Section 51 of The Companies Act, 2013

Section 51 of The Companies Act, 2013 reads as –

Payment of dividend in proportion to amount paid-up.

A company may, if so authorised by its articles , pay dividend  in proportion to the amount paid- up on each share .

The Companies Act, 2013 governs the functioning of companies in India, ensuring compliance with corporate regulations. Among its various provisions, Section 51 plays a crucial role in dividend payments, allowing companies to distribute dividends in a manner that aligns with their Articles of Association (AOA) and financial policies. This section provides flexibility in the mode of dividend payment while ensuring fairness and legal compliance.

Section 51 of the Companies Act, 2013 states that a company may pay dividends to its shareholders in cash or through any other prescribed mode as per its AOA. This gives companies the discretion to decide how they will distribute dividends, provided they adhere to the Companies Act and other applicable regulations.

Modes of Dividend Payment

A company can distribute dividends using various methods, ensuring efficient and convenient disbursement to shareholders. Some of the widely accepted modes include:

1. Electronic Transfer

Companies can directly transfer dividends to shareholders’ bank accounts using NEFT (National Electronic Funds Transfer), RTGS (Real-Time Gross Settlement), IMPS, or other digital payment methods.

2. Cheque or Demand Draft

If electronic payments are not feasible, companies can issue cheques or demand drafts in favor of shareholders.

3. Credit to Shareholder’s Account

Sometimes, dividends are credited to an account maintained by the shareholder with the company, as per the AOA’s provisions.

Role of Articles of Association (AOA) in Dividend Payments

The Articles of Association (AOA) of a company outline the rules and procedures for dividend distribution. Since Section 51 allows companies to determine their mode of dividend payment, they must follow their AOA’s guidelines while making distributions.

For example:

• If the AOA mandates electronic transfers, the company cannot issue dividend cheques.
• If the AOA permits only annual dividends, the company cannot declare interim dividends unless the AOA is amended.

By following the AOA, companies ensure compliance and transparent dividend distribution.

Legal Provisions and Restrictions on Dividend Payment

Although Section 51 provides companies with flexibility, it must be read along with other provisions of the Companies Act to ensure compliance.

1. Dividends Can Be Paid Only from Profits

As per Section 123, a company cannot distribute dividends unless it has sufficient profits, ensuring that payouts are made only from legitimate earnings. Additionally, borrowed funds cannot be used for dividend payments, maintaining financial stability and preventing undue financial strain on the company.

2. Equal Treatment for Shareholders

Shareholders holding the same class of shares must receive dividends on a uniform basis, ensuring fairness in profit distribution. A company cannot discriminate between shareholders unless explicitly permitted by its Articles of Association (AOA).

3. Unpaid Dividend Must Be Transferred to the IEPF

If a dividend remains unclaimed for 30 days, the company is required to transfer it to an Unpaid Dividend Account. If it remains unclaimed for seven years, it must be deposited into the Investor Education and Protection Fund (IEPF) as mandated under Section 124.

These provisions protect shareholder interests and prevent mismanagement of funds.

Secretarial Standards on Dividend (SS-3)

The Secretarial Standard SS-3 on Dividend, issued by the Institute of Company Secretaries of India (ICSI), provides guidelines for the declaration and payment of dividends on both equity and preference share capital. It ensures companies follow best corporate governance practices.

However, as per the Explanation to Section 205(1) of the Companies Act, 2013, only secretarial standards approved by the Central Government are mandatory. SS-3 is not mandatory but only recommendatory, meaning companies are encouraged to follow it, but it is not legally binding.

Conclusion

Section 51 of the Companies Act, 2013 is a vital provision that regulates dividend payments, ensuring fairness, transparency, and legal compliance. By granting companies the flexibility to choose their mode of payment while enforcing financial discipline, this provision balances corporate autonomy and shareholder protection. Additionally, while SS-3 on Dividend is not mandatory, companies are encouraged to follow it to maintain best corporate governance practices.

Bibliography

• Section 51, The Companies Act, 2013
• Ramaiya, Guide to the Companies Act (19th ed. 2020)
• T Ramappa, Commentary on the Companies Act, 2013 as Amended by the Companies (Amendment) Act, 2015

This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions. For expert assistance, feel free to contact us.