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This article has been written by M Karthi Keyan pursuing the Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho. This article has been edited by Tanmaya Sharma (Associate, Lawsikho) and Arundhati Das (Intern at Lawsikho). 

This article has been published by Oishika Banerji. 

Introduction 

This article seeks to explain the Investor Education and Protection Fund and the compliances which have to be followed while transferring the unclaimed or unpaid dividends to the Investor Education and Protection Fund.

What is a dividend?

Generally, a dividend is a part of the earnings of a company that is being distributed among its shareholders. Under the Companies Act, 2013 Section 2 (35) defines a dividend as a specified proportion of profit from the net profit of the company for a financial year that is not being retained in the business and has been distributed among the shareholders of the company.

When does a dividend become unclaimed or unpaid?

As per Section 124 of the Companies Act, 2013 if a dividend has not been paid or claimed within 30 days of the declaration, the company, after the expiration of 7 days of the said period of 30 days, must transfer the total amount of unpaid/unclaimed dividend to a special account in any scheduled bank, and the account would hereby be referred to as an “Unpaid dividend account.” When the amount has remained unclaimed or unpaid for a said period of 7 years consecutively in the unpaid dividend account, then within the next 30 days, the amount unpaid or unclaimed will be transferred to a fund called the Investor Education Protection Fund (IEPF).

What is an Investor Education Protection Fund?

As per Section 125 of the Companies Act, 2015, the Central Government (Ministry of Corporate Affairs) under the guidance of SEBI, has established a fund called the Investor Education Protection to protect the interests of investors and to increase the number of investors by encouraging and educating them on the practical aspects and their legal responsibilities in the securities market and, lastly, on the option of refunding the unclaimed dividends which are transferred to this fund.

Important cases

In the case of Pragana Desai vs. National Stock Exchange of India Ltd., a writ petition was filed to recover the amount awarded in the arbitration against the Investor education and protection fund. The court held that a writ petition is not a proper remedy to enforce the award and held that the petitioner has to initiate procedures for the execution of the award by making a necessary application under relevant provisions and statutes and thereby rejecting the writ petition.

In another case in the Delhi high court, in India Awake for Transparency vs Union of India, the court clarified that Section 124(6) of the Companies Act, 2013 which mandates the transfer of shares to the Investor Education and Protection Fund, does not essentially result in statutory vesting of the property. The IEPF merely enforces a transfer of shares from a company that has yielded unclaimed dividends for a consecutive period of 7 years to the IEPF, and the said authority of the fund after the transfer of such shares holds the shares as a custodian, or in any manner prescribed thereof. Therefore, the court hereby holds that the writ petition filed by the plaintiff for strict enforcement of the Investor Education and Protection Fund Authority rules is to be dismissed.

Compliance and general procedures for the Transfer of Unpaid or Unclaimed Dividends to IEPF

  1. Filing of Form IEPF-1

The following are the e-form’s rules:

As per Rule 5(2) of the Investor Education and Protection Fund Authority (Accounting, transfer, Audit, and Refund) Rules 2016, which prescribes that any sum of amount which is to be credited to this fund as provided under Section 125(2) of the Companies Act shall be filed online with the addition of the e-form IEPF-1 for the purpose of the statement of the amount credited to the Investor Education and Protection Fund within 30 days from the date calculated from the expiry of 7 consecutive years.

Step-by-step details required to be filled in form IEPF-1:

  • The company should be in active status.
  • Valid company Corporate Identification Number (CIN) or bank Corporate Identification Number (BCIN).
  • Required details of the company, i.e., name, registered address, email-id of the company.
  • The intended amount has to be credited by the company to the IEPF fund.
  • Date of transfer of the unpaid dividend to the unpaid dividend account as created by the company under Section 124 should be provided.The application money received by the companies for the allotment of any securities is due for a refund.
  • Other miscellaneous details viz. which financial year the amount belongs to etc.
  • The form includes the date of the board of resolution authorizing the signatory to sign the form and the digital signature of the director, managing director, CFO, CEO, or company secretary.
  1. Filling out form IEPF-2:

The purpose of filing the form IEPF-2:

  • To provide a statement of the amount of unpaid or unclaimed dividends
  • To provide the details regarding the appointment of Nodal and deputy Nodal officers
  • To provide or update the details of the Nodal officer
  • To update/delete the details of the deputy nodal officer

According to Section 7 (2A) of the Investor Education and Protection Fund Authority (Accounting, Transfer, Audit, and Refund) Rules 2016, every company that is required to credit shares or other funds or deposit or transfer shares to the IFPF fund shall appoint a Nodal Officer who shall be a director, company secretary, or chief financial officer of the company who has been assigned with the duty of verifying the claims and coordinating with the authorities of the fund. In such a case,

If a company fails to appoint a nodal officer, the director of the company is deemed to be a nodal officer and the nodal officer as appointed is liable for the actions of the Deputy Nodal officer.

The rules governing the e-form

Rule 5(8) of the Investor Education and Protection Fund Authority (Accounting, transfer, audit, and refund) Rules, specifies that within 60 days after holding the AGM (Annual General Meeting) or the date on which it should have been held as per section 96 of the Companies Act, whichever is earlier, and every year thereafter until the completion of the seven years, it is mandated to identify the unclaimed amounts as of the date of closure of the financial year and to furnish them separately and to upload the relevant details about the unclaimed and unpaid dividends on the company’s website, as well as on the Authority’s website, or any other website as may be specified by the Government of India. This statement has to be filed along with the following information: 

1) The name and last known address of the individual whose dividend has gone unclaimed or unpaid.

2) Amounts to which each individual is entitled.

3) The amount’s nature.

4) The deadline for transferring such funds to the IEPF.

5) Other necessary information as specified has to be filled in along with the form IEPF-2.

6) Should be filed through Form No. IEPF-2. 

The details of the Nodal and Deputy Nodal officers are specified in Rule 7 (2B) and have to be notified within 15 days to the Investor Education and Protection Fund Authority in the form IEPF-2 from the date on which the information of such nodal and deputy nodal officer has been published on the company’s website. If the nodal officer has been changed or if any amendment has to be made in the details of the nodal officer, then it has to be notified within 7 days along with the details of the board resolution which approves the fourth change.

Step-by-step instructions for completing Form IEPF-2

  1. The company should be in active status.
  2. Valid company Corporate Identification Number (CIN) or bank Corporate Identification Number (BCIN).
  3. Required details of the company, i.e., name, registered address, email id of the company.
  4. Enter the details of the nodal officer who has been appointed by the company.
  5. Enter the number of Deputy Nodal Officers who have been appointed by the company.

(Note: The appointment of a deputy nodal officer is optional under Section 124(6), and the maximum number of nodal officers appointed is five.)

  1. Enter the relevant Deputy Nodal officer(s) information, including the verified PAN number.
  2. End of the Financial Year (as mentioned earlier under Section 125 of the Companies Act, the end of the seventh consecutive financial year) and Date of the Annual General Meeting.
  3. If applicable, or if there are no such small shareholders and depositors in the company, enter 0.
  4. Details of the unclaimed/unpaid accounts for seven consecutive years.
  5. The total amount of the unpaid/unclaimed dividend account for 7 years.
  6. The total number of underlying shares for the amount in the unpaid/unclaimed dividend accounts.
  7. Amount  Refunded by the company from the unpaid/unclaimed dividend account.
  8. Amount of application money received and due for refund.
  9. The total value of matured deposits and matured debentures and the amount refunded by the company.
  10. Other miscellaneous details, including the application money, matured deposits, redemption amount of preference shares, etc., and the total amount should be calculated and entered finally.
  11. The form includes the date of the board of resolution authorizing the signatory to sign the form and the digital signature of the director, managing director, CFO, CEO, or company secretary.

Mandatory attachment

The resolution of the board regarding the appointment of the Nodal officer and Deputy Nodal officer in the case.

How to claim the unpaid dividend from IEPF?

Any unclaimed and unpaid shareholder whose amount has been transferred by the company to the Investor Education and Protection Fund can claim the unpaid amount from the IEPF Authority by filling out the IEPF-5 form.

What is IEPF form-5?

According to Section 125 and Subsection 3 of the Companies Act, as well as Rule 7(1) of the IEPF Authority (Accounting, Audit, Refund, and Transfer) Rules 2016, an eligible person may apply for a refund of their unclaimed dividend, matured debentures and deposits, and respective shares by submitting Form IEPF-5 online.

The procedure is not as complex as compared to the previous one. The essentials required to fill out this form are:

  1. Particulars of the applicant and the company from which the amount is due
  2. Details of the shares/amount to be claimed
  3. In the case of NRI/Foreigners: Passport or Overseas Citizen of India/Person of Indian Origin Card Number.
  4. The number of claims
  5. Details of the bank account (in the case of Indians, it should be linked with Aadhar).
  6. A Demat Account Number (A Demat Account or a dematerialized account which is used for converting and holding physical shares in an electronic format, i.e., it is a piece of digital evidence issued to prove that the person is holding investments like shares, mutual funds, bonds etc.). 
  7. Declaration of the Applicant

Once the form is being uploaded, to initiate a verification of the claim, the applicant should send an envelope to the Nodal officer of the respective company with the following attachments:

  1. A copy of the duly completed IEPF–5 form
  2. A copy of the acknowledgement is generated after uploading the form.
  3. Original copy of the indemnity bond with the claimant’s signature.
  4. Original copy of the advance stamp receipt attested by the claimant and 2 witness.
  5. If the shares are in physical form, then the original copy of the share certificate is to be attached.
  6. A copy of the claimant’s identification documents (Aadhar, Pan card, or passport/OCI/PIO card in the case of an NRI)
  7. Proof of entitlement to the shares or dividend warrant
  8. Master List of Demat Accounts of the Claimant
  9. A death certificate copy is needed in case one of the joint holders is deceased.

What happens if the company fails to comply with this provision?

If the company fails to comply with the provisions of Section 124, then under subsection 7 of Section 124, this attracts punishment according to which, the company is liable to pay a fine which is not less than 5 lakhs rupees and not exceeding  25 lakhs rupees, and every person of the company who is in default of this offence shall be liable to pay a fine which is not less than 1 lakh rupees and may extend up to 5 lakhs.

Conclusion

According to an estimate which was published on March 31, 2020, the unclaimed dividends lying in the investor education and protection fund have increased to Rs. 4,100 crores. Though the government has relaxed and simplified the process for the shareholders to claim their amount from the IEPF, certain aspects like the complexity involved if the shares held are in the physical form and are no longer linked to a bank account, the death of an investor, as a result of which his bank account has been closed, or even a mere address change has caused serious trouble for the shareholders to claim back their dividends. It should also be noted that the government approved over 6000 claims from investors regarding unpaid dividends and matured company deposits through the investor education and production fund in 2019 and 2020.


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