Paragraph 1 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Before a Board recommends or declares a dividend, it must know how much it can lawfully distribute and whether anything blocks the declaration. Paragraph 1 of SS-3 answers both questions: it covers dividend out of profits, the bars on declaring, interim dividend, and dividend out of reserves when profits are short. A compliance advisory check of the figures before the Board meeting is the safest order of work.
SS-3, effective from 1 January 2018 (recommendatory), is not approved under section 118(10), so a company is not bound by it in the way it is bound by SS-1 and SS-2; it remains a recognised guide to good practice. ICSI may revise the Standards, so check the current version on icsi.edu. The Standard itself says that if a later change in the Act or other law makes any part inconsistent, the Act prevails.
Dividend comes out of profits of the year or undistributed profits of earlier years, after depreciation. If profits are inadequate, final dividend may come from distributable reserves on four conditions; interim dividend never does. No dividend can be declared while certain defaults subsist (deposits, debentures, preference shares, declared dividend, term loans). Bonus shares are not dividend. The Act and rules in force prevail over this 2017 text.
What the Standard covers
SS-3 sets principles for declaring and paying dividend on equity and preference shares of a going concern, both final and interim. It treats a bonus issue as capitalisation of profits, not dividend, and notes that a section 8 company is prohibited by its constitution from paying dividend. It does not apply to a company limited by guarantee without share capital, or to dividend declared by a company in liquidation. For tax on dividends see our income-tax guides.
The key definitions, in TaxClue's words:
| Term | Meaning in SS-3 |
|---|---|
| Dividend | A distribution of sums to members out of profits and, where permitted, out of distributable reserves (the Standard uses the Act's defined term for reserves) |
| Final Dividend | Recommended by the Board and declared by members at an Annual General Meeting |
| Interim Dividend | Declared by the Board |
| Distributable reserves | Reserves available for dividend per the latest audited balance sheet, excluding unrealised or notional gains, revaluation of assets, and fair value changes in carrying amounts recognised in equity |
| Member | Subscriber to the memorandum; any person who agrees in writing and is entered in the register; any beneficial owner in a depository's records |
| Preference Shareholder | Holder of shares with a preferential right to dividend of a fixed amount or rate and to return of capital |
The full set of definitions is in the Standard on icsi.edu. The Act's provisions on dividend are explained in section 123 on declaration and payment of dividend and a summary of the whole Standard is in our article on SS-3 key requirements.
Paragraph 1.1: out of profits
1.1.1 Source. Dividend is paid out of profits of the year for which it is declared and/or undistributed profits of earlier years, after providing depreciation under the Act (Schedule II). Dividend may also be declared out of money provided by the Central or a State Government under a guarantee for that purpose. It is not declared until previous losses and depreciation not provided earlier are set off against the current year's profit. Before declaring, the company may transfer a chosen percentage of the year's profit to reserves. The profit and loss statement must give a true and fair view and follow accounting standards.
1.1.2 When dividend is barred. A company does not declare dividend on equity shares while it is in non-compliance with the Act's deposit provisions, until the deposits are repaid with interest. It also declares no dividend while it is in default in any of the following:
- redemption of debentures, payment of interest or creation of the debenture redemption reserve;
- redemption of preference shares or creation of the capital redemption reserve;
- payment of dividend declared in the current or earlier years;
- repayment of a term loan to a bank or financial institution, or interest on it.
No dividend is declared during any extended time granted by a Tribunal or Court for repaying those liabilities.
1.1.3 Sources that cannot be used. Dividend is not declared out of the securities premium account, the capital redemption reserve, revaluation reserve, amalgamation reserve, profits on re-issue of forfeited shares, or profits earned before incorporation.
1.1.4 Interim dividend. It is declared and paid out of the surplus in the profit and loss account and/or profits of the year in which it is declared. The Board may declare it during any financial year or between year-end and the AGM. It must consider the financial results for the period and be satisfied that the financial position supports it. Those results take into account depreciation for the full year, tax including deferred tax for the full year, other anticipated losses, the fixed dividend on preference shares and any losses up to the end of the preceding quarter. Where the company has incurred losses in the year up to that quarter, interim dividend is not declared at a rate higher than the average rate of the last three financial years.
1.1.5 Differential rights. The Board may declare interim dividend on some or all classes of equity shares according to their terms of issue, checking that profits can meet what is payable to the other classes.
Paragraph 1.2: out of reserves
1.2.1 Final dividend when profits are inadequate. The company may declare dividend out of distributable reserves if:
| Condition | Test |
|---|---|
| (a) Rate | Not above the average rate declared in the three preceding financial years (not applicable if no dividend was declared in each of those three years) |
| (b) Amount | Total withdrawal from accumulated profits not more than one-tenth of paid-up share capital plus those reserves, per the latest audited statements |
| (c) Use | The amount withdrawn first sets off the year's losses |
| (d) Floor | Balance of reserves after withdrawal not below fifteen per cent of paid-up share capital |
These conditions do not apply to a Government company whose entire paid-up capital is held by the Central or State Governments. The same four conditions appear in rule 3 of the dividend rules, which should be read as now in force; see Rules 1 to 3 of the Dividend Rules and our note on dividend with inadequate profits. The live rule article records that an older sub-rule on setting off earlier losses and depreciation was omitted in 2015 and that the rule as printed has no separate proviso on interim dividend. Where the Standard's 2017 text goes beyond the rule, the Act and rules in force prevail.
1.2.2 Interim dividend. The Standard says interim dividend is not declared or paid out of distributable reserves; in a loss or inadequate-profit year, only final dividend may be paid from them, on the conditions in 1.2.1.
A worked example
Anchor Polymers Limited has a thin year and wants a final dividend above its three-year average rate. Under 1.2.1 the rate cannot exceed that average, and the withdrawal from reserves must stay within the one-tenth cap and the fifteen per cent floor. The Company Secretary also finds an overdue term-loan instalment, so no dividend can be declared while that default subsists. The Board clears the instalment first and revisits the recommendation, noting that the Act and rules prevail over the 2017 Standard text. For tax on the dividend, see our income-tax guides.
Need help with a dividend decision?
A dividend that is declared when a default subsists or from a barred reserve is hard to undo. TaxClue's compliance advisory team can test the distributable amount against the Act, the rules and SS-3 before the Board recommends it.
Key takeaways
- Dividend comes from current profits after depreciation, undistributed earlier profits, or specified Government money.
- Subsisting defaults on deposits, debentures, preference shares, declared dividend or term loans bar declaration.
- Securities premium, capital redemption, revaluation and amalgamation reserves cannot be used.
- Reserves can fund only final dividend, on four conditions; interim dividend cannot come from them.
- SS-3 is recommendatory and the Act and rules in force prevail.
Read next
- Paragraphs 2 to 5 of SS-3: declaration, entitlement and payment
- Paragraphs 6 to 10 of SS-3: unpaid dividend and IEPF
- SS-3 on dividend: key requirements
- Section 123: declaration and payment of dividend
Disclaimer: Based on the Secretarial Standards issued by the Institute of Company Secretaries of India (SS-1 and SS-2 as revised effective 1 April 2024; SS-3 effective 1 January 2018; SS-4 effective 1 October 2018), as consulted on 3 October 2026. ICSI revises the Standards from time to time; check the current versions on icsi.edu and the Companies Act provisions referred to. This article is general information, not legal advice; check the official text before acting.