This article is written by Yash Mukadam, here he discusses on unclaimed dividends.

Chapter VIII of the Companies Act, 2017 deals with declaration and payment of dividend. It is to be noted that ‘Dividend’, as defined by the said act also includes Interim Dividend. 

Most shareholders invest in companies with the aim of earning the maximum profit which comes in the form of a dividend. Companies also fight hard to earn as much profit as possible to allow their members the highest possible dividends which can, in turn, bring the company several benefits in terms of increased market value, higher share price, better reputation etc.  A Company thus has a lot of incentives to offer higher dividends sometimes even at the cost of other interests of the company. It is therefore not uncommon for a company to provide inflated dividends to attract investors and then gradually reduce them when the purpose is served.

S. 123 of the act states that no dividend shall be declared except out of (i) profits after providing for depreciation (provided that any amount representing unrealized gain/notional gains/revaluation of assets/liabilities is excluded in computation of profits); (ii) money provided by Central Government/State Government for payment of dividend in pursuance of a guarantee given by that government. The Amount of declared dividend is deposited in a scheduled bank within 5 days from the date of declaration and is thereby paid to the registered shareholders.

What happens if some members fail to claim their share of the dividend?[1] [2]

Where a dividend has not been paid/claimed within 30 days of declaration then the unclaimed/unpaid balance is transferred to a special account opened by the company in a scheduled bank called the ‘Unpaid Dividend Account’. If the company defaults in transferring the unpaid dividend to the Unpaid Dividend Account, it will be liable to additionally pay interest at the rate of 12% p.a. from the date of default. The interest accruing on such amount is for the benefit of the members. Within 90 days of such transfer, the company prepares a statement through Form No. IEPF 2 containing names, last known address and the amount and nature of unpaid/unclaimed dividend, the due date for transfer into the Investor Education and Protection Fund as well as any other information that it deems necessary and posts it on its website and any other website as prescribed by the Central Government. Eligible members can contact the company and claim their share.

If the amount stays unclaimed for 7 years then the amount along with the interest accrued is transferred to a fund established by the Central Government called “Investor Education and Protection Fund” and a statement regarding the transfer is sent to the authorities responsible for the fund. The authority sends a receipt to the company as evidence of the transfer. All the shares on which the dividend remains unpaid are also transferred to an IEPF suspense account (on the name of the company). The company informs the members about the transfer at least 3 months prior to the transfer as well as simultaneously publishes a notice in an English and a regional newspaper of wide circulation and on its website. The company will not transfer any shares if there is any specific order of a Court/Tribunal/Statutory Authority restraining the transfer (authorities are to be intimated of the unpaid dividend and corresponding shares within 30 days of the end of the financial year).  The voting rights on the transferred shares remain frozen until the rightful owners claim them. The authority holds the shares on behalf of the members and the members are also entitled to all the benefits accruing on the shares.

It may be noted that in case the owner has encashed any dividend warrant during the last 7 years such shares shall not be required to be transferred to the Fund even though some dividend warrants may not have been encashed.

Any claimants can apply for the transfer of shares or refund as the case may be, directly from the Authority by making an online application in Form IEPF 5 and by paying the required fee. After making the application, the person has to send the duly signed application form (along with required documents) to the concerned company, which will, within 15 days send a verification report (along with the documents submitted) to the authorities. The authorities, after completing their internal procedures, transfer the shares (or the refund) within 60 days of receiving the verification report. IEPF cannot transfer the shares to anyone except the rightful owners. Every company which has deposited the amount to the fund has an appointed Nodal Officer who coordinates between the company and the IEPF. If the IEPF authorities do not receive the documents within 90 days from the date of filing of the IEPF 5 form, they may reject the form after giving an opportunity to be heard to the claimant.   

Method of transfer as mentioned in Rule 7(4) of Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016:  “After verification of the entitlement of the claimant- (a) to the amount claimed, the Authority and then Drawing and Disbursement Officer of the Authority shall present a bill to the Pay and Accounts Office for e-payment as per the guidelines, (b) to the shares claimed, the Authority shall issue a refund sanction order with the approval of the Competent Authority and shall credit the shares to the DEMAT account of the claimant to the extent of the claimant’s entitlement.”

It may be noted that in case the owner has encashed any dividend warrant during the last 7 years such shares shall not be required to be transferred to the Fund even though some dividend warrants may not have been encashed.

A failure to comply with any of the above provisions will make the company liable for a fine, not less than 5 lakhs but up to 25 lakhs (in rupees) and every officer responsible for the default will be fined not less than 1 Lakh but upto 5 Lakhs (in rupees).

Conclusion

Chapter VII  (specifically S. 124) of the Companies Act, 2013 and Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 have significantly strengthened the legal framework governing unclaimed/unpaid dividends thereby reducing instances of companies taking undue advantage of the dividend in question. Secretarial Standards – 3 put forth by the ICSI, if enforced, will further help in protecting the said dividends.

[1] S. 124 of the Companies Act, 2013

[2] Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016.