Answer: (a) Yes, provided it is paid out of the surplus in the profit and loss account and the rate does not exceed the average of the three preceding years; (b) Yes, subject to the conditions of the Act and Rules; (c) No.
(a) Under Section 123(3) of the Companies Act, 2013, the Board may declare interim dividend during a financial year out of the surplus in the profit and loss account or out of the profits of the current financial year. If profits till date are insufficient (or the company has incurred a loss up to the quarter preceding the declaration), the interim dividend cannot be at a rate higher than the average rate declared during the three immediately preceding financial years. So the Board is justified only if ₹ 5 per share is within this limit and sufficient surplus is available; otherwise it is not.
(b) Yes. Where profits of the year are inadequate, dividend may be declared out of accumulated profits transferred to free reserves, subject to the Companies (Declaration and Payment of Dividend) Rules, 2014: the rate must not exceed the average of the three preceding years, the amount drawn must not exceed one-tenth of paid-up capital plus free reserves, it must first be used to set off the current year’s losses, and the balance of reserves after withdrawal must not fall below 15% of paid-up capital. (Strictly, only the shareholders declare such final dividend; the Board recommends it.)
(c) No. Dividend can be paid only out of profits. Paying dividend out of capital would reduce the capital, which is against the Companies Act and harmful to creditors.
