Sections 126 and 127 of the Companies Act, 2013: Dividend, Rights Shares, Bonus Shares and Failure to Distribute Dividend

Updated: 17 September 2026

Sections 126 and 127 form part of Chapter VIII of the Companies Act, 2013, dealing with declaration and payment of dividend. Section 126 protects rights connected with shares while registration of a transfer is pending. Section 127 deals with the consequences of a company's failure to distribute a declared dividend within the prescribed period.

Contents

Section 126 - Right to Dividend, Rights Shares and Bonus Shares Pending Registration of Transfer

Section 126 applies where an instrument of transfer of shares has been delivered to a company for registration but the transfer has not yet been registered. The provision determines how the company must deal with dividend and specified rights or bonus entitlements attached to those shares during that intervening period.

Core rule under Section 126

Where an instrument of transfer has been delivered for registration and the transfer has not been registered, the company must transfer the dividend relating to those shares to the Unpaid Dividend Account referred to in Section 124, unless the registered holder has authorised the company in writing to pay that dividend to the transferee named in the transfer instrument.

The company must also keep in abeyance, in relation to those shares, an offer of rights shares under Section 62(1)(a) and an issue of fully paid-up bonus shares referred to in Section 123(5).

Meaning of "held in abeyance": the relevant entitlement is kept pending rather than finally allotted or dealt with while registration of the share transfer remains incomplete. This protects the entitlement until the person legally entitled to it can be determined through registration of the transfer.

How Section 126 Operates

1. Dividend during pending transfer

The ordinary rule is that dividend relating to the shares is transferred to the Unpaid Dividend Account under Section 124 while registration is pending. An exception applies where the registered holder gives written authority to pay the dividend to the transferee specified in the transfer instrument.

2. Rights shares

An offer of rights shares covered by Section 62(1)(a), to the extent it relates to the shares under transfer, is kept in abeyance while registration remains pending.

3. Bonus shares

Any relevant issue of fully paid-up bonus shares under Section 123(5) is likewise kept in abeyance pending registration of the transfer.

Practical point: Section 126 addresses the period between delivery of the transfer instrument and registration of the transfer. It should therefore be read with the provisions governing transfer and transmission of securities, dividend, unpaid dividend, rights issues and bonus shares.

Section 127 - Punishment for Failure to Distribute Dividends

Section 127 applies after a company has declared a dividend. If the dividend is not paid, or the dividend warrant is not posted, within thirty days from the date of declaration to a shareholder entitled to payment, the statutory consequences may arise.

Consequences of default

Every director who is knowingly a party to the default is punishable with imprisonment which may extend to two years and with a fine of not less than Rs. 1,000 for every day during which the default continues.

The company is also liable to pay simple interest at the rate of 18 percent per annum for the period during which the default continues.

The requirement that a director be knowingly a party to the default is expressly stated in Section 127. The section also contains specified circumstances in which no offence is deemed to have been committed.

Exceptions: When No Offence Is Deemed to Have Been Committed

Under the proviso to Section 127, no offence is deemed to have been committed in the following circumstances:

  • the dividend could not be paid because of the operation of any law;
  • the shareholder gave directions regarding payment that could not be complied with and the inability to comply was communicated to the shareholder;
  • there is a dispute regarding the right to receive the dividend;
  • the dividend has been lawfully adjusted by the company against a sum due to it from the shareholder; or
  • for any other reason, the failure to pay the dividend or post the warrant within the prescribed period was not due to any default on the part of the company.
Important: Whether a particular case falls within an exception depends on its facts and the applicable statutory and regulatory requirements. The current text of the Act and relevant notifications should be checked before taking action.

Official Resources

For the latest statutory text, amendments, rules and notifications, refer to the official resources below:

India Code - Central Acts and statutory text

Ministry of Corporate Affairs - Companies Act, rules, notifications and updates

This article is intended as a general guide to Sections 126 and 127 of the Companies Act, 2013. Statutory provisions, notifications and their application should be verified for the facts of a particular matter.