Declared a Dividend? The Five-Day Deposit, the Thirty-Day Unpaid Account, and the Seven-Year IEPF Clock

Declaring a dividend starts a statutory countdown that can run for seven years. Sections 123 and 124 of the Companies Act, 2013 fix each step: what profits may fund the payout, the five-day separate-account deposit, payment only to the registered holder, the thirty-plus-seven-day transfer to the Unpaid Dividend Account, twelve per cent interest on delay, and the final transfer of money and shares to the Investor Education and Protection Fund (the Fund set up under s.125). A company that treats declaration as the finish line misses the whole compliance staircase that follows.

Legal basis: Companies Act, 2013, ss.123, 124 and 125, as currently in force.

What can fund a dividend: current profits, past profits, or Government money

"No dividend shall be declared or paid by a company for any financial year except—(a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both" (s.123(1), Companies Act 2013). In computing profits, "any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded". The only other permitted source is "money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government" (s.123(1)(b)).

Four provisos fence the Board's discretion (s.123(1)):

A company "may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company". Reserves first, dividend after, at a percentage the company chooses.
Where, owing to inadequacy or absence of profits in a year, a company proposes to pay a dividend out of accumulated profits of earlier years that it transferred to free reserves, the declaration "shall not be made except in accordance with such rules as may be prescribed". Check those rules before relying on this route.
"No dividend shall be declared or paid by a company from its reserves other than free reserves."
"No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year." The profit that counts is what survives the set-off, not the first figure on the profit and loss account.

Depreciation for this purpose "shall be provided in accordance with the provisions of Schedule II" (s.123(2)).

Interim dividends: the Board's window and the loss-year cap

"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 financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend" (s.123(3)).

Three funding pools, one Board resolution, no general meeting needed. A loss year, however, caps the rate: "in case the company has incurred 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 immediately preceding three financial years" (proviso to s.123(3)). A Board that paid 10, 12 and 14 per cent in the last three years (average 12 per cent) cannot declare 20 per cent as an interim dividend in a year that was already in loss at the last quarter-end.

Five days to segregate, registered holders only, cash only

"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" (s.123(4)). The clock runs from declaration, and interim dividends are covered.

On payment: "No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash" (s.123(5)). Two provisos soften this. Capitalising profits or reserves to issue fully paid-up bonus shares, or to pay up unpaid amounts on shares, is not prohibited. And "any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend". In practice: pay the registered holder (or the holder's order or banker), by cash, cheque, warrant or electronic transfer. Bonus shares travel through capitalisation, not through the dividend channel.

A company in deposit default is barred altogether: "A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares" (s.123(6)).

The thirty-plus-seven-day transfer to the Unpaid Dividend Account

"Where a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account" (s.124(1)). Thirty days of grace, then seven days to move every unpaid rupee, so the transfer is due by day 37 from declaration.

Next comes public disclosure. The company "shall, within a period of ninety days of making any transfer of an amount under sub-section (1) to the Unpaid Dividend Account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed" (s.124(2)). Name, last known address and amount go public within ninety days of the transfer. The form and manner are left to the rules; this article does not state rule-level detail.

Delay is priced: "If any default is made in transferring the total amount referred to in sub-section (1) or any part thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve per cent. per annum and the interest accruing on such amount shall ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them" (s.124(3)). The interest belongs to the unpaid members pro rata, so the company cannot gain from holding their money.

Claimants apply directly to the company: "Any person claiming to be entitled to any money transferred under sub-section (1) to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed" (s.124(4)).

Seven years unclaimed: money and shares go to the Fund

"Any money transferred to the Unpaid Dividend Account of a company in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along with interest accrued, if any, thereon to the Fund established under sub-section (1) of section 125 and the company shall send a statement in the prescribed form of the details of such transfer to the authority which administers the said Fund and that authority shall issue a receipt to the company as evidence of such transfer" (s.124(5)). Keep that receipt; it is the company's evidence of transfer. Section 125(2)(c) separately lists "the amount in the Unpaid Dividend Account of companies transferred to the Fund under sub-section (5) of section 124" as a credit to the Fund.

The shares follow the money. "All shares in respect of which dividend has not been paid or claimed for seven consecutive years or more shall be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed" (s.124(6)). Two safeguards apply:

The Explanation: "in case any dividend is paid or claimed for any year during the said period of seven consecutive years, the share shall not be transferred to Investor Education and Protection Fund". One paid or claimed year in the run breaks the chain.
The proviso: "any claimant of shares transferred above shall be entitled to claim the transfer of shares from Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed". The shareholder is not permanently deprived.

The statements, forms and claim procedure are all "prescribed", that is, set by rules. This article does not describe those rules or forms; check the current rules before you file.

Non-compliance: fixed plus per-day penalties

"If a company fails to comply with any of the requirements of this section, such company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of ten lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees" (s.124(7)). This is the current text of s.124(7); it replaced the earlier sub-section with effect from 24 March 2021. For the company the penalty is ₹1,00,000 plus ₹500 a day, capped at ₹10,00,000. For each officer in default it is ₹25,000 plus ₹100 a day, capped at ₹2,00,000. The penalty applies to "any of the requirements of this section", so it reaches the thirty-plus-seven-day sweep, the ninety-day statement, the seven-year money transfer and the share transfer alike. The twelve per cent interest under s.124(3) is a separate cost on top.

The dividend compliance calendar

Declare out of eligible profits, after loss and depreciation set-off and Schedule II depreciation (s.123(1)-(2)).
Deposit the total dividend in a separate scheduled-bank account within five days of declaration (s.123(4)).
Pay registered holders by cash, cheque, warrant or electronic mode (s.123(5)).
At day 30, sweep what is unpaid or unclaimed into the Unpaid Dividend Account within seven more days, that is by day 37 (s.124(1)).
Publish the name, last known address and amount statement within ninety days of that transfer (s.124(2)).
Pay twelve per cent a year on any delayed sweep, for the benefit of the unpaid members (s.124(3)).
At seven years from the transfer, move the money plus accrued interest to the Fund and collect the receipt (s.124(5)).
Transfer the underlying shares for any holding with no dividend paid or claimed for seven consecutive years, unless a dividend was paid or claimed in any year of that run (s.124(6)).

What to do now

Next step: list every dividend declared in the last seven or more years and mark, for each shareholder, whether it was paid or claimed. Anything unpaid after thirty days from declaration should be in the Unpaid Dividend Account (s.124(1)); if not, transfer it now.
Deadline: thirty days from declaration plus seven days for the transfer (s.124(1)); ninety days from each transfer for the website statement (s.124(2)); seven years from each transfer for the Fund (s.124(5)); seven consecutive years without payment or claim for shares (s.124(6)).
Consequence of missing it: twelve per cent a year on the untransferred amount from the date of default (s.124(3)), and a penalty on the company of ₹1,00,000 plus ₹500 a day up to ₹10,00,000, and on each officer in default ₹25,000 plus ₹100 a day up to ₹2,00,000 (s.124(7)).

Have a CA review your facts before you act or file.

FAQ

How fast must a declared dividend be segregated?
"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" (s.123(4)).

Who can receive a dividend, and in what form?
Only "the registered shareholder of such share or to his order or to his banker", and it is payable "in cash", which includes cheque, warrant or electronic mode (s.123(5)). Bonus shares go through capitalisation, not as dividend.

When does unpaid dividend leave the company?
Dividend unpaid or unclaimed thirty days after declaration moves to the Unpaid Dividend Account within seven days of that expiry (s.124(1)). After seven years from the transfer it goes to the Fund under s.125 with accrued interest (s.124(5)).

Do the shares follow the money to the Fund?
Yes. Shares on which dividend has not been paid or claimed for seven consecutive years or more are transferred in the name of the Fund, unless a dividend was paid or claimed for any year in that period; claimants can then claim the shares under the prescribed procedure (s.124(6)).

What does delay cost?
Twelve per cent a year interest for the unpaid members (s.124(3)), plus the s.124(7) penalties: company up to ₹10,00,000, each officer in default up to ₹2,00,000.

---

Next steps on director payouts

See what applies to your company, then check it with a free tool.

Plan director payouts →Founder Salary vs Dividend Optimiser Run free compliance health check