CAN THE MCA ISSUE CLARIFICATION AS REGARDS TO PAYMENT OF DIVIDEND BY DEMAND DRAFT , PAY ORDER , TRANSFER THROUGH NEFT OR RTCGS UNDER SECTION 123 (4) OF COMPANIES ACT TO REMOVE THE DIFFICULTIES FACED BY SMALL COMPANIES AND PRIVATE LIMITED COMPANIES ?

CAN THE MCA ISSUE CLARIFICATION AS REGARDS TO PAYMENT OF DIVIDEND BY DEMAND DRAFT , PAY ORDER , TRANSFER THROUGH NEFT OR RTCGS UNDER SECTION 123 (4) OF COMPANIES ACT TO REMOVE THE DIFFICULTIES FACED BY SMALL COMPANIES AND PRIVATE LIMITED COMPANIES ?

Section 123 of Companies Act 2013 deals with the declaration of dividend. Section 123 (1) says that no dividend shall be declared or paid by a company for any financial year except-

Sub section (4) of section 123 says - The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

In the above section, the word “shall” connotes that it is mandatory for all the companies to adhere this section. Government of India already issued notification June 5, 2015 that section 123 (4) will not be applicable to government companies, that means it will be applicable to all companies other than government companies. (Repeat All Companies). Even small companies, One Man Company and private limited companies with two shareholders - section 123(4) is applicable. Government should come forward to issue notification to extend the above relaxation to the small companies, one man company and private limited companies with two or shareholders.

Sub section (4) does insist that the payment of dividends within 5 days through a SEPARATE bank account. There is an ambiguity and Act should be amended to facilitate the payment by any method.

Due to section 123 (4), all the companies are compelled to open a bank account even with two shareholders mainly to satisfy the provision of section 123 (4).

Secretarial Standard 3- Clause 5.1 says that the dividend should be paid within thirty days of declaration. The amount of Dividend after deducting tax at source, if applicable, should be deposited in a separate bank account within five days from the date of declaration of Dividend. Dividend should be paid out of such bank account within thirty days of declaration.

This section has been introduced as the many companies defaulted to pay dividend citing liquidity crisis. To prevent this, the section 123 (4) mandates that dividend amount should be transferred to separate bank account within 5 days of different declaration.

However, many banks are not in a position to open a bank account within 5 days as they are having lot of formalities as they have to get the approval from their head office or regional office for opening a dividend current account. Likewise, a company has to adhere a lot of formalities like passing a board resolution, tracing the bank for opening an account and adhering the formalities imposed by the bank to open such accounts within short period of five days. 

It is creating a lot of hardships for a private company with the two shareholders as it has to open a separate bank account for depositing the dividend into that account within Five Working days.  After the payment of divided, the account which is opened has become superfluous and the company is forced to either the close the account or to maintain the account for the future dividend payment.

It is submitted that MCA should come forward to issue a circular suggesting that the paying through a pay order or demand drat or transferring the dividend to the shareholders bank account through NEFT or RTCGS within five days will be sufficient compliance of the section 123 (4) of the Companies Act 2013 in addition to the transferring and paying through a separate account.

Such clarification or removal of doubts will help the small companies, one man companies, small private companies which is having just 2 shareholders or less than 20 shareholders and will go long way in removing the procedural difficulties that is being faced by the Indian companies in depositing dividend to a separate bank account within 5 days of the banking working days.