All you need to know about Process of Interim Dividend

Meaning of Interim Dividend

As per Secretarial Standards issued by the Institute of Company Secretaries of India, the term “Interim Dividend” means dividend declared by the Board of Directors. Such Dividend is declared by the Board of Directors in between two Annual General Meetings. Before declaration and payment of Interim Dividend, it is advisable to take an opinion of Company’s Auditor as Interim Dividend is paid before Final Accounts of the company is prepared and finalized.

Unlike Final Dividend, Interim Dividend can be paid multiple times in a Financial Year. Most companies follow a practice of paying such Dividends either quarterly or on half-yearly basis. The rate of Interim Dividend is generally lower than that of Final Dividend. The Board of directors have the authority to declare and pay Interim Dividend but on the other hand Shareholders of the company have the power to revoke the decision of the Board and refuse the payment of Interim Dividend. Interim Dividend is usually declared by the Board of Directors when the company has sufficient earnings higher than expected.

Features of Interim Dividend

Some of the features of Interim Dividend are as follows:

• Declared by the Board- The authority of declaration and payment of Interim Dividend rests with the Board of Directors only and no interference of shareholders must be there.
• Articles shall authorize- Articles of Association of the company shall authorize Board for declaration of Interim Dividend. If Articles do not authorize then, it needs to get altered before declaration of same.
• Pass Board Resolution- The Board of Directors shall pass Board Resolution in the Board meeting convened to declare Interim Dividend.
• Free Reserves- The Interim Dividend cannot be paid out of Free Reserves.
• Provide Depreciation- Before declaring Interim Dividend, the company shall provide depreciation for full year not for partial/proportionate year.
• Time period- Within 30 days of declaration of dividend, it shall be paid to the shareholders.
• Transfer to Unpaid Dividend Account- If dividend remains unclaimed or unpaid within seven days of expiry of thirty days of declaration, then such amount shall be transferred to “Unpaid Dividend Account”.
• Transfer to IEPF- If Dividend remains unclaimed for seven years, then such dividend shall be transferred to Investor Education and Protection fund.
• Separate Bank Account- Within five days of declaration of Dividend, the amount to be given as a Dividend shall be transferred to a separate Bank Account. 

Sources of distribution of Interim Dividend

Amount of Interim Dividend shall be paid out of:

• Surplus in profit and loss account.
• Profit of current Financial Year for which such Interim Dividend is paid.
• Profit generated in the Financial Year preceding the Quarter in which such Dividend is declared.

Usually, Interim Dividend are paid out of retained earnings which already includes the undistributed profits of Previous Financial Years. Till the end of the quarter immediately preceding the date of declaration of Interim Dividend if the company has incurred loss, then the rate of dividend on such shares shall not be higher than the average rate of dividend during the immediately preceding three Financial Year.

While declaring Interim Dividend, the Board of Directors shall take into consideration-

• Depreciation of whole year
• Tax including deferred tax of the company of whole year
• Losses which are anticipated for Financial Year
• Fixed rate of Dividend that is required to be paid on preference shares

Difference between Interim and Final Dividend

Procedure of declaration and payment of Interim Dividend

The procedure that is required to be follow for the declaration and payment of dividend are as follows:

• At least seven days’ notice of Board meeting shall be issued to each and every director of the company to call a Board Meeting for a purpose of declaration of Interim Dividend.
• Board meeting shall be convened and consideration of all matters related to payment of Interim Dividend shall take place and it also includes:
  • Ascertainment of financial position of the company
  • Amount of dividend to be declared
  • Fixation of record date
  • Opening of bank account for the purpose of transferring dividend
  • Printing and granting authority for signing dividend warrants
  • Pass Board Resolution for declaration and payment of Dividend. 
• After passing Board resolution, separate Bank Account needs to be opened with the scheduled bank.
• Deposit the amount of Dividend payable in that account within five working days of declaration of such dividend.
• The dividend shall be paid to the registered shareholders or the banker within thirty days of declaration of dividend.
• If amount of Dividend remains unclaimed or unpaid then such amount shall be transferred to the “Unpaid Dividend Account” within seven days of expiration of thirty days of declaration of such dividend.
• Within a period of ninety days of making any transfer in “Unpaid Dividend Account”, the company shall prepare a statement containing names, address, etc and also place it on a website, if any
• If any person desires to claim his amount of dividend from Unpaid Dividend account, then such person have to apply in Form IEPF-5 to the company.
• After the expiry of seven years from the date of transfer of dividend to “Unpaid Dividend Account” such unclaimed dividend shall be transferred to Investor Education and Protection Fund.

Wrapping up

The Interim Dividend shall be declared by the Board of Directors before finalisation of Annual accounts. It is also considered as debt of the company, that once declared it cannot be revoked. The board of directors shall analyse the financial position of the company before declaring any sort of Interim Dividend and such dividend shall be paid out of surplus in profit and loss account of the company. The rate of Interim Dividend is generally lower as compared to the rate of Final Dividend.

Read: All you need to know about Process of Final Dividend