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A company proposes a dividend of 20% for the financial year. Under section 123(1) of the Companies Act, 2013, what transfer of its current profits to reserves must it make before declaring the…

Question and options

A company proposes a dividend of 20% for the financial year. Under section 123(1) of the Companies Act, 2013, what transfer of its current profits to reserves must it make before declaring the dividend?

  1. 10% of the profits for the year

  2. 5% of the profits for the year

  3. 7.5% of the profits for the year

  4. No fixed minimum is required

Answer and explanation

Correct answer: D - No fixed minimum is required

The first proviso to section 123(1) lets a company, before declaring a dividend, transfer such percentage of its profits for the year as it considers appropriate to reserves, so no transfer is compulsory. The fixed percentages linked to the rate of dividend come from transfer-to-reserves rules made under the Companies Act, 1956, which do not apply under the 2013 Act.

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