Dividend Despite Losses: What Section 123 of the Companies Act Really Allows

Vinu: Manu, I read in BusinessLine that 24 listed companies have proposed dividends in FY25, even though they’ve incurred standalone losses. Is that even legally allowed? I thought dividends can be declared only if the company makes profits.

Manu: Good question, Vinu. Yes, companies can legally declare dividends even in a loss-making year, but it has to comply with specific provisions of the Companies Act, 2013, particularly Section 123.

Vinu: Can you explain what exactly Section 123 says? How does it permit dividend distribution during losses?

Manu: Sure. Section 123 of the Companies Act, 2013 allows a company to declare dividends out of:

The profits of the current year after providing for depreciation,

OR

The accumulated profits of previous financial years, again after providing for depreciation.

So even if the company makes a loss in the current year, it can still pay dividends from its free reserves—which are basically past profits that have been retained by the company.

Vinu: So this is why companies like EID Parry and Edelweiss were able to declare dividends despite losses?

Manu: Exactly. As per the article, EID Parry had a standalone loss of ₹428 crore but a consolidated profit of ₹1,773 crore, and Edelweiss had a standalone loss of ₹52 crore but a consolidated profit of ₹536 crore. They used free reserves or profits from previous years to propose dividends.

Vinu: What if the company has made losses both on standalone and consolidated basis?

Manu: Even then, dividend declaration is possible only if there are sufficient free reserves built from earlier profitable years. But companies must follow conditions such as:

Disclosing the source of dividend payment,

Justifying the rationale behind it in the AGM,

Ensuring that such payouts don’t erode core capital.

Vinu: Interesting. What’s the legal and governance intent behind allowing this?

Manu: The legal intent is to provide flexibility. It recognises that companies may face temporary setbacks but still have strong fundamentals or past performance. The governance intent is transparency—companies must clearly explain their decision to declare dividends despite losses, to avoid misleading investors.

Vinu: Got it. Manu, could you also explain a few technical terms you mentioned?

📘 Technical Terms Explained

1. Standalone Financials –

These are the financial results of the parent company alone, without consolidating the performance of its subsidiaries.

2. Consolidated Financials –

These include the financials of the parent company and all its subsidiaries, providing a holistic view.

3. Free Reserves –

These are accumulated profits from previous years, available for distribution as dividends.

4. Depreciation –

A non-cash accounting method used to allocate the cost of tangible assets over their useful lives. It must be deducted before calculating profits available for dividend.

5. Section 123 of Companies Act –

This section governs how and when companies can declare dividends—whether from current profits or reserves—and lays down conditions like provision for depreciation.

Vinu: Thanks, Manu! That clears up a lot. The legal framework seems robust but allows room for strategic financial decisions.

Manu: Exactly, Vinu. As long as companies follow the rules transparently, they can support shareholder confidence—even in tough times.

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