Every country imposes some restrictions on payment of dividend, as dividend distribution affects the economic conditions of the company, shareholders and other parties of the society. In India too, a number of restrictions has been placed on dividend payment by Indian Companies Act, e.g. there are restrictions on sources from which dividend can be paid, the time period within which dividend is to paid, the manner in which unclaimed dividend is to be dispatched etc.

(1) Sources of Dividend: The Company can declare dividend for the financial year out of the following sources according to Sec. 205:

(i) Out of the profits of the company for that year arrived at after providing for depreciation according to law or

(ii) Out of the profits of the company for any previous financial year or years arrived at after providing for depreciation, remaining undistributed or out of both or

(iii) Out of moneys provided by the Government for the payment of dividend in pursuance of guarantee given by that government.

(2) Calculation of Profit: There are some restrictions on calculation of profit available for distribution as dividend. Before declaring dividend, it is compulsory for companies to provide for depreciation on its fixed assets. If depreciation has not been provided for any previous year, it has to be first provided before paying dividend. If the company has incurred any loss in any previous financial years, then the amount of loss has also to be written off.

The rates at which depreciation is to be provided on various assets is prescribed in the Schedule XIV of the Companies Act or depreciation should be such an amount as is arrived at by dividing 95% of the original cost by useful life of the asset or an any other basis approved by the Central Government.

Of course, the Central Government has the powers to allow any company to declare or pay dividend without providing for depreciation.

(3) Transfer to Reserve : U/s 205(2A) it is provided that no dividend shall be declared or paid by a company out of the profits, except after the transfer to the reserves of such percentage of its profits, not exceeding 10% as may be prescribed.

The Central Government has framed The Companies (Transfer of Profits to Reserves) Rules, 1975. According to these rules, no dividend can be declared or paid by a company except after the transfer to the reserves of the company of a percentage of its profits as specified below:

(1) Not less than current profits  -  2.5%  of the  -  Where the dividend exceeds 10% but does not exceed 12.5%.

(2) Not less than current profits  -  5% of the  -  Where the dividend exceeds 12.5% but does not exceed 15% of paid up capital.

(3) Not less than current profits  -  7.5%  of the  -  Where the dividend proposed exceeds 15% but not above 20% of the paid up capital.

(4) Not less than current profits  -  10% of the  -  Where the dividend exceeds 20% of the paid up capital

If a company wants to make additional voluntary transfer of a higher percentage to the reserves, it may do so as per Rule 3 of these Rules.

(4) Payment of Dividend out of Reserves: Where, owing to inadequacy or absence of profits in any year, any company proposes to declare dividend out of the accumulated profits and transferred to the reserves, it should be done in accordance with the rules as may be made by the Central Government in this behalf or it should be made with the previous approval of the Central Government. The Rules made by the Central Government is called "Companies (Declaration of Dividend out of Reserves) Rules, 1975." According to these rules the rate of dividend declared should not exceed the average of the rates at which dividend was declared by it in the 5 years, immediately preceding that year or 10% of its paid-up capital, whichever is less. Secondly, the total amount to be withdrawn out of reserves should not be more than l/10th of the sum of its paid-up capital and free reserves. Thirdly, the balance of reserves after such withdrawal should not fall below 15% of its paid-up share capital.

(4) How to Pay Dividend and to Whom: Under Sec. 205 (3) it is provided that No dividend shall be payable except in cash. But the law allows the issue of fully paid bonus shares. Under the law, the company is allowed to capitalize its profits or reserves for the purpose issuing fully paid-up bonus shares or paying up any amount unpaid on shares held by the members of the company. But for issuing bonus shares, the guidelines for the issue of bonus shares issued by SEBI in 1994 must be observed.

(5) Period within which Dividend is Payable: Where a dividend has been declared by a company, it has to be paid or dividend warrant has to be posted within 30 days from the date of declaration to any shareholder entitled to the payment of dividend. Otherwise every director of the company is liable. But they are not so liable (i) if the dividend could not be paid due to operation of any law or (2) The directions given by shareholders to the company regarding payment of dividend could not be complied with. (3) If there is a dispute with regard to right to receive dividend. (4) Where default is not due to any fault on the part of the company.

The dividend has to be paid (i) to the registered holder of such share or to his order or to his bankers or (ii) in case a share warrant is issued, to the bearer of such warrant of to his bankers.

(7) Unpaid Dividend: Where a dividend has been declared by a company, but has not been paid or claimed within 30 days from the date of declaration, the company shall, within seven days from the date of expiry of the said period of 30 days, transfer the total amount of unpaid dividend to a special account to be opened by the company in any scheduled bank, to be called "Unpaid Dividend. Account of.... Company Limited." If default is made in transferring the amount, the company will be required to pay interest at 12% p.a. and such interest will be available to the members of the company in proportion to the amount remaining unpaid to them.

(8) Dividend Unclaimed for 7 years : Any money transferred to the unpaid dividend account of a company, which remains unpaid or unclaimed for a period of seven years from the date of such transfer, shall be transferred by the company to the "Investor Education and Protection Fund" established by the Central Government.

Now according to Companies (Amendment) Act, 1999 (with effect from 31-10-1998) any person claiming to be entitled to any money transferred to the above Fund is not entitled to get money from this Fund. It means after 7 years, nobody gets any money out of this Fund even though he is entitled to such a dividend. (Formerly it was possible to get his unclaimed dividend from Central Government).