Companies Act 2013 (Ch VIII, Sec 123–127): Dividend & IEPF

PFRDA Grade A • SEBI Grade A • UPSC EPFO APFC • RBI Grade B

⚡ Quick Answer & AI Exam Snapshot (TL;DR)

Chapter VIII (Sections 123 to 127) of the Companies Act, 2013 governs the Declaration and Payment of Dividend. Every SEBI Grade A, PFRDA Grade A, and UPSC EPFO aspirant must memorize the exact dividend payment timeline: Deposit in Separate Scheduled Bank Account within 5 days of declaration -> Pay/Credit Dividend within 30 days of declaration -> Transfer Unpaid/Unclaimed amount within next 7 days (i.e., by 37th day) to ‘Unpaid Dividend Account’ (12% p.a. interest for delay) -> Transfer to Investor Education and Protection Fund (IEPF, Section 125) after 7 consecutive years (along with underlying shares!). Failure to pay within 30 days attracts 18% p.a. interest to shareholders plus up to 2 years imprisonment for Directors under Section 127.

1. Master Section Map & The 5-30-7-7 Chronological Dividend Timeline (Sections 123–127)

Memorize the complete chronological sequence from the Day of Declaration of Dividend (Day 0) to Year 7:

Day 0 — Declaration of Dividend at AGM (or Interim Dividend by Board):
Rule: Shareholders at AGM can declare a lower rate, but can NEVER declare a dividend exceeding the rate recommended by the Board of Directors!

Within 5 DAYS of Declaration (Section 123(4)):
Deposit the total amount of dividend (including Interim Dividend) into a Separate Account in a Scheduled Bank.

Within 30 DAYS of Declaration (Section 124(1) & Section 127):
Pay or post dividend warrants/ECS to entitled shareholders.
Penalty for Failure to Pay within 30 Days (Section 127):
• On Company: Simple Interest at 18% PER ANNUM during the period for which default continues!
• On Every Director (knowingly a party to default): Imprisonment up to 2 YEARS AND fine of not less than ₹1,000 for every day during which default continues.

Within 7 DAYS After Expiry of 30 Days (i.e., by Day 37 — Section 124(1)):
Transfer the total unpaid or unclaimed dividend to a special account in a Scheduled Bank called the ‘Unpaid Dividend Account’.
Default Interest under Section 124(3): If delayed beyond 7 days, company pays interest at 12% PER ANNUM (Notice: 12% p.a. for delayed transfer to Unpaid Dividend A/c under Sec 124 vs 18% p.a. for non-payment to shareholder under Sec 127!).

Within 90 DAYS of Transferring to Unpaid Dividend Account (Section 124(2)):
Prepare a statement of names, last known addresses, and unpaid dividend amounts and place it on the Company’s Website.

After 7 CONSECUTIVE YEARS in Unpaid Dividend Account (Section 124(5) & (6)):
Transfer the unclaimed money (along with accrued interest) AND ALL UNDERLYING SHARES in respect of which dividend has not been paid or claimed for 7 consecutive years or more to the Investor Education and Protection Fund (IEPF — Section 125)!

2. Sources of Dividend & 4 Conditions for Declaring Dividend Out of Free Reserves (Rule 3)

Three Permitted Sources of Dividend (Section 123(1)):
1. Out of Current Year’s Profits arrived at after providing for Depreciation in accordance with Schedule II; OR
2. Out of Previous Financial Years’ Undistributed Profits arrived at after providing for depreciation (i.e., Free Reserves); OR
3. Out of Money Provided by the Central or State Government for payment of dividend in pursuance of a guarantee given by that Government.
Proviso: Before declaring any dividend, the company MUST set off carried-over previous losses and depreciation not provided in previous year(s) against the profit of the company for the current year! Also, no dividend can ever be paid out of Unrealised Gains, Revaluation Reserves, or Capital Profits.

4 Mandatory Conditions for Declaring Dividend Out of Free Reserves (Second Proviso to Section 123(1) & Rule 3 of Companies [Declaration and Payment of Dividend] Rules, 2014):
In the event of inadequacy or absence of profits in any financial year, a company (other than a 100% Government-owned company, which is exempt from these 4 rules!) may declare dividend out of accumulated Free Reserves ONLY if all 4 conditions below are satisfied:

Rule No.	Parameter	Exact Statutory Formula / Limit (Tested in SEBI & PFRDA!)
Condition 1 (Rate Cap)	Maximum Rate of Dividend	Shall NOT exceed the AVERAGE of the rates at which dividend was declared by it in the 3 YEARS immediately preceding that year! (Note: This condition does NOT apply if the company has not declared any dividend in each of the 3 preceding financial years).
Condition 2 (Withdrawal Cap)	Maximum Amount Drawn from Reserves	Total amount drawn from accumulated profits shall NOT exceed ONE-TENTH (1/10th or 10%) of the sum of its Paid-up Share Capital and Free Reserves as appearing in the latest audited financial statement.
Condition 3 (First Utilisation)	Set-off of Current Year Losses First	The amount so drawn shall FIRST be utilized to set off the losses incurred in the financial year in which dividend is proposed to be declared before any dividend on equity shares is declared.
Condition 4 (Minimum Balance Left)	Minimum Residual Balance in Reserves	The balance of reserves AFTER such withdrawal shall NOT fall below 15% of its Paid-up Share Capital as appearing in the latest audited financial statement!

Interim Dividend Cap in Case of Loss (Section 123(3) Proviso): In case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of Interim Dividend, such Interim Dividend shall NOT be declared at a rate higher than the average dividends declared by the company during the immediately preceding 3 financial years!

3. Section 125 (IEPF Authority) & Section 126 (Abeyance of Dividend) & 5 Exceptions Under Section 127

Investor Education and Protection Fund (IEPF — Section 125): Administered by the IEPF Authority (Chairperson: Secretary, Ministry of Corporate Affairs [MCA], plus max 7 members and a CEO). Used for refunding unclaimed dividends/matured deposits/debentures/shares to rightful claimants (via Form IEPF-5), promoting investor awareness, and reimbursing legal expenses incurred by members/debenture-holders in pursuing Class Action Suits under Sections 37 and 245 as sanctioned by NCLT!
Section 126 (Right to Dividend, Rights Shares and Bonus Shares to be Held in Abeyance): Where any instrument of transfer of shares has been delivered to the company for registration and the transfer has not been registered, the company shall transfer the dividend in relation to such shares to the Unpaid Dividend Account (unless the registered holder authorizes the company in writing to pay the dividend to the transferee specified in the transfer instrument) and keep any offer of Rights Shares or Bonus Shares in abeyance.
5 Statutory Exceptions Where Non-Payment of Dividend Within 30 Days is NOT an Offence (Proviso to Section 127):
1. Where the dividend could not be paid by reason of the operation of any law (e.g., court injunction or insolvency);
2. Where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;
3. Where there is a dispute regarding the right to receive the dividend;
4. Where the dividend has been lawfully adjusted by the company against any sum due from the shareholder to the company (e.g., unpaid calls on shares); OR
5. Where, for any other reason, the failure to pay the dividend or to post the warrant within 30 days was not due to any default on the part of the company.

🎯 High-Yield Exam One-Liners (Last-Minute Revision Box)

Chapter VIII of the Companies Act, 2013 spans Sections 123 to 127 and governs Declaration and Payment of Dividend.
Under Section 2(35), ‘Dividend’ includes any ‘Interim Dividend’.
Final Dividend is recommended by the Board of Directors and declared by the Shareholders at the Annual General Meeting (AGM) by an Ordinary Resolution.
Shareholders at an AGM can reduce the rate of dividend recommended by the Board, but can NEVER increase it beyond the Board’s recommendation.
Interim Dividend is declared by the Board of Directors between two AGMs (or during a financial year and up to the holding of the AGM).
If a company has incurred a loss up to the preceding quarter of the current FY, Interim Dividend cannot exceed the average dividend rate of the immediately preceding 3 financial years.
When declaring dividend out of Free Reserves (Rule 3), maximum withdrawal is 1/10th (10%) of (Paid-up Capital + Free Reserves), and the remaining reserve balance cannot fall below 15% of Paid-up Share Capital.
100% Government-owned companies (where entire paid-up capital is held by Central/State Govt) are exempt from the 4 conditions of Rule 3 for declaring dividend out of accumulated reserves.
Under Section 123(4), the total dividend amount must be deposited in a separate account in a Scheduled Bank within 5 DAYS from the date of declaration.
Dividend must be paid or warrants posted within 30 DAYS from the date of declaration.
Under Section 124(1), any dividend remaining unpaid or unclaimed after 30 days must be transferred to the ‘Unpaid Dividend Account’ within 7 DAYS (i.e., by Day 37).
Interest rate for delayed transfer to the Unpaid Dividend Account under Section 124(3) is 12% per annum.
Interest rate payable to shareholders for failure to pay/post dividend within 30 days under Section 127 is 18% per annum (plus up to 2 years imprisonment and ₹1,000/day fine for defaulting Directors).
Unclaimed dividend lying in the Unpaid Dividend Account for 7 CONSECUTIVE YEARS (along with the underlying shares!) is transferred to the Investor Education and Protection Fund (IEPF).
The ex-officio Chairperson of the IEPF Authority under Section 125(5) is the Secretary, Ministry of Corporate Affairs (MCA).
IEPF funds can be utilized to reimburse legal expenses incurred by members/debenture-holders in pursuing Class Action Suits under Sections 37 and 245 as sanctioned by NCLT.
Under Section 123(6), a company that fails to comply with Sections 73 and 74 (repayment of public deposits or interest thereon) is strictly barred from declaring ANY dividend on its equity shares so long as such failure continues!

📝 UPSC & Regulatory Level Practice MCQs (With Detailed Solutions)

Q1. Under Section 123, Section 124, and Section 127 of the Companies Act, 2013, what is the correct chronological sequence of statutory time limits following the declaration of a dividend?

A. Deposit in separate bank A/c within 7 days -> Pay within 45 days -> Transfer to Unpaid Dividend A/c within 15 days -> Transfer to IEPF after 5 years
B. Deposit in separate bank A/c within 5 days -> Pay within 30 days -> Transfer to Unpaid Dividend A/c within 7 days -> Transfer to IEPF after 7 years
C. Deposit in separate bank A/c within 10 days -> Pay within 30 days -> Transfer to Unpaid Dividend A/c within 30 days -> Transfer to IEPF after 7 years
D. Deposit in separate bank A/c within 5 days -> Pay within 15 days -> Transfer to Unpaid Dividend A/c within 7 days -> Transfer to IEPF after 10 years

Correct Answer: (B) — The statutory sequence is: Deposit in separate Scheduled Bank A/c within 5 days of declaration (Sec 123(4)) -> Pay/post within 30 days (Sec 124(1)/127) -> Transfer unpaid amount to Unpaid Dividend Account within 7 days of expiry of 30 days (Sec 124(1)) -> Transfer unclaimed amount and underlying shares to IEPF after 7 years (Sec 124(5)-(6)).

Q2. Under Section 124(3) and Section 127 of the Companies Act, 2013, what are the statutory rates of interest per annum payable by a company for (i) default in transferring unpaid dividend to the ‘Unpaid Dividend Account’ within 7 days, and (ii) failure to pay/post dividend to shareholders within 30 days of declaration, respectively?

A. (i) 18% per annum; (ii) 12% per annum
B. (i) 12% per annum; (ii) 18% per annum
C. (i) 15% per annum; (ii) 15% per annum
D. (i) 10% per annum; (ii) 24% per annum

Correct Answer: (B) — Under Section 124(3), default in transferring unpaid dividend to the Unpaid Dividend Account attracts interest at 12% per annum. Under Section 127, failure to distribute dividend within 30 days attracts simple interest at 18% per annum to shareholders.

Q3. In a financial year in which a company has inadequate profits and proposes to declare dividend out of accumulated ‘Free Reserves’ under the Second Proviso to Section 123(1) read with Rule 3, what is the maximum amount that can be drawn from reserves, and what is the minimum balance of reserves that must remain after such withdrawal?

A. Max drawal: 10% of (Paid-up Capital + Free Reserves); Minimum remaining reserve balance: 15% of Paid-up Share Capital
B. Max drawal: 15% of Paid-up Share Capital; Minimum remaining reserve balance: 10% of (Paid-up Capital + Free Reserves)
C. Max drawal: 20% of Free Reserves; Minimum remaining reserve balance: 25% of Paid-up Share Capital
D. Max drawal: 5% of Paid-up Capital; Minimum remaining reserve balance: 20% of Free Reserves

Correct Answer: (A) — Under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014: (1) Rate cannot exceed the 3-year average rate; (2) Total amount drawn cannot exceed 1/10th (10%) of (Paid-up Share Capital + Free Reserves); (3) Current year loss must be set off first; and (4) Remaining balance of reserves cannot fall below 15% of Paid-up Share Capital.

Q4. Under Section 124(6) of the Companies Act, 2013, all shares in respect of which dividend has NOT been paid or claimed for how many consecutive years or more shall be transferred by the company in the name of the Investor Education and Protection Fund (IEPF)?

A. 3 consecutive years or more
B. 5 consecutive years or more
C. 7 consecutive years or more
D. 10 consecutive years or more

Correct Answer: (C) — Section 124(6) mandates that all shares in respect of which dividend has not been paid or claimed for 7 consecutive years or more shall also be transferred by the company in the name of the Investor Education and Protection Fund (along with the unclaimed dividend under Sec 124(5)).

Q5. Under Section 123(6) of the Companies Act, 2013, a company is strictly prohibited from declaring any dividend on its equity shares if it has failed to comply with the provisions of:

A. Section 135 (Corporate Social Responsibility spending)
B. Sections 73 and 74 (Prohibition on acceptance of deposits from public and repayment of deposits/interest thereon)
C. Section 138 (Appointment of Internal Auditor)
D. Section 181 (Bona fide charitable contributions)

Correct Answer: (B) — Section 123(6) stipulates that a company which fails to comply with the provisions of Sections 73 and 74 (repayment of deposits accepted before/after commencement of the Act) shall not, so long as such failure continues, declare any dividend on its equity shares.

❓ Frequently Asked Questions (Exam FAQs)

Q: Can shareholders at an AGM declare a higher dividend than recommended by the Board of Directors?

Never. Under Clause 80 of Table F (Schedule I) and established company law principles, the power to recommend the maximum rate of dividend vests exclusively in the Board of Directors. Shareholders at the AGM may vote to reduce the rate recommended by the Board, but can never increase it.

Q: Does Condition 1 (3-year average dividend rate cap) of Rule 3 apply if a company did not declare any dividend in the preceding 3 years?

No! The Proviso to Rule 3(1) explicitly clarifies that the 3-year average rate ceiling shall NOT apply to a company which has not declared any dividend in each of the three preceding financial years (otherwise the average would be zero and it could never pay dividend out of reserves).

🚀 Continue Your Preparation on CrackTarget

UPSC EPFO APFC 2026 Hub: Full syllabus notes, 30/60/90-day study planner, PYQs (2012–2025) & free mocks.
UPSC DRDO SAO Grade-II Hub: 90-day roadmap, Office Procedure, HRM, Marketing & Accounting notes.
PFRDA Grade A & NABARD Grade A Hub: Paper-2 specialist notes, PYQ vault & real-UI mock tests.
Complete Free Study Materials Library & CrackTarget Press Book Store: Access 280+ free notes and specialist books.
Join Official Communities: Telegram Channel | YouTube | Instagram | Facebook | X (Twitter)