Investors of profitable companies expect dividends at least once every year, and many investor friendly companies have a track record of giving dividends every year from the annual/quarterly profits. But what happens if business climate is bad and the company is unable to make profits in a year and is unable to pay dividends to shareholders? Can the company pay dividend from its Reserves? Yes.

Following is the relevant rule from Company Law India, about Declaration of Dividend out of Reserves.
Reference: [GSR No. 427(E), dated July 24, 1975]

In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that:
(i) the rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid-up capital, whichever is less;
(ii) the total account to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilised to set off the lossesincurred in the financial year before any dividend in respect of preference or equity shares is declared ; and
(iii) the balance of reserves after such drawal shall not fall below fifteen per cent of its paid-up share capital.

Explanation:
For the purposes of this rule, “profits earned by a company in previous years and transferred by it to the reserves” shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared ; and in computing the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve (at the expiry of the period specified under the Income-tax Act, 1961 (43 of 1961) shall be included and all items of Capital Reserves including reserves created by revaluation of assets shall be excluded.