Legal restrications and constraints
Companies act has given certain provisions regarding the payment of dividends that is dividends can be paid only out of current year profit or past year profit after providing depreciation fund. In case company is not earning profit then it can not declare dividend. Apart from the companies Act there are certain internal provisions of the company that is whether the company has enough flow of cash to dividend. The payment of dividend should not effect the liquidity of the company. Sometimes restriction can be applied by lenders who provide loans to companies. If loans are acquired under restrictive clauses then the lender may require interest to be paid first before declaring any dividends. So if company has enough profit and liquidity and there are no restrictions on payment of dividend then it will declare dividend and keep aside less retained earnings.