividend’s declaration.
• If the amount of Dividend remains unclaimed or unpaid, such amount shall be transferred to the “Unpaid Dividend Account” within 7 days of the expiration of thirty days.
• Within ninety days of making any transfer in the “Unpaid Dividend Account,” the company must prepare a statement containing names, addresses, and other information and post it on a website, if one exists.
• If an individual wants to claim his or her dividend amount from the Unpaid Dividend account, he or she must submit Form IEPF-5 to the company.
• After seven years from the date of transfer to the “Unpaid Dividend Account,” any unclaimed dividend shall be transferred to the Investor Education and Protection Fund.

Completing the Declaration of Interim Dividend:

• The Interim Dividend will be declared by the Board of Directors prior to the implementation of the Annual Accounts.
• It’s also considered a company debt that can’t be cancelled once it’s been declared. Before declaring any sort of Interim Dividend, the board of directors shall examine the company’s financial position, and such dividend shall be paid out of the surplus in the company’s profit and loss account.
• The Interim Dividend rate is generally lower than the Final Dividend rate.

Declaration of Interim Dividend:

• The articles must authorize the payment of dividends; otherwise, the board cannot recommend dividends to the approval members.
• Similarly, unless the articles contain a provision permitting the Board to authorise the payment of an interim dividend, the Board cannot take any action in this regard.
• The Board of Directors of the company will declare an interim dividend in a profit and loss account or even in a profit from the financial year for which such interim dividend is to be declared or from profits generated in the financial year ti during any financial year or at any time during the period following the financial year’s closing date, until the annual General Meeting has been held. (Provided that if the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of interim dividend declaration, such interim dividend shall not be declared at a rate greater than the company’s average dividends declared during the previous three financial years.)
• Directors must produce a proforma for the company’s profit and loss account and balance sheet up to the latest practicable date of the financial year for which an interim dividend is intended to be issued, as well as provision for all working expenses and depreciation for the entire year.
• Within five days after the date of declaration of the dividend, including interim dividends, the amount of the dividend must be deposited in a scheduled bank in a separate account. The money that has been transferred will not be used for any other reason. The same must be paid within 30 days after the Board’s declaration.
• No company can issue a dividend in any year unless it charges depreciation in the current year’s profit and loss account and there is no unaccounted for depreciation from previous years.
• Prepare a dividend statement for each shareholder that includes the following information.
• Shareholder’s name and address with ledger Folio No.
• Shares held.
• Dividend payable
• Approval of members at the general meeting for the interim dividend, as well as approval of members at the upcoming AGM in the director’s report.

Meaning of Final Dividend

• On the recommendation of the Board of Directors, the company declares the final dividend at its Annual General Meeting (AGM).
• The final dividend is declared only after the Financial Statements have been prepared, finalized, and audited by the Auditors.
• The management shall decide the percentage of profit to be distributed among the shareholders based on the company’s profitability.
• The dividend, once declared, becomes the Company’s duty and cannot be reversed.
• The “Interim Dividend” is a dividend declared and paid by the Board of Directors between two Annual General Meetings. Interim dividends are declared from the profit and loss account surplus or profits of the financial year in which the dividend is to be declared.

Characteristics of Final Dividend:

Some characteristics of Final Dividend are as follows:

• The percentage of the Final Dividend is greater than the percentage of the Interim Dividend.
• The declaration of the Final Dividend builds trust in the shareholders.
• Investors are eager to invest in companies that declare a final dividend. Dividend certainty is always preferred by shareholders over higher capital gains.
• It is an unconditional payout of a portion of the company’s profits to the shareholders.
• Payments are available to both equity and preference stockholders.
• Dividends can be paid from profits rather than capital.
• On the Board of Directors’ recommendation, it can be declared.
• Dividends must be adopted by Ordinary Resolution at an Annual General Meeting.
• Dividends cannot be withdrawn once they have been proclaimed.
• The payment must be made in cash, not in kind.
• The dividend is only paid on the paid-up value of the shares.

Sources of distribution of Final Dividend:

The following sources will be used to pay the Final Dividend:

• Dividends shall be paid from the previous year’s profit or the current year’s profit of the fiscal year after previous losses and depreciation have been set off against the current year’s profit.
• In the event of insufficient profits, a firm may declare a dividend from its reserves, subject to the following conditions:
• The dividend rate shall not be higher than the average rate at which the dividend was announced in the previous three financial years.
• The amount to be taken from such reserves cannot exceed 1/10th of the paid-up share capital and free reserves as shown in the most recent audited Balance Sheet.
• After such withdrawal, the balance of such reserves must not be less than 15% of the paid-up share capital as shown in the most recent audited balance statement.
• The amount withdrawn will be used to offset losses from the Financial Year in which the Dividend is declared first.
• Dividend paid from funds provided by the Central or State Government–Dividends may also be paid from funds provided by the Central or State Government in accordance with the guarantee provided by the Government.

Difference between Interim Dividend and Final Dividend:

	Interim Dividend	Final Dividend
1.	It can be declared by the Board of Directors only.	It is recommended by the Board of Directors and declared by the Shareholders.
2.	It is declared during the Financial Year.	It is declared in the Annual General Meeting at the end of the Year.
3.	It is declared before the preparation of final accounts.	It is declared after the preparation of final accounts.
4.	Articles permit the declaration of payment of Interim Dividend.	No such provision is required in the Articles for payment of Final Dividend.
5.	Interim Dividend is declared by passing Board Resolution.	Final Dividend is declared by passing Ordinary Resolution at the AGM.

Procedure of declaration and payment of Dividend:

• For a Board meeting to be convened, at least seven days’ notice must be given, and in the event of a Listed Company, the stock exchange must be notified at least two working days before the meeting.
• Hold a Board meeting and approve a Board Resolution recommending a Final Dividend to shareholders. In the case of a publicly traded company, the dividend must be declared at least five days before the record date is set.
• At least twenty-one clear days before the meeting, notice of the general meeting must be given.
• A general meeting shall be called and an Ordinary Resolution shall be passed to declare the Final Dividend to the shareholders in accordance with the Board’s recommendation.
• Within five days of the declaration of the Dividend, a separate bank account shall be opened, and the amount of the Dividend shall be credited to such bank account.
• Dividends must be paid within thirty days of the Final Dividend being declared, and if the Dividend is unclaimed or unpaid, it must be transferred to an Unpaid Dividend account within 7 days just after thirty-day period expires.
• If a Dividend is not claimed or paid after seven years, it will be transferred to the Investor Education and Protection Fund.

Also Read : income tax treatment of a company’s dividend

Wrapping up:

• Dividend payments are always a motivating factor for investors who have put their money into the company.
• Dividends are beneficial to both the company and the shareholders. Dividend payments are determined by the company’s financial health and profitability.
• The Final Dividend is always greater than the Interim Dividend. This dividend is paid once a year and is usually higher than the interim dividend.

 More updates: Key Highlights of RACP Bill, 2020 and Companies (Amendment) Bill,2020