Section 51 of Companies Act. Payment of dividend in promotion to amount paid-up.

“-A company may, if so authorized by its articles, pay dividends in proportion to the amount paid-up on each share.”

Essential Ingredients of the Section 51 of Companies Act

1. Dividend:

Every Commercial organization does business for earning profit, similarly the company also does this for gaining profit. The profit that is earned by the company is then distributed among the shareholders. The Part of the profit which becomes part of the shareholders are known as Dividend.

2. Article of Association:

The Article of Association is one of the important documents in the company charter. It provides for the rules and regulations of the company and defines the company’s purpose. The document lays out how tasks are to be accomplished within the organization, including the process for appointing directors and handling financial records.

The Heart of Section 51 of Companies Act : A Right, not a Guarantee

The section 51 of the Act clearly mentions ‘may’ for the company. It means that there is a discretion that has been given to the company in order to choose the mode of payment of the dividends. The shareholders cannot consider dividend as their right. The decision relating to the payment of dividend is generally done by the board of directors.

The decision of the company whether to pay dividends or to hold them will have a great impact on the company. We will discuss both the reasons as to why a company may decide to pay the dividends and the reasons that can compel the companies to may not pay the dividend. 

1. A company may opt for: –

The companies may allow to pay dividends in proportion to the amount paid-up each share if it will be allowed by the Article of association of the company and upon considering the following social factors: –

• Financial stability:

The company that pays dividend to their investors gains more investors for themselves because the investors think of those companies as financially stable.

• Market recognition:

The investors expect to get dividends from the company because they invest with the intention of getting any other source of income. The more frequent a company pays dividends the more market recognition it will fetch for itself.

• Belief of investors:

Every company want to raise their share capital as quick as possible and in order to do that the companies need to lure investors to invest in the company. The company that provides regular dividends to its investors raises the belief of the investors.

2. A company may not opt for:

The companies may not allow to pay dividends in proportion to the amount paid-up each share even after being allowed by their article of association upon considering the following facts: –

• Not a stable form of income:

The dividends depends upon the price of the stock and they can easily fluctuate that it makes it evident that dividends will also fluctuate so the investors would not focus on the dividends rather they will focus on the bonds in which they will get fixed payments with interests.

• Taxation on Dividends:

The tax applicability on the dividends of the investors are more than that of capital gain therefore the net payment which the investors retain with themselves are very low.

• Increases the Overall Value:

If the company instead of paying dividends to their investors starts re-investing it funds in itself the market value of the company will be raised. It will ultimately attract more investors for the company.

Proportionality: Sharing the Pie Fairly

In order to guarantee that each shareholder receives an equitable percentage of the earnings according to their ownership position, Section 51 specifies how a company must distribute dividends: proportionate to the amount paid-up on each share.

The Section provides that the payment of dividends will depend upon the paid-up value on each share. There will be variation of dividends paid to the investors as it will depend on the payment that was made by the investors at the time of the purchase of their share.

Nuances of Section 51 of Companies Act

The provision of section 51 seems very straight forward however the language provides for the scope of variation in the payment of dividends.

• Different Share Classes:

Companies can provide preference to certain shareholder groups by issuing distinct classes of shares with varied dividend rights.

• Interim Dividends:

Subject to certain requirements, companies may distribute dividends at any time during the year, not just at the end of a fiscal year.

• Bonus Shares:

In lieu of cash dividends, companies may choose to offer bonus shares, which would increase each shareholder’s share count.

Ripple effect of the provision:

The impact of this provision will be seen on different stakeholders in different ways, such as: –

• Shareholders:

Dividend payments add to their total return and may have an impact on their decision to make additional investments in the future.

• Company Finances:

Paying dividends has an effect on the company’s cash flow and ability to make future investments, therefore careful financial planning is necessary.

• Market Confidence: 

The stock price of the company and investor sentiment can both be impacted by dividend policies.

• Regulators:

The regulators are always there to ensure the protection of investors’ interest from the discrimination of the companies. They force the companies to work in compliance with this act.

Conclusion

The Section 51 of the companies Act, 2013 clearly indicated that companies can make well-informed decisions about dividend payouts by knowing its fundamentals, nuances, and recent developments; investors can manage their expectations and realities of obtaining this highly sought-after reward. It lays the groundwork for dividend decisions while acknowledging their discretionary nature.

FAQs

Q1) What is Dividend?

Every Commercial organisation does business for earning profit, similarly the company also does this for gaining profit. The profit that is earned by the company is then distributed among the shareholders. 

The Part of the profit which becomes part of the shareholders are known as Dividend.

Q2) What is the rule 3 of payment of dividends as per ICSI?

The ICSI provides for the rule of payment of dividends in Rule 3. It is as follows: –

“The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year.”

Q3) What is a call for unpaid capital?

A call for unpaid share capital is one in which the company’s directors inform the shareholders that they are obligated to pay the remaining share amount owed to the company.

Q4) Is unpaid capital an asset?

The unpaid share doesn’t provide the company any share capital and also the investors doesn’t get the voting rights therefore, it can be concluded that the unpaid capital is not an asset.

Q5) What is the total aggregate amount unpaid shares?

The total aggregate amount of unpaid share can be calculated by subtracting the initially paid value of share with the total value of the share.

Q6) Can dividends be paid without profit?

No, the dividends is the Part of the profit which becomes part of the shareholders. Therefore, it can’t be paid if there is no profit.

Q7) How much dividend is tax free in India?

The payment of dividends up to 2,50,000 rupees is tax free in India.

Q8) What is unpaid and uncalled capital?

The remaining amount of the subscribed share capital is known as the unpaid share capital whereas, when the remaining dues of the share capital has not been called upon by the company they are known as uncalled capital.