Transfer of Shares related to Unpaid Dividend

Ministry of Corporate Affairs recently issued Indian companies, the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016. These rules published in Official Gazette on 5^th September 2016 and came into force on 7^th September 2016.  In this post, we will discuss transfer of shares related to unpaid dividend to the Investor Education and Protection Fund Authority.

UPDATE – provisions in this post are redundant from 28^th February 2017 due to amendment in relevant Rules. Please click here to know new provisions.

According to sub – section (6) of section 124 of the Companies Act, 2013 all shares in respect of which unpaid or unclaimed dividend has been transferred under sub-section (5) shall also be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed.

While transferring shares, there are two types of shares on procedural aspect –

• Shares in dematerialised form
• Shares in paper certificate form

Exemption from transfer

There are two exemptions – first on basis of encashment of dividend warrant and second, on specific order of court or authority.

According to proviso to sub – rule (1) of rule 6 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, in case the beneficial owner (of dematerialised share) has encashed any dividend warrant during the last seven years, such shares shall not be required to be transferred to the Fund even though some dividend warrants may not have been encashed.

The proviso restricts such benefit only to shares in dematerialised form not to all shares in paper certificate form. This requires amendment.

According to clause (b) of sub – rule (3) of rule 6 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 In case, where there is a specific order of Court or Tribunal or statutory Authority restraining any transfer of such shares and payment of dividend, the company shall not transfer such shares to the Fund.

Exemption from transfer – reporting

There is not reporting requirement for shares exempted due to encashment of any dividend warrant. This may create reconciliation issue for IEPF.

In case of exemption on specific order, procedure under proviso to rule 6(3)(b) shall be complied with. According to proviso to clause (b) of sub – rule (3) of rule 6, the company shall furnish details of such shares and unpaid dividend to the Authority in Form No. IEPF – 3 within thirty days from the end of financial year.

Procedure for transfer

Notice for transfer

According to clause (a) of sub – rule (3) of rule 6, the company shall inform at the latest available address, the shareholder concerned regarding transfer of shares three months before the due date of transfer of shares giving details of such shareholders and shares due for transfer. The company shall also simultaneously publish a notice in the leading newspaper in English and regional language having wide circulation. Such notice shall be placed on website of the company.

There is a transition provision for this year. According to proviso to clause (a) of sub – rule (1) of rule 6, where the seven years as provided under sub-section (5) of section 124 have been completed or are being completed within three months from the date of coming into force of these rules that is 6^th December 2016, the company shall initiate the aforesaid procedure immediately and transfer the shares on completion of three months.

Authorised person

According to sub – rule (2) of rule 6, for the purposes of effecting transfer of such shares, the Board shall authorise the Company Secretary or any other person to sign the necessary documents.

In my view, a company secretary in practice may also be authorised.

Transfer of dematerialised shares

According to sub – clause (i) of clause (c) of sub – rule (3) of rule 6, the Company Secretary or the person authorised by the Board shall sign on behalf of such shareholders, the delivery instruction slips of the depository participants where the shareholders had their accounts for transfer in favour of IEPF suspense account (name of the company).

Rule 6(3)(c)(ii) direct that on receipt of the delivery instruction slips, the depository shall effect the transfer of shares in favour of the Fund in its records.

Transfer of physical shares

According to sub – clause (i) of clause (d) of sub – rule (3) of rules 6, the Company Secretary or the person authorised by the Board shall make an application, on behalf of the concerned shareholders, to the company, for issue of duplicate share certificates.

According to sub – clause (ii) of clause (d) of sub – rule (3) of rules 6, on receipt of the application under clause (a) [please, read this typographic error as sub – clause (i) of clause (d) of sub – rule (3) of rules 6], a duplicate certificate for each such shareholder shall be issued and it shall be stated on the face of it and be recorded in the register maintained for the purpose, that the duplicate certificate is “Issued in lieu of share certificate No….. for purpose of transfer to IEPF” and the word “duplicate” shall be stamped or punched in bold letters across the face of the share certificate.

Interesting thing here, original certificates shall be with original shareholder. In case of sale which is otherwise legal, buyer have to “claim back” shares from IEPF as well.

According to sub – clause (iii) of clause (d) of sub – rule (3) of rules 6, particulars of every share certificate issued as above shall be entered forthwith in a register of renewed and duplicate share certificates maintained in Form SH – 2 as specified in the Companies (Share Capital and Debentures) Rules, 2014.

According to sub – clause (iv) of clause (d) of sub – rule (3) of rules 6, after issue of duplicate share certificates, the Company Secretary or the person authorised by the Board, shall sign the necessary Form SH – 4 i.e., securities transfer Form as specified in the Companies (Share Capital and Debentures) Rules, 2014, for transferring the shares in favour of the Fund.

This is not clear whether stamp duty shall be payable on such transaction, which is otherwise statutory corporate action. If applicable, who shall pay stamp duty company or IEPF.

According to sub – clause (v) of clause (d) of sub – rule (3) of rules 6, on receipt of the duly filled transfer forms along with the duplicate share certificates, the Board or its Committee shall approve the transfer and thereafter the transfer of shares shall be effected in favour of the Fund in the records of the company.

According to sub – rule (4) of rule 6, the company or depository, as the case may be, shall preserve copies of the depository instruction slips, transfer deeds and duplicate certificates for its records.

According to sub – rule (5) of rule 6, the company shall send a statement to the Fund in Form IEPF – 4 containing details of such transfer.

Freezing of rights

According to sub – rule (6) of rule 6, the voting rights on shares transferred to the Fund shall remain frozen until the rightful owner claims the shares. Further, according to proviso to sub – rule (6) of rule 6, the purpose of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, the shares which have been transferred to the Authority shall not be excluded while calculating the total voting rights.