August 8, 2025

Legal Framework, Process & Compliance Under Indian Law

Amit Kapoor030 mins
Legal Framework, Process & Compliance Under Indian Law

 1. Introduction

Dividends represent one of the most significant mechanisms through which companies reward their shareholders for their investment and demonstrate the success of their business operations. In the Indian corporate landscape, dividend distribution is governed by a comprehensive legal framework that ensures both corporate transparency and investor protection while maintaining the financial stability of companies.

The concept of dividends has evolved significantly since the enactment of the Companies Act, 2013, which brought substantial changes to the dividend distribution mechanism. The abolition of Dividend Distribution Tax (DDT) in 2020 and the shift to taxing dividends in the hands of shareholders marked a paradigm shift in India’s approach to dividend taxation. This transformation, combined with stringent regulatory requirements under SEBI’s Listing Obligations and Disclosure Requirements (LODR) and various provisions of the Income Tax Act, has created a robust framework that governs every aspect of dividend distribution.

Understanding dividend mechanics is crucial for multiple stakeholders – company directors who must ensure compliance while maximizing shareholder value, investors who rely on dividends for income, and financial professionals who guide corporate dividend policies. The intersection of corporate law, securities regulations, and tax provisions creates a complex web of requirements that demands a comprehensive understanding and meticulous compliance.

2. Definition and legal framework

√ Legal Definition

According to Section 2(35) of the Companies Act, 2013, “dividend” includes any interim dividend. This seemingly simple definition encompasses a broader spectrum of profit distributions that companies make to their shareholders. The definition extends beyond mere cash payments to include various forms of profit distribution, including bonus shares, stock dividends, and other forms of value transfer to shareholders.

The Income Tax Act, 1961, under Section 2(22), provides an even more comprehensive definition of dividend, encompassing distributions such as accumulated profits releases, bonus shares to preference shareholders, distributions during liquidation, and advances or loans to beneficial shareholders in specific circumstances. This broader tax definition ensures that various forms of corporate distributions are appropriately captured within the dividend taxation framework.

√ Constitutional and Regulatory Authority

The regulatory framework for dividends operates under a well-defined hierarchy of authorities. Section 24 of the Companies Act, 2013, specifically confers upon SEBI the power to administer provisions relating to non-payment of dividends by listed companies. This delegation of authority ensures specialized oversight of dividend-related matters for public companies while maintaining the Ministry of Corporate Affairs’ jurisdiction over private companies.

The Reserve Bank of India (RBI) exercises additional oversight over banking and financial sector companies, imposing specific dividend distribution restrictions and eligibility criteria to maintain the stability of the financial system. These sector-specific regulations reflect the critical role that financial institutions play in the broader economy and the need for enhanced prudential oversight.

3. Governing legal provisions

A. Companies act, 2013

i. Section 123 – Declaration of Dividend

Section 123 serves as the cornerstone of dividend legislation in India, establishing fundamental principles that govern dividend distribution. The section mandates that dividends can only be declared from:

    • Profits of the current financial year after providing for depreciation
    • Profits of previous financial years after providing for depreciation and remaining undistributed
    • Money provided by Central or State Government for dividend payment pursuant to guarantees

A critical amendment introduced in 2018 clarified that unrealized gains, notional gains, revaluation of assets, and fair value changes must be excluded while computing profits for dividend distribution[3][11]. This provision prevents companies from distributing dividends based on paper profits that may not represent actual cash generation.

ii. Section 123(3) – Interim Dividends

The provision for interim dividends allows boards of directors to declare dividends during the financial year from surplus in the profit and loss account and current year profits. However, if a company has incurred losses during the current financial year up to the quarter immediately preceding the interim dividend declaration, the rate cannot exceed the average dividend declared during the immediately preceding three financial years.

iii. Section 124 – Unpaid Dividend Account

This section establishes a protective mechanism for shareholders by requiring companies to transfer unpaid or unclaimed dividends to a separate Unpaid Dividend Account within seven days of the expiry of thirty days from dividend declaration. The company must prepare and publish a statement of unpaid dividends within ninety days, making it accessible to shareholders through the company’s website and government-approved platforms.

iv. Section 125 – Investor Education and Protection Fund (IEPF)

Section 125 establishes the IEPF as a repository for unclaimed dividends that remain unpaid for seven years. This provision ensures that unclaimed shareholder wealth is preserved and can be claimed by rightful owners even after extended periods, while simultaneously contributing to investor education and protection initiatives.

v. Section 127 – Punishment for Failure to Distribute Dividend

This penal provision imposes criminal liability on companies and their officers for failing to distribute declared dividends within the prescribed timeframe of thirty days. The section prescribes imprisonment and financial penalties, emphasizing the serious nature of dividend payment obligations.

B. SEBI LODR Regulations

i. Regulation 43A – Dividend Distribution Policy

Regulation 43A, inserted through amendments in 2016 and subsequently modified in 2021, mandates the top 1000 listed entities based on market capitalization to formulate and disclose dividend distribution policies. This regulation requires companies to specify:

    • Circumstances under which shareholders may or may not expect dividends
    • Financial parameters for dividend declaration
    • Internal and external factors affecting dividend decisions
    • Policy for utilization of retained earnings
    • Parameters for different classes of shares

ii. Regulation 12 and 43 – General Obligations

These regulations impose additional disclosure and compliance requirements on listed companies regarding dividend announcements, ensuring timely and accurate communication to all stakeholders[4].

iii. Income Tax Act, 1961

The taxation framework for dividends underwent a revolutionary change with the Finance Act, 2020, which abolished the Dividend Distribution Tax (DDT) system and shifted the tax burden to shareholders. This change aligned India’s dividend taxation with global practices and eliminated the cascading effect of dividend taxation.

iv. Section 194 – TDS on Dividend

Section 194 mandates Tax Deducted at Source (TDS) on dividend payments exceeding specified thresholds. As per Budget 2025, the threshold has been increased from Rs. 5,000 to Rs. 10,000 per financial year. The standard TDS rate is 10% for resident shareholders with valid PAN, increasing to 20% for those without PAN or with invalid PAN.

v. Section 115BBDA and Related Provisions

These sections previously governed the taxation of dividend income exceeding Rs. 10 lakh in the hands of shareholders. However, these provisions became largely redundant after the abolition of DDT and the introduction of slab-based taxation for all dividend income.

4. Detailed process for dividend declaration and payment

The dividend declaration and payment process involve multiple sequential steps, each with specific timelines and compliance requirements. Understanding this process is crucial for ensuring regulatory compliance and avoiding penal consequences.

Step 1: Board Meeting Notice (7 Days Prior)

The process begins with issuing a notice for the board meeting to all directors at least seven days in advance. The notice must specify:

    • Date, time, and venue of the meeting
    • Agenda items include dividend declaration
    • Relevant financial documents and supporting materials

Step 2: Board Meeting and Resolution

During the board meeting, directors must review the company’s financial position, including:

    • Available profits after depreciation
    • Cash flow requirements
    • Future capital needs
    • Regulatory compliance status
    • Impact on the company’s financial stability

The board passes a resolution specifying:

    • Type of dividend (final/interim)
    • Rate of dividend
    • Record date for determining eligible shareholders
    • Book closure dates
    • Dividend payment date

Step 3: Filing of Forms with Registrar of Companies

Form MGT-14: This form must be filed within 30 days of passing the board resolution for dividend declaration. The form contains details of the resolution and must be digitally signed by authorized personnel.

Form MGT-15: Required specifically for interim dividend declarations, this form captures the board’s decision and must be filed within the prescribed timeline.

Step 4: Annual General Meeting Approval (For Final Dividend)

Final dividends require shareholder approval at the Annual General Meeting (AGM). Key aspects include:

    • Shareholders can approve a lower rate but cannot increase the recommended rate
    • The dividend becomes a debt of the company once approved
    • The company cannot declare a second dividend in the same financial year after AGM approval

Step 5: Opening a Separate Bank Account

Companies must open a dedicated bank account with a scheduled bank specifically for dividend payments. This account serves as a safeguard, ensuring that dividend funds are segregated and used exclusively for shareholder payments.

Step 6: Deposit of Dividend Amount (Within 5 Days)

The total dividend amount must be deposited in a separate bank account within five days of:

    • Board meeting date (for interim dividends)
    • AGM approval date (for final dividends)

This timeline is strictly enforced, and any delay can result in penal consequences under Section 127.

Step 7: Payment to Shareholders (Within 30 Days)

Dividend payments must be completed within 30 days of declaration through:

    • Electronic transfer to registered bank accounts
    • Physical dividend warrants
    • Cheques sent to registered addresses

Step 8: Unpaid Dividend Account (After 30 Days)

Any dividends remaining unpaid after 30 days must be transferred to the Unpaid Dividend Account within seven days. The company must prepare and publish a statement of unpaid dividends within 90 days.

Step 9: Transfer to IEPF (After 7 Years)

Unclaimed dividends remaining in the Unpaid Dividend Account for seven years must be transferred to the Investor Education and Protection Fund, along with corresponding shares.

5. Eligibility criteria and requirement

A. For companies

Companies must satisfy several eligibility criteria before declaring dividends:

i. Financial Requirements:

    • Adequate profits available after providing for depreciation in accordance with Schedule II of the Companies Act, 2013
    • Compliance with minimum reserve requirements as prescribed
    • Sufficient cash flow to support dividend payments without compromising operations

ii. Regulatory Compliance:

    • Compliance with applicable capital adequacy requirements (especially for financial sector companies)
    • Meeting statutory obligations under various applicable laws
    • Absence of specific regulatory restrictions on dividend distribution

iii. Banking Sector Specific Requirements:

Banks must meet additional stringent criteria, including:

    • Capital to Risk-weighted Assets Ratio (CRAR) of at least 9% for the preceding two years and the current year
    • Net Non-Performing Assets (NPA) ratio below 7%
    • Compliance with Sections 15 and 17 of the Banking Regulation Act, 1949
    • Transfer of the prescribed percentage of profits to statutory reserves

B. For shareholders

Shareholders must meet specific eligibility criteria to receive dividend payments:

i. Share Ownership Requirements:

    • Valid shareholding in the company as of the record date
    • Shares must be purchased before the ex-dividend date
    • Proper registration with the company or depository participants

ii. Documentation Requirements:

    • Valid PAN registration linked with Aadhaar number
    • Complete Know Your Customer (KYC) compliance
    • Updated bank account details for electronic credit
    • Valid registered address for physical dividend warrants

iii. Timing Requirements:

    • Purchase shares at least one trading day before the ex-dividend date
    • Hold shares during the book closure period
    • Ensure demat account details are updated and accurate

6. Interim Vs final dividend: Comprehensive comparison

Criteria Interim Dividend Final Dividend
Time of declaration During the financial year After the year-end at the AGM
Authority Board of Directors Board recommends, shareholders approve
Approval No shareholder approval required (board’s discretion) Requires shareholder approval
Source of funds Only from current year profits (after depreciation), surplus in P&L From the current year’s profits or accumulated reserves
Filing MGT-15 with ROC MGT-14 with ROC
Revocation Can be revoked before payment Irrevocable upon declaration

7. Tax rates for different categories of recipients

A. Resident Individual and HUF:

  • Dividend income is added to total income and taxed at applicable slab rates
  • No special dividend tax rate; follows regular income tax slabs
  • Can claim deductions under Section 57 for interest expenses up to 20% of dividend income

B. Resident Companies:

  • Taxed at applicable corporate tax rates
  • Inter-corporate dividend benefits available under Section 80M to avoid cascading
  • Must comply with TDS provisions when receiving dividends

C. Non-Resident Indians (NRIs):

  • Dividend from GDR of Indian companies (purchased in foreign currency): 10%
  • Dividend on shares of Indian companies (purchased in foreign currency): 20%
  • Other dividend income: 20%
  • Double Taxation Avoidance Agreement (DTAA) benefits may apply

D. Foreign Portfolio Investors (FPIs):

  • Standard rate of 20% plus applicable surcharge and cess
  • May claim DTAA benefits based on their country of residence
  • Different surcharge rates apply based on dividend income levels

8. Restrictions and limitations

A. Financial and Prudential Restrictions

i. Profit-Based Restrictions:

Companies cannot distribute dividends exceeding their available profits after making adequate provisions for:

    • Depreciation as per Schedule II of the Companies Act, 2013
    • Statutory reserves as required by applicable laws
    • Contingent liabilities and future commitments

ii. Liquidity and Cash Flow Constraints:

Even with adequate profits, companies must ensure sufficient liquidity for:

      • Working capital requirements
      • Planned capital expenditures
      • Debt service obligations
      • Regulatory compliance reserves

iii. Regulatory Capital Requirements:

Financial sector companies face additional restrictions:

    • Minimum Capital Adequacy Ratios must be maintained post-dividend payment
    • Net NPA ratios must remain within prescribed limits
    • Stress testing requirements must be satisfied
    • Regulatory approval may be required for significant dividend distributions

B. Sector-Specific Limitations

i. Banking Sector:

RBI’s dividend distribution guidelines impose strict eligibility criteria, including:

    • CRAR of minimum 9% for the preceding two years and the current year
    • Net NPA ratio below 7% (relaxed to 5% in certain circumstances)
    • Compliance with Banking Regulation Act provisions
    • Maximum dividend payout ratio of 40% as per the prescribed matrix

ii. Non-Banking Financial Companies (NBFCs):

Recent RBI guidelines impose dividend restrictions based on:

    • Prudential requirements, including leverage ratios
    • Net NPA thresholds
    • Capital adequacy compliance
    • Maximum payout ratios varying by NBFC category

iii. Insurance Companies:

Insurance Regulatory and Development Authority (IRDAI) imposes specific limitations based on:

    • Solvency margin requirements
    • Technical reserves adequacy
    • Investment pattern compliance
    • Policyholder protection considerations

9. Compliance requirements and forms

A. Mandatory form filings

i. Form MGT-14:

This form is crucial for recording board resolutions regarding dividend declarations:

    • Must be filed within 30 days of the board resolution
    • Requires a digital signature of authorized personnel
    • Contains complete resolution details, including dividend rate, record date, and payment terms
    • Non-filing attracts penalties under Section 117 of the Companies Act

ii. Form MGT-15:

Specifically required for interim dividend declarations:

    • Captures the board’s interim dividend decision
    • Must be accompanied by relevant financial information
    • Filing timeline follows the same 30-day requirement as Form MGT-14

iii. Form SH-9:

Used for issuing duplicate dividend warrants when original warrants are:

    • Lost or stolen
    • Destroyed or damaged
    • Not received by shareholders
    • Required to be reissued for any other valid reason

B. Disclosure and communication requirements

i. Stock Exchange Intimations:

Listed companies must inform stock exchanges about:

    • Board meeting dates for dividend consideration
    • Dividend declaration outcomes
    • Record dates and book closure dates
    • Payment schedules and arrangements

ii. Newspaper Publications:

Public announcements in newspapers regarding:

    • Record dates for dividend entitlement
    • Book closure periods
    • Dividend payment arrangements
    • Contact information for dividend-related queries

iii. Website Disclosures:

Companies must maintain updated information on their websites about:

    • Dividend distribution policy (for top 1000 listed companies)
    • Historical dividend payment records
    • Unclaimed dividend details
    • IEPF transfer information and procedures

C. Regulatory Reporting Requirements

i. SEBI Reporting:

Listed companies must comply with:

    • Regulation 30 regarding material event disclosures
    • Regulation 43A regarding dividend distribution policy disclosure
    • Quarterly compliance reports including dividend-related information

ii. RBI Reporting (For Financial Sector):

Banks and NBFCs must submit:

    • Dividend declaration details within prescribed timelines
    • Compliance certificates regarding eligibility criteria
    • Post-dividend financial position reports
    • Adherence to prudential norms certification

iii. Income Tax Compliance:

Companies must ensure:

    • Proper TDS deduction and remittance
    • Filing of quarterly TDS returns
    • Issue of TDS certificates to shareholders
    • Annual information return filings

10. Unpaid and unclaimed dividends

√ Unpaid Dividend Account Management

The creation and management of Unpaid Dividend Accounts represent a critical shareholder protection mechanism under Section 124 of the Companies Act, 2013. This system ensures that even when shareholders fail to claim their dividends promptly, their rights are preserved through a structured process.

√ Timeline and Process:

1. Day 31-37: Transfer unclaimed dividends to Unpaid Dividend Account

2. Day 38-127: Prepare and publish statement of unpaid dividends

3. Ongoing: Maintain detailed records and respond to shareholder queries

4. Year 8: Transfer to IEPF if still unclaimed

√ Statement Preparation Requirements:

The statement of unpaid dividends must contain:

  • Complete names of entitled shareholders
  • Last known addresses as per company records
  • Folio numbers or DP ID and Client ID
  • Unpaid dividend amounts for each shareholder
  • Contact information for claiming procedures

√ Interest Provisions for Default

Companies failing to transfer unpaid dividends within the prescribed timeline face significant penalties:

  • Interest Rate: 12% per annum from the date of default
  • Beneficiaries: Interest accrues for the benefit of shareholders proportionally
  • Accumulation: Interest compounds until a proper transfer is made
  • Recovery: Shareholders can claim both the dividend and the accrued interest

11. Conclusion

The dividend distribution framework in India represents a sophisticated balance between shareholder rewards, corporate financial health, and regulatory compliance. The comprehensive legal structure encompassing the Companies Act, 2013, SEBI LODR regulations, and Income Tax Act provisions creates a robust system that protects stakeholder interests while promoting transparent and sustainable corporate practices.

The evolution from the DDT regime to the current shareholder-based taxation system marks a significant improvement in India’s dividend policy framework, eliminating cascading effects and providing better tax integration for investors. The enhanced TDS threshold of Rs. 10,000 from Budget 2025 further demonstrates the government’s commitment to supporting retail investors and simplifying compliance procedures.

For companies, understanding and implementing proper dividend policies requires careful consideration of multiple factors including financial position, regulatory requirements, stakeholder expectations, and long-term strategic objectives. The detailed process requirements, from board resolutions to IEPF transfers, demand meticulous attention to timelines and compliance procedures to avoid penal consequences.

Shareholders benefit from a transparent and protective framework that ensures their rights are preserved through mechanisms like the Unpaid Dividend Account and IEPF transfers, while also providing tax-efficient income opportunities through proper planning and compliance.

Looking forward, the integration of technology, evolving regulatory landscape, and global best practices will continue shaping India’s dividend distribution framework. Companies that proactively adopt these changes while maintaining strict compliance with existing requirements will be best positioned to maximize shareholder value while meeting all regulatory obligations.

The dividend distribution system in India serves as a testament to the country’s commitment to creating a fair, transparent, and efficient capital market environment that benefits all stakeholders while promoting sustainable economic growth and development.

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Disclaimer:-  The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.