Companies Act 2013 Chapter 8 Notes, Download Free PDF

Published on 29 October 2025 by

The Companies Act, 2013 governs the formation, management, and administration of companies in India. Chapter 8 of this Act deals with the “Declaration and Payment of Dividend”, covering Sections 123 to 127.

This chapter explains how dividends are declared, when and how they are paid to shareholders, and what happens if a company fails to distribute them within the prescribed time. It also provides guidelines about the Unpaid Dividend Account, the Investor Education and Protection Fund (IEPF), and penalties for default.

Candidates preparing for UGC NET Commerce, CA Inter, CS Executive, SEBI Grade A, and other competitive exams should carefully understand this chapter as questions are often asked from it.

Topics Covered in Companies Act 2013 Chapter 8

The topics covered under Chapter 8 of the Companies Act, 2013 are as follows:

  • Section 123 – Declaration of Dividend
  • Section 124 – Unpaid Dividend Account
  • Section 125 – Investor Education and Protection Fund (IEPF)
  • Section 126 – Rights to Dividend, Rights Shares, and Bonus Shares Held in Abeyance
  • Section 127 – Punishment for Failure to Distribute Dividend

Download SEBI Grade A 350+ PYQs with Solutions PDF

Section Wise Notes on Companies Act 2013, Chapter 8

The detailed section-wise notes on Chapter 8 of the Companies Act, 2013 are as follows:

Section 123 – Declaration of Dividend

This section explains how a company can declare and pay dividends to its shareholders. It ensures that dividends are declared only out of genuine profits and after necessary deductions like depreciation.

  1. Dividend Source
    A company can declare a dividend only:
    • Out of the profits of the current financial year, after providing for depreciation.
    • Out of profits of previous financial years (undistributed), also after providing for depreciation.
    • Or out of both current and past profits.
  2. Exclusion from Profits:
    Unrealised or notional gains, such as revaluation of assets or fair value changes, cannot be used for dividend declaration.
  3. Transfer to Reserves (Optional):
    The company may transfer a certain percentage of its profits to reserves before declaring a dividend.
  4. Declaration from Free Reserves:
    In case of inadequate profits, dividend can be declared from free reserves, following prescribed rules.
  5. Interim Dividend (Sub-section 3):
    The Board of Directors can declare an interim dividend during the financial year or before the annual general meeting, out of:
    • Surplus in profit and loss account
    • Profits of the current financial year
    • Profits generated till the quarter preceding the date of declaration
      However, if the company incurs a loss during the current financial year, interim dividend cannot be higher than the average of dividends declared in the last three years.
  6. Deposit of Dividend:
    The amount of dividend must be deposited in a separate bank account within five days from the date of declaration.
  7. Mode of Payment:
    Dividend is payable only in cash, by cheque, warrant, or electronic mode. However, capitalisation of reserves for bonus shares is allowed.
  8. Restriction:
    A company that has failed to comply with sections 73 and 74 (regarding deposits) cannot declare any dividend on its equity shares.
NotificationNotification
UGC NET NotificationSEBI Grade A Notification

Section 124 – Unpaid Dividend Account

This section deals with the treatment of unpaid or unclaimed dividends. It ensures that companies properly handle and disclose unpaid dividends, protecting the rights of shareholders.

  1. Transfer to Special Account:
    If any dividend remains unpaid or unclaimed for 30 days from declaration, the company must transfer it within 7 more days to an “Unpaid Dividend Account” in a scheduled bank.
  2. Disclosure:
    Within 90 days of this transfer, the company must upload the details of shareholders and unpaid amounts on:
    • Its own website, and
    • Any other website approved by the Central Government.
  3. Interest for Delay:
    If the company fails to transfer unpaid dividend within the time limit, it must pay 12% interest per annum on the amount.
  4. Claim by Shareholders:
    Any person entitled can apply to the company for payment of unpaid dividend from this account.
  5. Transfer to IEPF:
    Amounts remaining unpaid for 7 years must be transferred to the Investor Education and Protection Fund (IEPF), along with interest.
  6. Transfer of Shares:
    Shares for which dividend is not claimed for 7 consecutive years shall also be transferred to IEPF.
  7. Penalty:
    Failure to comply attracts a penalty up to ₹10,00,000 for the company and ₹2,00,000 for officers in default.
Attempt A Free Mock Test Today!

Section 125 – Investor Education and Protection Fund (IEPF)

Section 125 establishes the Investor Education and Protection Fund (IEPF). This fund ensures that unclaimed dividends and other investor dues are safely managed and used for investor awareness and refunds.

  1. Establishment:
    The Central Government shall establish the Investor Education and Protection Fund (IEPF).
  2. Sources of the Fund:
    The Fund includes:
    • Amounts from Unpaid Dividend Accounts.
    • Matured deposits and debentures not claimed for 7 years.
    • Sale proceeds of fractional shares.
    • Redemption amounts of preference shares unpaid for 7 years.
    • Donations, grants, and interest earned on the Fund.
  3. Utilisation of the Fund:
    • Refund of unclaimed dividends, deposits, and debentures.
    • Promotion of investor education and awareness.
    • Reimbursement of legal expenses for investor protection actions.
    • Distribution of disgorged amounts among affected investors.
  4. Administration:
    An authority constituted by the Central Government administers the Fund and maintains audited accounts, reports, and statements.

Download 100+ Important Economic and Finance Terms PDF

Section 126 – Dividend, Rights, and Bonus Shares Held in Abeyance

If a transfer of shares is pending registration:

  • The dividend for such shares is to be transferred to the Unpaid Dividend Account, unless the registered shareholder authorises payment to the transferee.
  • The rights and bonus shares in relation to those shares shall be kept in abeyance until registration is completed.

Download 120+ Management MCQs Ebook

Section 127 – Punishment for Failure to Distribute Dividend

If a company declares a dividend but does not pay it or post the warrant within 30 days, the following consequences apply:

  1. Penalty on Directors:
    Each director knowingly responsible for default faces:
    • Imprisonment up to 2 years, and
    • Fine of at least ₹1,000 per day of default.
  2. Interest:
    The company must pay 18% simple interest per annum for the delay period.
  3. Exceptions:
    No offence is deemed if:
    • Payment is prohibited by law.
    • Shareholder instructions cannot be complied with.
    • There’s a dispute on the right to receive dividend.
    • Dividend is lawfully adjusted against any due amount.
    • The delay was not due to company’s fault.
Solve Free Previous Year Exam Papers Today!

Download Companies Act 2013 Chapter 8 Free PDF

Aspirants preparing for the UGC NET Commerce paper, SEBI Grade A exam, and various other government exams can download the complete details of the Companies Act, 2013 through the direct link provided below. Specifically, to check Chapter 8 of the Companies Act, 2013, refer to pages 81 to 85 of the PDF.

Download Companies Act 2013 Free PDF

Questions Based on Chapter 8 of Companies Act 2013

1. Under which section of the Companies Act, 2013 is the declaration of dividend covered?

A. Section 122
B. Section 123
C. Section 124
D. Section 125
E. Section 126

Correct Answer: B
Explanation: Section 123 specifically deals with the declaration of dividend and the conditions under which it can be paid.

2. Dividend can be declared out of which of the following?

A. Capital
B. Loans
C. Free reserves and profits after depreciation
D. Revaluation reserves
E. Share premium account

Correct Answer: C
Explanation: Dividend can be declared only out of current profits, past profits, or free reserves after providing for depreciation.

3. Dividend must be deposited in a separate bank account within how many days of declaration?

A. 3 days
B. 5 days
C. 7 days
D. 10 days
E. 15 days

Correct Answer: B
Explanation: As per Section 123(4), the amount of dividend must be deposited into a separate bank account within 5 days from declaration.

4. If any dividend remains unpaid after 30 days of declaration, it must be transferred to which account?

A. Dividend Reserve Account
B. Unpaid Dividend Account
C. Investor Protection Account
D. Suspense Account
E. Profit and Loss Account

Correct Answer: B
Explanation: Section 124 requires companies to transfer such unpaid dividend to an Unpaid Dividend Account within 7 days.

5. The Unpaid Dividend Account must be opened in which type of bank?

A. Private Bank
B. Co-operative Bank
C. Scheduled Bank
D. Regional Rural Bank
E. Any financial institution

Correct Answer: C
Explanation: The Act mandates that the Unpaid Dividend Account must be maintained in a scheduled bank.

Get ready to crack government job exams with leading educators

Enroll in Online Live Classes Today!

6. After how many years are unclaimed dividends transferred to the Investor Education and Protection Fund (IEPF)?

A. 3 years
B. 5 years
C. 7 years
D. 10 years
E. 12 years

Correct Answer: C
Explanation: If dividend remains unclaimed for 7 years, it is transferred to the IEPF along with related shares.

7. Interim dividend may be declared by which authority?

A. Shareholders
B. Board of Directors
C. Central Government
D. Company Secretary
E. Registrar of Companies

Correct Answer: B
Explanation: The Board of Directors has the power to declare an interim dividend during the financial year.

8. What is the rate of interest payable for delay in transferring unpaid dividend to the special account?

A. 10% per annum
B. 12% per annum
C. 15% per annum
D. 18% per annum
E. 20% per annum

Correct Answer: B
Explanation: As per Section 124(3), delay in transfer attracts 12% per annum interest from the date of default.

9. Which section of the Companies Act, 2013 establishes the Investor Education and Protection Fund (IEPF)?

A. Section 123
B. Section 124
C. Section 125
D. Section 126
E. Section 127

Correct Answer: C
Explanation: Section 125 establishes the IEPF for protecting investor interests and managing unclaimed funds.

10. Which of the following cannot be a source for declaring dividends?

A. Free reserves
B. Profits after depreciation
C. Capital reserves
D. Surplus from previous years
E. Current year profit

Correct Answer: C
Explanation: Capital reserves cannot be used for declaring dividends as they are not earned profits.

11. What happens to shares for which dividend has not been claimed for seven consecutive years?

A. Cancelled
B. Sold to promoters
C. Transferred to IEPF
D. Reissued to investors
E. Forfeited

Correct Answer: C
Explanation: Section 124(6) mandates that such shares be transferred to the IEPF.

12. Which section provides punishment for failure to distribute dividends?

A. Section 123
B. Section 124
C. Section 125
D. Section 126
E. Section 127

Correct Answer: E
Explanation: Section 127 deals with punishment for failure to distribute declared dividends within 30 days.

13. What is the interest rate payable if a company fails to pay the declared dividend within 30 days?

A. 10%
B. 12%
C. 15%
D. 18%
E. 20%

Correct Answer: D
Explanation: Companies must pay 18% per annum interest for the period of delay in distributing dividend.

14. When share transfer is pending, dividends and bonus shares are—

A. Cancelled
B. Distributed equally
C. Kept in abeyance
D. Transferred to government
E. Paid to transferor only

Correct Answer: C
Explanation: As per Section 126, dividend, right, and bonus shares are kept in abeyance until registration of transfer.

Also Check: What are the Upcoming Government Exams

15. Who audits the accounts of the Investor Education and Protection Fund (IEPF)?

A. Comptroller and Auditor General (CAG)
B. SEBI
C. RBI
D. Ministry of Corporate Affairs
E. Parliament Committee

Correct Answer: A
Explanation: The CAG of India audits the accounts of the IEPF annually.

16. What is the penalty on a company for failure to transfer unpaid dividends as required under Section 124?

A. ₹1 lakh
B. ₹2 lakh
C. ₹5 lakh
D. ₹10 lakh
E. ₹15 lakh

Correct Answer: D
Explanation: Section 124(7) imposes a penalty of up to ₹10 lakh on the company.

17. Dividend can be paid through which of the following modes?

A. Only in cash
B. Only by cheque
C. Only by demand draft
D. Cash, cheque, warrant, or electronic mode
E. Shares

Correct Answer: D
Explanation: Section 123(5) allows payment of dividend only in cash, cheque, warrant, or electronic mode.

18. Under Section 125, one of the uses of IEPF is—

A. Company profit distribution
B. Refund of unclaimed dividends
C. Promoter remuneration
D. Employee bonus payments
E. CSR fund utilisation

Correct Answer: B
Explanation: IEPF is used to refund unclaimed dividends or deposits to rightful investors.

19. If a company suffers a loss during the year, interim dividend can be declared—

A. Up to any amount
B. Not at all
C. Up to average dividend of last three years
D. Up to half of paid-up capital
E. As decided by shareholders

Correct Answer: C
Explanation: In case of a loss, interim dividend shall not exceed the average of the preceding three years.

20. Dividend cannot be declared if the company has defaulted under which sections related to deposits?

A. Section 70 & 71
B. Section 73 & 74
C. Section 80 & 81
D. Section 90 & 91
E. Section 100 & 101

Correct Answer: B
Explanation: Section 123(6) restricts declaration of dividend if the company has defaulted under Sections 73 and 74.