Dividend Out 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.
When a company has no profit, or too little profit, in a year, rule 3 lets it declare dividend out of its reserves, but only if four conditions are met. This article covers rules 1 to 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014. It is as amended up to G.S.R. 441(E) dated 29 May 2015 per the MCA e-book. Later amendments should be checked before you rely on it. For help with a dividend decision, see our compliance advisory service.
In the event of inadequacy or absence of profits in any year, a company may declare dividend out of its distributable reserves (the Act's defined term) if: (1) the rate does not exceed the average of the rates declared in the three immediately preceding years; (2) the amount drawn is not more than one-tenth of paid-up share capital plus those reserves in the latest audited financial statement; (3) the amount drawn first sets off the current year's losses; and (4) the balance of reserves does not fall below fifteen per cent of paid up share capital.
Rule 1: short title and commencement
The rules may be called the Companies (Declaration and Payment of Dividend) Rules, 2014 and came into force on 1 April 2014. They were notified on 31 March 2014 as G.S.R. 241(E) under section 123(1) read with section 469, in supersession of the Companies (Central Government's) General Rules and Forms, 1959 and other rules under the Companies Act, 1956 on the matters covered.
Rule 2: definitions
"Act" means the Companies Act, 2013 and "section" means a section of the Act. Words not defined take their meaning from the Act or the Companies (Specification of Definition Details) Rules, 2014. The rules are short: the heart of them is rule 3.
Rule 3: dividend in the event of inadequate or no profits
Rule 3 applies in the event of inadequacy or absence of profits in any year. The company may then declare dividend out of its distributable reserves (the Act's defined term) subject to the following conditions.
Condition (1): the rate
The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the three years immediately preceding that year.
The proviso says this sub-rule does not apply to a company that has not declared any dividend in each of the three preceding financial years.
Condition (2): the amount drawn
The total amount drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and those reserves, as appearing in the latest audited financial statement.
Condition (3): set off losses first
The amount drawn must first be used to set off the losses incurred in the financial year in which dividend is declared, before any dividend in respect of equity shares is declared.
Condition (4): the floor
The balance of reserves after the withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement.
What about sub-rule (5)?
Rule 3(5), a condition on setting off previous losses and depreciation, was omitted in 2015 and carries no requirement now. Only conditions (1) to (4) are in force. The text of rule 3 as printed contains no separate proviso on interim dividend.
The conditions in a table
| Condition | Test | Measured against |
|---|---|---|
| (1) Rate | Not above the average rate of the three immediately preceding years (no application if no dividend was declared in each of the three preceding years) | Rates declared in the three preceding years |
| (2) Amount drawn | Not more than one-tenth | Sum of paid-up share capital and the reserves, per latest audited statement |
| (3) Loss set-off | Drawn amount first sets off the current year's losses | Before any dividend on equity shares |
| (4) Floor | Balance of reserves not below fifteen per cent | Paid up share capital, per latest audited statement |
A worked example
Banyan Chemicals Limited has paid-up share capital of rupees one hundred crore and reserves of rupees fifty crore in its latest audited financial statement. In the three preceding years it declared dividend at ten, twelve and eight per cent; the average is ten per cent. This year it has a loss.
- Rate. The dividend cannot exceed ten per cent.
- Amount drawn. One-tenth of one hundred and fifty crore rupees is rupees fifteen crore, so the amount drawn from reserves cannot exceed rupees fifteen crore.
- Loss set-off. If the year's loss is rupees four crore, the first four crore of the amount drawn goes to set it off before any dividend on equity shares.
- Floor. After the withdrawal, the balance of reserves must stay at or above fifteen per cent of paid up share capital, that is, rupees fifteen crore. Drawing fifteen crore rupees leaves thirty-five crore rupees, so the floor is met.
A dividend of ten per cent on one hundred crore rupees would cost rupees ten crore. With rupees four crore going to the loss, only rupees eleven crore is left of the maximum draw, and the dividend must be fitted within it.
The wider dividend framework
The rule is the working end of section 123 of the Act, which sets out the sources of dividend and the other conditions; see our post on section 123 of the Companies Act, 2013. Practical points on what shareholders may waive and on dividends in kind are in our article on dividend waiver and dividend in kind, and the overview is in our Dividend Rules guide. On the other side of dividends, unpaid and unclaimed amounts move to the Investor Education and Protection Fund: see our articles on the IEPF Rules 1 to 4 and on transfer of shares to the IEPF. Secretarial Standard 3 is covered in a separate post: Secretarial Standard 3 on dividend.
Need help with a dividend declaration?
Testing a dividend out of reserves against all four conditions, and recording the Board's reasoning, takes care. Our compliance advisory team can run the calculations from your latest audited financial statement and prepare the Board resolution.
Key takeaways
- Rule 3 applies when profits are inadequate or absent in a year.
- The rate may not exceed the average of the three immediately preceding years, unless no dividend was declared in each of those years.
- The draw is capped at one-tenth of paid-up share capital plus reserves, per the latest audited financial statement.
- The draw first sets off the year's losses; the reserves balance must stay at or above fifteen per cent of paid up share capital.
- Sub-rule (5) was omitted in 2015.
Read next
- Section 123 of the Companies Act, 2013: dividend
- Dividend waiver by a shareholder and dividend in kind
- Rules 1-4 of the IEPF Rules, 2016
- Rule 6 of the IEPF Rules: transfer of shares after seven years
Disclaimer: Based on the Companies Act, 2013 rules (and the Companies (Auditor's Report) Order, 2020) named above as consolidated in the MCA e-book (consulted on 3 October 2026), with the later notifications the article names. Later amendments, fees, forms and the Companies Act, 2013 provisions referred to should be checked. This article is general information, not legal advice; check the official text before acting.