Lalchand Ltd. proposes to declare dividend in the current year and provides you the following information: Equity share capital-paid up ₹5 crore 10% Preference share capital-paid up ₹2 crore General reserves ₹1.50 crore

According to third proviso to Section 123(1) read with rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014, in case of inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall be made in accordance with such the following conditions, namely:- The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. This sub rule shall not apply to a company which has not declared any dividend in each of preceding 3 financial years. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement. The amount so drawn shall first be utilized 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. The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement. Computation: Average rate of dividend; (10%+12%+14%)/3 = 12% 1/10th of paid up capital and free reserves: ₹86 lakh as computed below: Equity capital ₹5 crore + Preference Capital ₹2 crore + GR ₹1.50 crore + Surplus as per P & L A/c ₹10 lakh = ₹8.60 crore 1/10th * ₹8.60 crore = ₹86 lakh Available reserve for drawing as computed below: General Reserve ₹1.50 crore Less: 15% of paid up share capital of ₹7 crore (₹1.05 crore) Balance reserve available ₹0.45 crore Plus: Surplus ₹0.10 crore Free Reserves Available ₹0.55 crore Distributable amount for dividend ₹55 lakh being lower than ₹86 lakh as computed under point 2 above ₹55 lakh - amount set aside for dividend to preference shareholders ₹20 lakh i.e. 10% of share capital of ₹2 crore. Hence, available reserve for equity dividend is ₹35 lakh. Rate of dividend, if ₹35 lakh is distributed: (₹35 lakh/equity capital ₹5 crore)*100 = 7% Dividend @7% may be distributed being less than the average rate of dividend.