How do the stock market companies draft the dividend proposal?

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Every story has a beginning. Much before a dividend, as we know it, reaches our expectant hands, a small gathering sits around, burning the midnight oil drafting the dividend proposal, pondering over the minutest details. With all the nitty-gritty settled for good after multiple rounds of discussion, the final draft is ready for publishing. Each company follows its steps in the process. However, the basic premise remains common for everyone. Let’s go behind the curtains and see what those common courses of action taken for a dividend proposal are for a better understanding.

First, the basics!!

What is a dividend?

Simply put, a benefit or gains - received by a company’s stockholders, dividends might be paid in cash, stocks, or any other form. The board of directors defines a company's dividend, which the shareholders must confirm. It’s important to note that corporations are not compelled to pay dividends. A dividend is a share of a firm’s profitability distributed to its shareholders.

You’ll be surprised to know that a dividend you receive in hand might be vastly different from what was initially drafted!

What is a proposed dividend?

A proposed dividend is in the initial stage when it is brought forward, discussed, and shared among the corporate shareholders during a financial year. It is merely in the suggestive phase and could go through manifold amendments. Shareholders are expected to cast their votes either approving or rejecting the proposal. Only once their approval has been received that the proposal is good to go that a dividend becomes a reality.

Let’s get some clarity.

While announced dividends form a part of a company's dividend plan, dividends paid, on the other hand, are the actual utilisation of that financial plan. This is vital for investors to know since it may impact their decision to buy a stock with a high dividend return.

Remember, it might be a clue that a firm is in financial difficulty if it has a history of declaring rich dividends and yet only paying out only a fraction of them as dividends. On the contrary, a company's history of handing over most or all of its announced dividends could signal strong economic wellbeing.

It's also worth noting that not every business releases a statement declaring their dividend and related payments. In a nutshell, getting the correct data and clarity on the subject before proceeding with the investment is crucial.

How do stock market companies draft their dividend proposals? 

In practice, once profit has been derived post-settlement of depreciation, a dividend could be declared for the year; otherwise, retrospectively, profits from the last year and before could be pulled back to effect the same.

1: The amount of dividend for the stockholders to be announced and paid would be considered in a board meeting

2: A general meeting with the sole purpose of declaring the dividend is informed to all the stakeholders.

3: A general meeting is held, a resolution proclaiming a dividend is passed, as well as the record date is confirmed.

  • Only those participants who are the actual holders of the company’s stocks are qualified to receive dividends.
  • Stock Exchange is mandated to maintain a record of persons against whom the dividend is due to post a general meeting.

4: The dividend is given to the investors once the dividend decision has been taken.

Draft Resolution for Declaring Dividends

If you haven’t received a dividend or haven’t really paid attention to the details, here’s how a draft resolution looks like when a company decides to declare a dividend. 

RESOLVED THAT as per the recommendation of the Board of Directors of the Company, the approval of the members of the Company be and is hereby granted for payment of dividend (Rate of dividend) per share on the equity share capital of the company for the financial year ended on 31st March,_____ and the same be paid to all the members whose names appear in the Register of Members as on ______ (record date).

RESOLVED THAT for the purpose of giving effect to this resolution, Mr./Ms. ………………….. of the Company be and is hereby authorised, on behalf of the Company, to do all acts, deeds, matters and things as deem necessary, proper or desirable.”

Dividend Proposal Rules & Regulations

Some points and rules that companies must adhere to when they’re issuing dividends.

  • Dividend Payment

All dividends must be paid up within 30 days of initial declaration via a unique bank account. 

  • Penalty for Not Paying Declared Dividend

Failure to pay up dividends within 30 days post declaration makes it a punishable offence by the Directors of the firm, in addition to incurring 18% interest per annum against the period when such delay occurs.

  • Interim Dividend

If a firm does well and generates good profits in the current fiscal year and wants to share its profits with the shareholders until the quarter before the expiry of interim dividend declaration, it does so through interim dividend. The excess in the Profit and Loss account and profits from the current financial year might be used to declare an interim dividend.

Declaring Dividends in a Loss-Making Company

Yes, a dividend could be declared by a loss-making firm if it has otherwise ample and healthy possessions:

  • The current dividend rate should not exceed the average rates declared for the past three years. Not applicable to a firm that hasn’t declared so far.
  • The amount set aside for dividends should not be more than 1/10 of the firm’s paid-up share capital (money received from shareholders) and free reserves.
  • The primary duty of the firm is to utilise any revenue earned so far for settling the loss deficit before the declaration of a dividend.
  • Once the amount for the dividend is pulled, the reserves should not go below 15% of the firm’s paid-up capital.
  • A firm may declare a dividend only once it has settled all the pending losses and depreciation against the revenue earned so far in the current year.

In a nutshell

 A good meal takes time, revealing a lot about its past. Likewise, a rewarding dividend not only affirms a corporation’s financial transparency and goodwill but also its overall health to investors who return with confidence aiding in the company’s future growth. The thumb rule says - Ailing companies are generally unable to pay dividends to their owners.

In a nutshell, bear in mind the performance of the company and do adequate research before you decide to invest in dividend-paying firms.

Frequently Asked Questions 

What is a dividend proposal?

It is the prospective dividend presented by a company’s board of directors but yet to receive the formal approval of shareowners or investors. It is derived once the company's annual accounts have been settled for that fiscal year.

How do you calculate the proposed dividend?

The amount set aside as a dividend is usually treated as the firm’s Current Liability in the balance sheet as well as the profit and loss account.

Usually, a dividend payable is calculated by excluding the amount yet to be paid by member shareholders from the firm’s share capital.

What are the types of dividends?

A firm may offer the following sorts of dividends:

  • Cash dividend – Dividend is received by all the member shareholders who had deposited cash, in proportion to the value of their stocks.
  • Stock dividend – In case member shareholders receive surplus shares from the firm, provided it is lower than the 25% benchmark set against stock released earlier.
  • Property dividend – Sometimes member shareholders may receive dividends in kind such as property. The awarded property dividend would be withdrawn from the asset's current market value though.
  • Scrip dividend - If a corporation does not have resources, it may also choose to offer dividends in the form of a promissory note that will be paid to shareholders at a subsequent date.
  • Liquidating dividend – This happens when the board decides to wind up the business and considers repaying the original capital deposited by the shareholders.

Is dividend proposed a liability?

A proposed dividend by its very nature is treated as an amount to preempt any future loss or claims, hence it is represented on the liability side of the balance sheet under the title provisions.

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