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A company may declare dividend in the event of inadequacy of profits. The maximum total amount that may be drawn from accumulated free reserves is capped at:
AAverage of dividends declared in the immediately preceding three FYs
B10% of paid-up capital and free reserves
C20% of free reserves
DWhatever is recommended by the Board
Answer & Solution
Correct answer: A. Average of dividends declared in the immediately preceding three FYs
1. Rule 3 of Companies (Declaration and Payment of Dividend) Rules — rate of dividend declared cannot exceed the average of three preceding years' dividend rates.
2. Also amount drawn from reserves is capped at 10% of (paid-up + free reserves).
3. Hence (B).
_Source: ICAI BoS CA Inter Paper 2 — Declaration and Payment of Dividend_