The following figures have been extracted from the financial statements of MC Limited for the year ended 31 st March, 2025: Particulars Amount (₹)…

When the current year's profit is not included in free reserves ₹ ₹ Amount that can be drawn from reserves for 12.5% Dividend 12.5% Dividend on 40,00,000/- 5,00,000 Profits available Current year Profit 2,25,000 Less: Preference Dividend 8% on 12,50,000/- (1,00,000) Amount which can be utilized from reserves 1,25,000 3,75,000 Conditions as per Companies (Declaration of Dividend out of Reserves) Rules, 2014: 1. The rate of dividend declared should not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. Since 12.5% is lower than the average rate of dividend (13%), 12.5% dividend can be declared. 2. Maximum amount that can be drawn from the accumulated profits and reserves should not exceed 10% of the paid up capital and free reserves i.e.,6,42,500 (10% of [40,00,000+12,50,000+11,75,000]) 3. The balance of reserves after drawl of 8,00,000 (₹ 11,75,000 -3,75,000) should not fall below 15% of its paid up capital i.e,7,87,500 [15% of 52,50,000]. Since all the three conditions are satisfied, the company can withdraw - 5,00,000/- from its free reserves (i.e.1,25,000/- from current year of profit and - 3,75,000/- from accumulated profits) as per Companies (Declaration of Dividend out of Reserves) Rules, 2014 Alternatively, when the current year's profit is included in free reserves. In case of declaration of dividend out of free reserves, there are 3 conditions: 1. Dividend Rate < Average Rate of last 3 years (Condition 1) Calculate the average dividend rate The average dividend rate for the immediately preceding three financial years (2021-22, 2022-23, 2023-24) Average Rate = (12%+13%+14%) / 3 = 13% The proposed dividend rate of 12.5% is lower than the average rate of 13%, thus satisfying the first condition of the Rules. 2. Determine total paid-up capital and free reserves Only free reserves are considered for withdrawal. Securities Premium Reserve and Capital Redemption Reserve are not free reserves. Paid-up Share Capital (Equity + Preference):40,00,000 +12,50,000 = 52,50,000 Free Reserves (General Reserve + Net Profit for the year):11,75,000 +2,25,000 = 14,00,000 Total Paid-up Capital and Free Reserves:52,50,000 +14,00,000 = 66,50,000 Calculate the maximum permissible withdrawal amount (Condition 2) The maximum amount that can be drawn shall not exceed 10% of the total of paid-up capital and free reserves. Maximum Withdrawal Limit (10%) of 66,50,000 = 6,65,000 3. Calculate the minimum required reserve balance (Condition 3) The balance of reserves after withdrawal must not fall below 15% of the paid-up share capital. Minimum Reserve Balance (15%) of 52,50,000 = 7,87,500. Determine the maximum usable amount from reserves The company has a total of 14,00,000 in free reserves. After maintaining the minimum balance of 7,87,500, the maximum amount that can be utilized is: Maximum Usable Amount = 14,00,000 -7,87,500 = 6,12,500 The management proposes a 12.5% dividend on equity shares only (typically dividends on preference shares are paid first from profit, but the problem implies the need to use reserves for the equity dividend). Total Equity Share Capital = 40,00,000 Proposed Equity Dividend Amount = 12.5% of 40,00,000 = 5,00,000. Since the proposed dividend amount (5,00,000) is less than the maximum usable amount from reserves (₹ 6,12,500), the company can declare the proposed dividend. The company can utilize the lower of the amount from Condition 2 (6,65,000) and the amount from Condition 3 (6,12,500), which is 6,12,500 The amount that can be utilized by the company out of its reserves in accordance with the Companies (Declaration of dividend out of Reserves) Rules, 2014 is 5,00,000.