Smily Ltd. had a track record of declaring dividends @ 10%, 15% and 14% in the three financial years preceding the financial year 2015-16. In the year 2015-16, the company declared dividend @ 15% even though there was in

Smily Ltd. declared dividend @ 15% in the financial year 2015-16 even though there was inadequacy or absence of profit. Section 123 of the Companies Act, 2013 read with rule 3(1) of Companies (Declaration & Payment of Dividend) Rules, 2014 provides that in case of inadequate profits or absence of profits, 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. Declaration of dividend @15% by Smily Ltd. is not valid as it has exceeded the average rate of dividend declared in the preceding three financial years. Whereas, if the company has not declared any dividend in each of the three preceding financial year, the limit prescribed above shall not apply. As a Secretarial Auditor of the Company, in the event of inadequacy or absence of profits in any year, compliance of the following shall have to be ensured- 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. However, this sub-rule shall not apply to a company which has not declared any dividend in each of the three preceding financial year. 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 utilised 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. No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against the profit of the company of the current year.