Interim Dividend vs Final Dividend: The Rules

On interim dividend vs final dividend, the difference that matters is not the size or the timing. It is who has the authority to declare it and what pot the money can come out of. Both sit in section 123 of the Companies Act, 2013, and the sub-section governing the interim variety was rewritten by Act 1 of 2018, section 32, with effect from 9 February 2018.

Interim dividend vs final dividend: the core differences

Who is allowed to declare each

Section 123(3) is the operative text for the interim case: the Board of Directors of a company may declare interim dividend during any financial year, or at any time during the period from closure of the financial year till the holding of the annual general meeting.

That second limb is the part people misread. An interim dividend is not confined to mid-year. A Board can declare one after the financial year has closed, as long as the annual general meeting has not yet been held.

For a final dividend, section 123 is silent on the question. It says nothing about who declares one or when. What it does govern, in section 123(1), is the profits any dividend may be paid out of, and the declaration itself is left to the company's own articles. So the asymmetry in this comparison is the statute's, not an omission in the reading of it.

What each can be paid out of

For a dividend generally, section 123(1) allows two sources: profits of the company for that year after providing for depreciation under section 123(2), or undistributed profits of previous financial years arrived at after providing for depreciation, or both. A separate limb covers money provided by the Central Government or a State Government for payment of dividend under a guarantee.

Five proviso-shaped limbs then narrow it:

• Unrealised gains are excluded. In computing profits, any amount representing unrealised gains, notional gains or revaluation of assets, and any change in the carrying amount of an asset or liability on measurement at fair value, is excluded. This limb is attached to clause (a).
• Transfers to reserves are optional. A company may, before declaring any dividend, transfer such percentage of that year's profits to reserves as it considers appropriate.
• Accumulated profits need the rules. Where, owing to inadequacy or absence of profits in a financial year, a company proposes to declare dividend out of accumulated profits earned in previous years and transferred to the free reserves, that declaration must follow the rules prescribed for the purpose.
• Free reserves only. No dividend shall be declared or paid from reserves other than free reserves.
• Losses come first. No company shall declare dividend unless carried-over previous losses and depreciation not provided in previous years are set off against the current year's profit.

The loss-year cap that applies only to interim dividends

The proviso to section 123(3) is the sharpest difference between the two. Where the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration, the interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

So a loss-making quarter does not block an interim dividend. It caps it, against the company's own three-year record.

What is identical for both

Once declared, the two behave the same way.

Section 123(4) requires the amount of the dividend, including interim dividend, to be deposited in a scheduled bank in a separate account within five days of the date of declaration. Section 123(5) restricts payment to the registered shareholder, that shareholder's order or banker, and requires payment in cash, with cheque, warrant or electronic mode permitted. The proviso preserves the capitalisation of profits or reserves for issuing fully paid-up bonus shares.

Section 123(6) adds a disqualification: a company that fails to comply with sections 73 and 74, which govern deposits, cannot declare any dividend on its equity shares for as long as the failure continues.

After thirty days, both feed the same pipe. Dividend unpaid or unclaimed thirty days from declaration moves to the Unpaid Dividend Account within a further seven days, under section 124(1), and section 127 makes a knowing director liable for a failure to pay or post a declared dividend within those thirty days.

Where this sits in the disclosure picture

A dividend declaration reaches the market as an exchange filing before it reaches a bank account. The board meeting intimation names the agenda, and the record date decides entitlement.

• How to read a board meeting intimation covers the filing that flags a dividend on the agenda.
• Record date vs ex-date is the pair of dates that decides who is entitled.
• Stock split vs bonus issue covers the capitalisation route the section 123(5) proviso preserves.
• The unpaid dividend account is where an uncollected dividend goes next.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.