The following aspects may generally be kept in mind in the matter of dividend on shares.

1. Dividends can be declared or paid for a financial year out of profits of that financial year or previous years after providing for at least the prescribed depreciation or the losses for each of those years, whichever is less.

2. In case of inadequacy of profits, the Company may declare dividends out of accumulated reserves provided the following conditions are satisfied with:-

1. The rate of dividend shall not exceed the average rate at which dividends are paid in the preceding 5 financial years or 10% whichever is less.

2. The total amount used from reserves shall not exceed 10% of the paid-up capital and free reserves and such amount shall first be used to set off against losses of that financial year.

3. The remaining reserves shall not fall below 15% of its paid-up share capital.

3. Before declaration/payment of dividends, a Company shall transfer to reserves at least the following percentage of its profits after depreciation:­—

Dividend as % of paid-up capital	% of profits to be transferred to reserves
0-10%	Nil
10-12.50%	2.50%
12.50-15%	5.00%
15-20%	7.50%
>20%	10.00%

4. A Company can transfer to reserves more than 10% of its profits

(i) Where dividend is declared, —

1. dividend is declared/ paid at a rate equal to the average rate of dividend in the preceding three years.

2. in case bonus shares were issued during this period of 3 preceding financial years, then the dividend declared/paid during that financial year shall be an amount at least equal to the average amount of dividend declared over the 3 years immediately preceding the financial year,

Provided that where net profits after tax are

(i) lower by 20 per cent or

(ii) more than the average net profits after tax of the two financial years immediately preceding,

Conditions in this paragraph will not apply.

(ii) Further, where the Company does not declare any dividend,—

the Company can make transfers to reserves from profits of that year of an amount not exceeding the average amount of dividends distributed in the three preceding financial years.

5. The dividend declared shall be transferred within 5 days of declaration in a separate bank account. Dividends not paid/ claimed within 30 days of such declaration shall be transferred to a separate bank account.

6. Dividends shall be payable only in cash.

1. Generally, fully paid-up bonus shares can be issued out of free reserves, share premium account and capital redemption reserve.

2. The SEBI (Disclosure & Investor Protection) Guidelines 2000 also provide conditions for such issue, which, in particular include the following:—

1. When there are any convertible debentures pending conversion, similar benefit shall be extended through reservation to such holders.

2. Revaluation reserves cannot be used for issue of bonus shares.

3. Bonus shares cannot be issued in lieu of dividend.

4. Before issuing bonus shares, the Company shall ensure that all partly paid-up shares are made fully paid-up.

5. The company should not have defaulted in the repayment of fixed deposits, interest or principal on debentures and payment of statutory dues such provident fund, etc.