Nozama International Ltd has a consistent dividend policy in the past 5 years paying 10% dividend, and although during the current year it sustained a loss but it wanted to keep up its reputation and declared 12% dividen

Proviso to Section 123(1) of the Companies Act, 2013 states that owing to inadequacy or absence of profits in any financial year, if any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the free reserves, then such declaration of dividend shall not be made except in accordance with such rules as prescribed in this behalf. Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 provides that in the event of adequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the fulfilment of the following conditions, namely:- (1) 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: Provided that this sub rule shall not apply to a company which has not declared any dividend in each of preceding 3 financial years. (2) 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. (3) 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. (4) 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. Further, Fourth Proviso to Section 123(1) provides that, no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year. However, this proviso is not applicable to Government Company in which entire paid-up share capital is held by the Central Government or by any State Government or Governments or by the Central Government and one or more State Governments. Accordingly, in the above case among other things to follow as per section 123, as Nozama International Ltd. has incurred loss during the current year, as per Rule 3(1), it cannot declare dividend @ 12% out of its accumulated profits, as its average of the rates at which dividend was declared by it in immediately preceding three years is only 10%, so it cannot pay dividend out of accumulated profits @ more than 10%.