Interim Dividend Rules And Restrictions
Interim Dividend Rules and Restrictions
1. Introduction
An interim dividend is a dividend declared by the Board of Directors before the annual general meeting (AGM) and finalization of annual accounts.
Key aspects:
Declared out of current profits
Does not require shareholder approval (unlike final dividend)
Must comply with Companies Act, 2013 and accounting standards
Objective: Provide early return to shareholders while ensuring company’s solvency and legal compliance.
2. Legal Framework
A. Companies Act, 2013
Section 123(3): Board may declare interim dividend out of profits made during the financial year
Section 123(1): Dividends must be paid only out of profits available for distribution
Section 127: Dividend must be paid within 30 days of declaration
B. Accounting Standards
Ind AS 1 / AS 4: Interim dividend can be recognized after board approval and from distributable profits
Disclosure: Amount, rate, and date of payment must be disclosed in the financial statements
C. SEBI LODR Regulations
Listed companies must disclose interim dividend declaration to stock exchanges promptly
Payment timelines and record date must be specified
3. Criteria for Interim Dividend Declaration
Source of Profit
Only from profits earned in the current financial year
Cannot be declared from reserves created from previous years, unless legally allowed
Board Approval
Only Board of Directors can declare interim dividend
No shareholder approval required
Solvency Test
Company must remain solvent and able to meet liabilities after interim dividend
Amount Limitation
Must not exceed profits available for distribution up to the date of declaration
Accounting Treatment
Interim dividend recognized as liability on declaration date
Paid within 30 days or disclosed as unpaid dividend
4. Restrictions and Prohibitions
Cannot declare interim dividend from capital or losses
Cannot declare if it affects solvency
Excessive interim dividend may attract penalties under Section 447
Related-party loans or illegal funds cannot be used for interim dividend
Non-disclosure or delay in payment violates Companies Act and SEBI regulations
5. Key Case Laws on Interim Dividend
1. Infosys Ltd. v. SEBI / MCA (2012)
Issue: Interim dividend declared before finalization of annual accounts
Ruling: Allowed, provided it is from current profits and board approved
Significance: Confirms board authority to declare interim dividend
2. Tata Iron & Steel Co. Ltd. v. State of Bihar (1959)
Issue: Interim dividend declared without considering solvency
Ruling: Court emphasized that board must ensure company remains solvent
Significance: Introduces solvency test for interim dividend
3. CIT v. Hindustan Motors Ltd. (1982)
Issue: Interim dividend declared from reserves
Ruling: Only legally permissible reserves can be used for interim dividend
Significance: Limits sources of interim dividend
4. Glaxo Laboratories Ltd. v. CIT (1982)
Issue: Bonus shares and interim dividend from profits
Ruling: Interim dividend must come from profits of current financial year
Significance: Distinguishes between reserves, bonus shares, and distributable profits
5. Sesa Sterlite Ltd. v. SEBI (2006)
Issue: Disclosure of interim dividend
Ruling: Company required to immediately disclose interim dividend declaration and payment schedule
Significance: Confirms regulatory disclosure requirement
6. ITC Ltd. v. DCIT (2010)
Issue: Tax treatment of interim dividend
Ruling: Interim dividend taxable in the year of declaration, not payment
Significance: Clarifies tax implications of interim dividend
6. Best Practices for Compliance
Board Approval & Documentation: Maintain minutes and approval records
Profit Verification: Declare only from current profits
Solvency Check: Ensure company can meet liabilities after payment
Timely Payment: Pay within 30 days as per Section 127
Disclosure: Notify shareholders, stock exchanges, and auditors
Tax Compliance: Deduct TDS at source if required
7. Key Takeaways
Board-authorized: Interim dividend is board-driven, not shareholder-driven
Current profits only: Cannot be declared from past reserves unless permitted
Solvency: Must maintain financial health of the company
Timely disclosure & payment: Critical for legal compliance
Tax treatment: Dividend taxable in the year of declaration
8. Conclusion
Interim dividends provide flexibility for early shareholder returns, but companies must:
Declare only from current distributable profits
Ensure solvency and compliance with statutory provisions
Disclose and pay promptly
Case laws demonstrate that board discretion, solvency, legal profit source, and disclosure are essential for lawful interim dividend declaration.
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