MEANING
Divisible Profits are the profits that are legally available for distribution among the shareholders by way of dividend. These are the profits which the directors consider should be distributed after making provision for past losses and reserves.
LEGAL RESTRICTIONS
UNDER SECTION 123 (1): As per this section, the payment of dividends can be made either out of profits of the company for the year or out of undistributed profits of the previous year.
UNDER SECTION 123 (2): As per this section, ‘Profit’ for the purpose of paying dividends must be arrived at after making provisions for depreciation.
FACTORS INFLUENCING DIVISIBLE PROFITS
The following are the factors that influence the profits distributable as dividends:
CAPITAL PROFIT: Divisible profit can be paid, if there is some capital profit.
CAPITAL LOSS: In case of capital loss, dividend can be paid out of the current profits.
DEPRECIATION: Depreciation is charged before distribution of divisible profits. If the amount of depreciation will be more, there will be less divisible profits. If the amount of depreciation is small, there will be more divisible profits.
TRANSFER TO RESERVES: Divisible profits can be calculated only after making transfer to the reserves. The balance of the reserves shall not fall below 15% of the paid up capital of the company.
OTHER FACTORS: Other factors that affect the divisible profits amount are:
- Working capital requirements of the company
- Past dividend payout history
- Dividend on preference shares.
PROVISIONS REGARDING DIVISIBLE PROFITS
DECLARATION OF DIVIDEND
Divisible profits are to be declared as dividend only after providing for depreciation and previous year losses. The board of directors has the right to recommend the rate of dividend or lower the same, but they cannot increase the amount.
DIVIDEND AS DEBT
A dividend, when declared, becomes a debt, and a shareholder is entitled to suit a law for the recovery of the same after the expiry of the time period.
REVOCATION OF DECLARED DIVIDEND
A dividend once declared can never be revoked. However, the dividend illegally declared can be revoked.
DEPOSIT OF DIVIDEND
As per section 123 (4), the amount of dividend shall be deposited in a separate bank account within 5 days from the date of declaration.
SOURCES OF DIVISIBLE PROFITS
Section 123 of the Companies Act, 2013 the sources from where the divisible profits are distributed as dividends are:
- OUT OF CURRENT YEAR PROFITS: The dividend is declared after providing for depreciation. The amount of profits to be transferred as dividend is transferred to the General Reserve.
- OUT OF PAST YEAR PROFITS: The dividend can also be declared from the divisible profits of past years.
- The divisible profits can also be provided out of the funds given by Central Government.
DISTRIBUTION
The divisible profits should be distributed as dividends in two ways:
- FINAL DIVIDEND: Final dividend is proposed by the Board of Directors and approved by the shareholders at annual general meeting. The final dividend is paid in addition to the interim dividend. When a final dividend is declared, then interim dividend is not adjusted unless the resolution mentions it specifically.
- INTERIM DIVIDEND: Interim dividend represents the dividend paid by the company before the preparation of final accounts. In other words, an interim dividend is a dividend declared at any time between the two annual general meetings in anticipation of profits. It can be paid only if authorized by the Articles.
MODE OF PAYMENT
The profits can be distributed as dividends to the shareholders in the following ways:
- By cash
- By cheque
- By issuing share warrants.
PROFITS MUST BE IN THE LIMITS PRESCRIBED BY ARTICLES OF ASSOCIATION
The Articles of Association being the Doctrine of Indoor Management, describes the limits within which the divisible profits must be declared as dividends.
FOLLOWING OF ACCOUNTING PRINCIPLES
The accounting principles such as
- Going Concern Concept
- Consistency Concept
- Conservatism Concept
- Matching Concept
Must be applied while calculation of profits to be distributed as dividends.
SHAREHOLDERS APPROVAL
Dividend cannot be distributed as dividend without the approval of shareholders. Annual general meeting is to be conducted for the declaration of dividend.
DEDUCTIONS
The following deductions should be made out of the divisible profits to distribute it as dividends;
- Under section 205(2): Current Depreciation
- Under section 205 (2a): Transfer to General reserve
- Under Section 205 (a): Arrears of depreciation
- Under section 252 (b): Past Losses.