Under SEBI accounting guidelines, how must an AMC calculate the distributable reserves out of which Income Distribution cum Capital Withdrawal (dividends) can be declared?

[ A ]Dividends can be paid only out of realized net profits; unrealized valuation gains are completely excluded, while unrealized valuation losses must be adjusted against profits.[ CORRECT ]

[ B ]Dividends must be paid 100% out of unrealized paper valuation gains on unsold equities.

[ C ]Dividends can be paid by borrowing money from commercial banks regardless of scheme profitability.

[ D ]Dividends are paid directly out of the Sponsor's personal equity share capital.

Takeaway

Option A is correct: Dividends can be paid only out of realized net profits; unrealized valuation gains are completely excluded, while unrealized valuation losses must be adjusted against profits.

Derivation

SEBI enforces a conservative accounting framework for dividend (IDCW) declaration: Dividends can only be paid out of accumulated distributable reserves. In computing distributable reserves, all operational realized net profits (accrued income minus accrued expenses) are included, but unrealized valuation gains on portfolio holdings are strictly EXCLUDED. However, unrealized valuation losses MUST be deducted from profits. This ensures dividends represent genuine realized surplus. This tests accounting prudence rules. A common error is believing paper MTM gains can fund dividends.

Why the others fail

B — Dividends must be paid 100% out of unrealized paper valuation gains on unsold equities.

Unrealized paper valuation gains may reverse upon market corrections and are strictly prohibited from funding cash dividend payouts.

C — Dividends can be paid by borrowing money from commercial banks regardless of scheme profitability.

Mutual funds cannot borrow money from banks to pay dividends; borrowing is permitted solely for short-term redemption liquidity.

D — Dividends are paid directly out of the Sponsor's personal equity share capital.

Dividends are funded entirely from the scheme's own distributable reserves, completely independent of the Sponsor's corporate capital.