Rule 1Short title and commencement
Companies (Declaration and Payment of Dividend) Rules, 2014; effective from 1 April 2014.
Finin2minCompanies Act Rules Master Series 07
Dividend, Unpaid Dividend Account
and Investor Education and Protection Fund
A professional rulebook covering sections 123-127, distributable profits, free-reserve withdrawal, interim and final dividend, bank and payment controls, unpaid dividend, IEPF money and share transfers, current forms, investor claims and default consequences.
Sections 123-127
Complete Chapter VIII lifecycle
Complete Chapter VIII lifecycle
5 Days
Separate bank deposit
Separate bank deposit
30 + 7 Days
Payment and UDA transfer
Payment and UDA transfer
7 Years
IEPF transfer trigger
IEPF transfer trigger
Executive architecture
Dividend is a four-stage legal process
Source
Prove legally distributable profit or satisfy every free-reserve withdrawal condition.
Authority
Board recommends final dividend; members declare it. Board declares interim dividend.
Payment
Ring-fence the declared amount within five days and pay entitled holders within 30 days.
Investor protection
UDA, website disclosure, seven-year transfer, share monitoring and IEPF claim.
Central principle: accounting profit does not by itself create a lawful dividend pool. Source, statutory adjustments, authority, cash and entitlement must all pass.
Decision map
Can the company lawfully declare and pay dividend?
Act gateway
Sections 123-127 working register
| Section | Subject | Professional control |
|---|---|---|
| 123 | Declaration of dividend | Lawful source, depreciation, exclusions, loss set-off, authority, separate bank account and payment mode. |
| 124 | Unpaid Dividend Account | 30-day payment, following seven-day UDA transfer, 90-day website statement, 12% delay interest, seven-year IEPF money/share transfer. |
| 125 | Investor Education and Protection Fund | Amounts credited, uses of Fund, Authority and refund entitlement. |
| 126 | Transfer lodged but not registered | Dividend to UDA unless registered holder authorises transferee; rights and bonus kept in abeyance. |
| 127 | Failure to distribute | 30-day default, officer consequences, 18% company interest and limited statutory defences. |
Distributable profit
Section 123 source and adjustment tests
- Current-year profit after Schedule II depreciation.
- Prior-year undistributed profit after the same depreciation discipline.
- Compliant withdrawal from accumulated profits transferred to free reserves.
- Money provided by Central or State Government under a dividend guarantee.
- Exclude unrealised gains, notional gains, revaluation gains and specified fair-value carrying changes.
- Set off carried-forward losses and unprovided depreciation before current-year dividend.
- Do not use non-free reserves, securities premium or capital reserves unless a distinct lawful capital route applies.
Fair-value example: Reported profit is Rs. 30 crore, including Rs. 9 crore unrealised fair-value gain. The ordinary distributable-profit review starts from Rs. 21 crore before other statutory and contractual adjustments.
Dividend Rules
Companies (Declaration and Payment of Dividend) Rules
Rule 2Definitions
Act meanings remain central, especially free reserves, paid-up capital and financial year.
Rule 3Dividend out of free reserves
Apply all four current conditions together: three-year average-rate cap unless no dividend in each of those years; 10% withdrawal ceiling; current-year loss set-off first; and 15% residual-reserve floor. Former sub-rule (5) was omitted in 2015.
Reserve-route formula: total withdrawal is capped by the lower of 10% of paid-up capital plus free reserves and the amount that preserves free reserves equal to 15% of paid-up capital. Current-year loss is absorbed first.
Final and interim dividend
Authority and rate controls
| Point | Final dividend | Interim dividend |
|---|---|---|
| Authority | Board recommends; members declare | Board declares |
| Maximum | Members cannot exceed Board recommendation | Available surplus/current profits under section 123(3) |
| Loss cap | Ordinary source/reserve rules | If loss exists up to preceding quarter, rate cannot exceed three-year average |
| Payment obligations | Separate bank account within five days and payment within 30 days | |
Interim-loss example: Current-year loss exists up to the quarter immediately before declaration and the preceding three-year average dividend rate is 6%. The interim rate cannot exceed 6%.
Free-reserve calculation
All Rule 3 tests must pass together
| Test | Working rule |
|---|---|
| Rate | Not above average rates declared in immediately preceding three years, unless no dividend was declared in each of those years. |
| Withdrawal | Not above 10% of paid-up share capital plus free reserves in latest audited financial statements. |
| Loss absorption | Use withdrawal first to set off current-year loss. |
| Reserve floor | Free-reserve balance after withdrawal not below 15% of paid-up share capital. |
Worked case: Paid-up capital Rs. 20 crore, free reserves Rs. 80 crore and prior rates 8%, 10% and 12%. Maximum total withdrawal is Rs. 10 crore and the rate cap is 10%, subject to loss set-off and other law.
Entitlement and payment
From declaration date to shareholder credit
| Control | Requirement |
|---|---|
| Bank account | Deposit full declared amount in separate scheduled-bank account within five days. |
| Payee | Registered shareholder, order or banker, subject to section 126 and lawful mandates. |
| Mode | Electronic mode, cheque or warrant; bonus/capitalisation is separately permitted. |
| Payment period | Pay or post warrant within 30 days of declaration. |
| Unsuccessful credit | Track rejected bank credits, stale warrants and unclaimed amounts for UDA. |
| Deposit default | Continuing sections 73/74 failure bars equity dividend. |
Cash shortage: after declaration, general liquidity difficulty is not one of the listed section 127 defences.
Section 126
Transfer lodged but not registered
Where a transfer instrument is lodged but registration is pending, the company transfers the related dividend to the UDA unless the registered holder authorises payment to the named transferee. Rights-share offers and fully paid bonus shares relating to those shares are kept in abeyance pending registration.
Unpaid Dividend Account
Thirty days, following seven days and ninety days
| Stage | Deadline / consequence |
|---|---|
| Dividend payment | Within 30 days of declaration |
| UDA transfer | Within following seven days for total unpaid/unclaimed amount |
| Delayed UDA transfer | 12% annual interest from default date, accruing for affected members |
| Investor statement | Names, last-known addresses and amounts on prescribed websites within 90 days of UDA transfer |
| Investor claim before IEPF | Claim directly from company while amount remains in UDA |
| IEPF money transfer | After seven years in UDA, with accrued interest if any |
IEPF lifecycle
Money, shares and investor refund
IEPF Rules
Current operating framework
IEPF Rule 1Title and commencement
IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016; effective from 7 September 2016, subject to later amendments.
IEPF Rule 2Definitions
Authority, Fund, company, nodal officer and operating expressions.
IEPF Rule 3Fund and bank framework
Custody and banking framework for statutory amounts credited to IEPF.
IEPF Rule 4Accounts and audit
Authority accounts, records and CAG-linked audit and reporting.
IEPF Rule 5Transfer of amounts and statements
IEPF-1 amount transfer/remittance and IEPF-2 investor-wise unpaid data; 2024 consolidation absorbed former IEPF-7 functions into IEPF-1.
IEPF Rule 6Transfer of shares under section 124(6)
Advance shareholder and public notice, depository transfer, corporate benefits and IEPF-4; former IEPF-3 functions were consolidated into IEPF-4 in 2024.
IEPF Rule 6AOther statutory security transfers
Covers shares transferred to IEPF under the SBO restriction regime and related statement/depository process.
IEPF Rule 7Refund to claimant
Current IEPF-5, company/nodal-officer verification, succession evidence, clarification and money/share refund. Current form applies from 6 October 2025.
IEPF Rule 8Authority information powers
Authority may call for company and claimant records needed to administer transfers and claims.
Share-transfer test
Seven consecutive years is not the same as seven old dividends
- Test each share/folio or demat position for seven consecutive dividend years.
- If any dividend is paid or claimed during that sequence, the share is not transferred based on that interrupted chain.
- Amount transfer and share transfer are related but separate controls.
- Send advance communication and complete public/website notice before transfer.
- Transfer shares through depository corporate action and report in current IEPF-4.
- Credit later bonus, split, consolidation, merger or other corporate benefits to the IEPF framework.
Interrupted-chain example: Dividend was unclaimed for six years, claimed in year seven and unclaimed again in year eight. The earlier sequence is broken; the share is not transferred on that incomplete chain.
Investor claim
Current IEPF-5 and company verification
IEPF-5->Claim documents->Nodal officer->Company verification->Authority review->Refund / demat credit
- Use the current online IEPF-5 form effective from 6 October 2025.
- Legal heirs must establish succession and original entitlement.
- Company/nodal officer normally sends verification within 30 days.
- Preserve original holder, bank, folio, depository, transfer and prior correspondence records.
- Authority can seek clarification before approving money or securities.
Forms and evidence
Current dividend and IEPF matrix
| Form / evidence | Purpose |
|---|---|
| Board resolution | Recommend final dividend or declare interim dividend |
| AGM ordinary resolution | Declare final dividend not exceeding Board recommendation |
| Separate dividend account | Deposit full declared amount within five days |
| Unpaid Dividend Account | Transfer unpaid/unclaimed balance after 30 days within following seven days |
| Website claimant statement | Names, last-known addresses and unpaid amounts within 90 days of UDA transfer |
| IEPF-1 | Amount transfer and remittance statement; includes former IEPF-7 function |
| IEPF-1A | Historical/legacy statement for specified old-law transfers |
| IEPF-2 | Investor-wise unpaid/unclaimed amounts and prescribed company/nodal information |
| IEPF-3 | Historical - merged into IEPF-4 in 2024 |
| IEPF-4 | Current securities-transfer statement and consolidated share reporting |
| IEPF-5 | Current investor claim for money and/or securities; substituted from 6 October 2025 |
| IEPF-6 | Omitted historical form |
| IEPF-7 | Historical - merged into IEPF-1 in 2024 |
| Nodal-officer record | Company-side claim contact, website disclosure and verification |
| Depository corporate action | Transfer shares and subsequent benefits to/from IEPF demat account |
Current-form control: do not file IEPF-3 or IEPF-7 as separate current forms. Their functions were consolidated in 2024.
Section 127
Default consequence and statutory defences
| Consequence | Rule |
|---|---|
| Officer consequence | Knowing default can attract daily imprisonment and fine under section 127. |
| Company interest | Simple interest at 18% per annum during the default period. |
| Defence 1 | Payment prevented by operation of law. |
| Defence 2 | Shareholder direction cannot be complied with and holder was informed. |
| Defence 3 | Dispute regarding right to receive dividend. |
| Defence 4 | Lawful adjustment against sum due from shareholder. |
| Defence 5 | Failure not due to any default of company. |
Accounting, tax and listed overlay
Separate frameworks after company-law eligibility
| Framework | Separate control |
|---|---|
| Ind AS 10 / AS 4 | Final dividend declared after reporting date is generally a non-adjusting disclosure rather than reporting-date liability. |
| Income-tax | Withholding, rate, declaration forms, non-resident treaty/FEMA and information reporting. |
| SEBI LODR | Prior intimation/disclosure, record date, payment mode, dividend distribution policy and unclaimed amount requirements. |
| Preference shares | Priority, arrears and terms before equity dividend. |
| Financing covenants | Leverage, distribution lock-up and lender-consent tests. |
Practical cases
Fourteen professional scenarios
1. Fair-value gain: Exclude unrealised gain before assessing the ordinary dividend pool.
2. Free-reserve route: Apply average rate, 10% withdrawal, loss set-off and 15% floor together.
3. No prior dividend: Three-year rate cap is inapplicable only when no dividend was declared in each year; other Rule 3 conditions remain.
4. Interim loss: Rate cannot exceed the preceding three-year average.
5. Deposit default: Equity dividend is barred while sections 73/74 failure continues.
6. Day-eight bank deposit: Payment by day 30 does not cure breach of five-day ring-fencing.
7. Late UDA transfer: Company owes 12% statutory interest for members' benefit.
8. Share chain interrupted: One paid/claimed dividend year prevents transfer on that seven-year sequence.
9. Transfer pending: Dividend goes to UDA unless registered holder authorises transferee.
10. Members increase final dividend: Resolution above Board recommendation is ineffective.
11. Legal-heir claim: Current IEPF-5 plus succession and company verification.
12. Old form used: Separate IEPF-3/IEPF-7 workflow is obsolete after 2024 consolidation.
Audit and secretarial checklist
Dividend and IEPF evidence pack
Declaration and payment
- Distributable-profit computation
- Reserve-route calculation
- Board/member resolutions
- Class entitlement and record date
- Separate bank-account proof
- Payment/rejection reconciliation
Unpaid and IEPF
- UDA bank and 90-day statement
- IEPF-1/2/4 acknowledgements
- Seven-year folio tracker
- Shareholder/public notices
- Depository corporate action
- IEPF-5 verification and nodal records
Immediate red flags
| Red flag | Risk |
|---|---|
| Profit includes revaluation gain | Not legally distributable under section 123. |
| Only 10% reserve test applied | Rate, loss and residual-reserve tests omitted. |
| Dividend bank deposit after day 5 | Independent statutory breach. |
| Any unclaimed seven years assumed to transfer shares | Consecutive-year interruption test ignored. |
| Old IEPF form workflow | Portal rejection and incomplete statutory record. |
Finin2min Q&A
Quick answers
Can dividend be paid from revaluation reserve?
No. Reserve-funded dividend must use free reserves and pass Rule 3.
No. Reserve-funded dividend must use free reserves and pass Rule 3.
When is declared dividend deposited in bank?
Within five days in a separate scheduled-bank account.
Within five days in a separate scheduled-bank account.
When does unpaid dividend move to UDA?
Within seven days after the 30-day payment period expires.
Within seven days after the 30-day payment period expires.