Ministry of Corporate Affairs
The Preference Shares (Regulation of Dividends) Act, 1960 is an Indian legislation designed to regulate the payment of dividends on preference shares issued by companies. The primary aim of the Act is to protect the interests of preference shareholders by ensuring that they receive a fair share of the profits and to provide clarity on the distribution of profits. It addresses complexities related to income tax and dividend payouts, making it important for understanding corporate finance.
Act Background and Ministry:
The Preference Shares (Regulation of Dividends) Act, 1960 is a central act and is administered by the Ministry of Corporate Affairs, and relevant courts under Indian legal system.
Enactment Date, Number of Chapters, Number of Sections:
The Act was enacted on 28th December 1960. It has 7 sections and one schedule, and it has no formal chapters.
Act Governed By:
The Act is governed by the Indian legal system. It has an overriding effect over other laws.
On Whom it is applicable:
The Act applies to all Indian companies that have issued preference shares. It is applicable throughout India except for the State of Jammu and Kashmir, with some exceptions for banking, insurance, and financial corporations. The Union territory of Pondicherry has certain specific modifications of the Act as per the schedule of the act.
Penalties/Punishments:
This act does not prescribe any specific penalties or punishments for contravention of its provisions. However, it does outline regulations that the companies must follow, to ensure that preference shareholders receive proper share of dividends.
Important Pointers:
-
Regulation of Dividends: The Act provides specific rules for dividend distribution on preference shares, especially shares issued before 1st April 1960.
-
Stipulated Dividend: The Act regulates dividends on the basis of a stipulated dividend – a preferential right to be paid a fixed amount or calculated at a fixed rate.
-
Free of Income Tax: The Act governs the distribution of dividends that are free of income tax and the mechanism for increasing the stipulated dividend by 30% for such cases, for dividends that are declared post 1960.
-
Subject to Income Tax: For preference shares where dividends are specified to be subject to income tax, the Act states that such shares will carry preferential rights to receive dividend in an amount exceeding the stipulated dividend by 11%.
-
Previous Year Declarations: If a company declares dividends for a previous year, there are rules specified for additional dividends to be paid, which depends on date and when the company declared the said dividend.
-
Special Provisions: The act provides special rules for cases where portion of company’s profits are exempt from income tax. The act specifies rules for cases where a portion of the income is agricultural in nature.
-
Deduction of Income Tax: The act specifies that deductions made for income tax should not exceed 27.5% of aggregate amounts of stipulated dividends and an additional 11%, as applicable for specified shares issued before 1st April 1960.
-
Overriding Effect: The provisions of this Act override any other conflicting laws or clauses in companies’ constitutions.
-
Participating Preference Shares: This Act does not apply to participating preference shares which have a right to participate in the profits and share of a company’s assets.
-
Power to Make Rules: The Act empowers the Central Government to make rules to ensure the effective implementation of the act.
Act Copy: