Transfer of Shares related to Unpaid Dividend

Ministry of Corporate Affairs recently amended Indian companies, the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016. the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Amendment Rules, 2017 published in Official Gazette on 28^th February 2017 and came into force on same date. We discussed original rules earlier here.  In this post, we will discuss amended law related transfer of shares related to unpaid dividend to the Investor Education and Protection Fund Authority.

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

According to sub – rule (1) of rule 6, the shares shall be credited to DEMAT Account of the Authority to be opened by the Authority for the said purpose, within a period of thirty days of such shares becoming due to be transferred to the Fund.

Due date of Transfer

According to combined reading of sub – section (6) and sub – section (5) of Section 124 of the Companies Act, 2013, transfer of shares to IEPF shall become due on completion of seven years from the date of transfer of dividend of first year (among these seven years) to Unpaid Dividend Account.

It is ==> Date of Declaration + 30 days + 7 days + 7 years (assuming all things done on last date of compliance.

However according to second proviso to sub – section (1) of amended rule 6 of these rules, in cases where the period of seven years provided under sub-section (5) of section 124 has been completed or being completed during the period from 7th September, 2016 to 31st May, 2017, the due date of transfer of such shares shall be deemed to be 31st May, 2017.

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 first 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 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.

Literal interpretation of this proviso restricts such benefit only to shares in dematerialised form not to all shares in paper certificate form. This is because term beneficial owner is not defined in these Rules, the Companies (Specification of definitions details) Rules, 2014 and the Companies Act, 2013 but in Section 2(1)(a) of the Depositories Act, 1996. This requires amendment for clarity. Purposive interpretation suggest all shareholders can benefit of this proviso.

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.

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. The company shall also simultaneously publish a notice in the leading newspaper in English and regional language having wide circulation.

Such information and notice shall inform that the names of such shareholders and their folio number or DP ID – Client ID are available on their website duly mentioning the website address.

These amended rules makes website a mandatory requirement for companies including small companies.

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

This is a welcome amendment. Now, according to sub – clause (i) of clause (c) of sub – rule (3) of rule 6, the Company shall inform the depository by way of corporate action, where the shareholders have their accounts for transfer in favour of the Authority.

According to sub – clause (ii) of clause (c) of sub – rule (3) of rule 6, on receipt of such intimation, the depository shall effect the transfer of shares in favour of DEMAT account of the Authority.

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, which continue from original rules, 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 on the first page 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 through original shareholder.

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 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, after issue of duplicate share certificates, the company shall inform the depository by way of corporate action to convert the duplicate share certificates into DEMAT form and transfer in favour of the Authority.

This is again a welcome change and dispense with requirement of share transfer forms and other formalities. Most significantly, this make clear that there shall be no stamp duty on such transfer.

It is not clear who will pay dematerialisation charges to the depositories. Are depositories are bound to demat such shares without charges? Is dematerialisation duty of depository according to these Rules? Is it additional duty cast upon company?

Statement of Transfer

According to sub – rule (5) of Rule 6, the company shall send a statement to the Authority 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.

Preserving and maintaining Record

According to sub – rule (4) of Rule 6, the company shall make such transfers through corporate action and shall preserve copies for its records.

According to sub – rule (7) of Rule 6, the company shall maintain the details of shareholding of each individual shareholders whose shares have been credited to the DEMAT account of the Authority.

Credit of Benefits

According to sub – rule (8) of Rule 6, all benefits accruing on such shares e.g., bonus shares, split, consolidation, fraction shares etc except right issue shall also be credited to such DEMAT account.

It seems due to technicalities and amount which may be involved, no allotment of shares shall be possible in respect of right issues. However, such shareholder may claim his shares from IEPF and apply of shares under right issue.

No transfer and dealing

According to sub – rule (9) of Rule 6, the shares held in such DEMAT account shall not be transferred or dealt with in any manner whatsoever except for the purposes of transferring the shares back to the claimant as and when he approaches the Authority or in accordance with sub-rule (10) and (11).

Surrendering of shares on delisting/ winding up

According to sub – rule (10) of Rule 6, if the company is getting delisted, the Authority shall surrender shares on behalf of the shareholders in accordance with the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 and the proceeds realised shall be credited to the Fund and a separate ledger account shall be maintained for such proceeds.

According to sub – rule (11) of Rule 6, in case the company whose shares or securities are held by the Authority is being wound up, the Authority may surrender the securities to receive the amount entitled on behalf of the security holder and credit the amount to the Fund and a separate ledger account shall be maintained for such proceeds.

Credit of Dividend

According to sub – rule (11) of Rule 6, any further dividend received on such shares shall be credited to the Fund and a separate ledger account shall be maintained for such proceeds