Green Ltd., a power generating company, attracted numerous investors due to its strong growth potential. Mr. Arju, one of the investor purchased a…

Section 2 (35) of the Companies Act, 2013, defines the term “dividend” as any distribution of profits by a company to its shareholders, whether in cash or in kind, out of free reserves available for the purpose. The above statement implies that shareholders do not have an inherent or guaranteed right to receive dividends from a company. The decision to declare dividends lies with the board of directors, subject to shareholder approval and legal provisions under the Companies Act, 2013. The board of directors has the authority to recommend dividends. If they believe distributing dividends is not in the best interest of the company, they may choose not to declare them, even if the company has sufficient profits. Shareholders cannot force the company to declare dividends. A company can declare dividends only out of: Current year's profits after providing for depreciation.Previous years profits transferred to reserves.Money provided by the government (in case of guaranteed companies). Before declaring a dividend, the company must set aside a specified percentage of profits in reserves if required. Shareholders can approve the dividend recommended by the board at the Annual General Meeting (AGM), but they cannot demand a higher dividend. The board may declare an interim dividend before the final accounts are prepared if they find it appropriate. If dividends remain unpaid for 30 days, the company must transfer them to a separate Unpaid Dividend Account. Thereby, the distribution of dividends is subject to multiple considerations, including the company's profitability, legal compliance, and the board's discretion. The Companies Act, 2013, ensures that dividends are declared in a financially responsible manner, protecting both the company and its investors. Since shareholders cannot demand dividends as a matter of right, it is evident that dividends are not an absolute right but a discretionary benefit provided when the company deems it appropriate. Validity of the Argument: As per the stated facts, Mr. Arju argued that as a shareholder, he had an absolute right to receive dividends. He believed that since the company was in profitable state, dividends should be mandatorily distributed. His expectation of dividends was based on his investment, but the law does not guarantee an absolute right to dividends. The board has the authority to withhold dividends if it deems reinvestment necessary for the company's long-term growth. Therefore, while shareholders have a reasonable expectation of returns, they do not possess an unconditional entitlement to dividends. Therefore, the argument of Mr. Arju is invalid in the light of the legal provision given in section 123 of the Companies Act, 2013.