The article is written by Sneha Mahawar, a student of Ramaiah Institute of Legal Studies. The article discusses the concept of Investor Education and Protection Fund and how it is created under Company Law.

What is a company?

To understand legally, a company is an entity having legal personality, and thus is able to own property and to sue and be sued in its own name. It has no definite meaning in legal sense. In a general sense it is a team, a group of people who work together professionally for achieving a particular objective. Section 2(20) of the Companies Act, 2013, defines the term ‘Company’.

What is IEPF?

Investor Education and Protection Fund or IEPF was initially a fund set up under the Section 205C of the Companies Act, 1956. Now it is set up under Section 125 of the Companies Act, 2013. 

It is a fund set up to pool in all the dividends of the Asset Management Companies, matured deposits, share application interests or money, debentures, interests, etc. that are unclaimed for seven years. All the money collected from these sources has to be transferred to IEPF. Investors, who are trying to seek a refund for their unclaimed rewards can now do so from the Investor Protection and Education Fund (IEPF). The fund has been set up under the guidance of SEBI and the Ministry of Corporate Affairs India (MCA).

Why was IEPF introduced?

IEPF concept was introduced initially with the idea of using the investor’s money for their benefits such as investor’s education, investor’s awareness programme. Later in 2016, the government made it mandatory the transfer of underlying shares on which dividends had not been claimed for the last seven consecutive years. This gave rise to ambiguities with respect to the process of transferring the same to the government and certain other confusions among all the stakeholders. Therefore, this was amended by the MCA several times including the recent amendment, dated 14th August, 2019 through which the process has been simplified.

Section 125 of the Companies Act, 2013

This Act states that:

Sub-section(1), the central government of India shall make a fund called the Investor Education and Protection Fund. (Here, the word ‘fund’ means IEPF)

Sub-section(2)

(a) The Central Government by way of grants for being utilised for the purposes of the fund (IEPF) provides a certain amount by the law which should be credited to the IEPF;

(b) There are various institutions and government bodies which provide donations to credit the IEPF;

(c) According to Sub-section(5) of section 124 of the Companies Act,2013 the fund ie, the IEPF shall be credited by the amount of money kept in the unpaid or unclaimed dividend account of that company;

(d) According to Sub-section(5) of section 205A of the Companies Act, 1956 the fund which is the IEPF shall be added by the amount of money in the general revenue account of the central government;

(e) According to section 205C of the Companies Act, 1956 section 205C is the Act which governed IEPF in 1956 until 2013 when new Act came into existence) the fund should be added by the amount in the IEPF; 

f) The fund should be credited by the interest or other income received out of the investments which is the amount of money invested by number of individuals in a particular company;

g) Under sub-section (4) of section 38 of the Companies Act, 2013; the fund should be credited by the amount received; 

(h) The money received by the companies through application for allotment of any securities, the fund should be credited by that amount;

(i) The fund should be credited by companies having matured deposits other than banking companies;

(j) The fund should be credited by companies having matured debentures;

(k) IEPF should be added by the interest earned or incurred by the money received by the companies through application for allotment of securities, matured deposits and matured debentures;

(l) IEPF shall be added by sale proceeds of shares on issue of bonus shares, merger and consolidation for consecutive seven or more; and

(m) IEPF shall be added by recovered preference shares which are unpaid or unclaimed for seven or more than consecutive seven years or more; and(n) The fund should be credited by such other amounts as may be prescribed.

The clauses (h) to (j) shall only form the part of IEPF if such amount remains unclaimed and unpaid for seven consecutive years from the due date.

Sub-section(3) 

1. The IEPF money shall be used for the the dividend which is unclaimed, the deposits and debentures which have matured and the application money which is due for refund;
2. The IEPF money shall be used for a person who invests in a company. This fund id for that individual’s education, awareness and protection;
3. The IEPF money is used for distribution of it among people who hold a company’s shares, debentures,etc and have suffered losses and court has ordered to pay them damages;
4. The IEPF money shall be used for reimbursement of legal expenses for company members and debenture holders; and
5. The fund can be used for any other purpose if such rules are prescribed.

Sub-section(5), states that the chief executive officer of the fund is appointed by the central government and IEPF also consists of a chairperson and maximum of seven members.

Sub-section(6), states that the conducting of meetings and appointing various authorities shall be in compliance with the rules.

Sub-section(7), states that the offices, and other required resources such as employees, officers will be provided by the Central Government as per the rules.

Sub-section(8), provides that separate accounts shall be maintained after consulting Comptroller and Auditor-General of India.

Sub-section(9), provides that the authorities shall be using the fund for the the dividend which is unclaimed, the deposits and debentures which have matured and the application money which is due for refund. This fund id for that individual’s education, awareness and protection;The fund is used for distribution of it among people who hold a company’s shares, debentures,etc and have suffered losses and court has ordered to pay them damages; The IEPF money shall be used for reimbursement of legal expenses for company members and debenture holders.

Sub-section(10) states that the fund shall be audited by specified authorities at regular intervals as prescribed and be submitted to the Central Government on an annual basis.

Sub-section(11) states that the specified authorities shall prepare annual reports of each financial year providing with full account of the activities taking place and forward a copy of it to the Central Government.

How is IEPF created under company law?

Step 1: Dividend Declaration (AGM)

A dividend is declared by the company in the Annual General Meeting (AGM). Post the declaration of dividend in the AJM the company is required to file e-FormIEPF-2 along with a statement or information of unclaimed and unpaid dividend within 60 days of the AGM. These statements are to be separately filed for each of the previous seven financial years.

Step 2: Dividend payment to shareholders

The dividend declared by the company has to be transferred to the separate dividend bank account of the company within 5 days of AGM and then the dividend needs to be remitted or paid to the shareholders within 30 days from the date of the AJM. At this point, the company needs to file e-FormIEPF-7 in order to report that the dividend that has been directly remitted to PNB account of the IEPF authority on the shares which have already been transferred to IEPF in compliance of rule6 sub rule12 of the IEPF authority rules 2016. It means the payment of the dividend on those shares which the company has already transferred to the IEPF in the previous financial years.

Step 3: Transfer to unpaid dividend account

Further, the dividend remained unpaid and unclaimed is required to be transferred to a separate unpaid dividend account within 7 days. The date on which the unclaimed dividend is transferred would become the base date for calculating the due date or cut-off date for transferring the unclaimed dividend and underlying shares to IEPF in future.

Step 4: Due date

This step deals with due date calculation for transferring to IEPF. The company to calculate 7 years from the date when the company has transferred the unclaimed dividend to unpaid dividend account as explained in step 3. The date we get after adding 7 years would be the due date or cut-off date for transferring unclaimed dividend and underlying shares. This is in compliance with section 124 of the Companies Act, 2103 read with rule 6 of IEPF authority rules 2016 as amended. The company shall inform the latest available address of the concerned shareholder regarding transfer of shares at least 3 months before that due date of transfer of shares. The company is also required to simultaneously publish a notice in a leading newspaper in English and regional language having wide circulation informing the concerned shareholders to claim unpaid dividend failing which the unclaimed dividend and underlying shares would be transferred to IEPF. The notice also notifies about the availability of the details of such shares along with the folio number or DP ID, client ID are available on the company’s website, mentioning the website address.

Step 5: Transfer of unclaimed dividend and underlying shares to IEPF

The transfer needs to be made within 30 days thereof. There are slightly different processes for transferring unclaimed dividend and underlying shares.

For unclaimed dividend, the company needs to file e-FormIEPF-1 on MCA portal along with uploading and confirming the excel sheets containing the list of shareholders whose dividend is to be transferred. The e-FormIEPF-1 to contain the amount of unclaimed dividend in the unpaid dividend account as on that due date then from the pay miscellaneous section on MCA portal that dividend is required to be remitted to the IEPF authority PNB account.

For underlying shares, firstly the corporation is required to be executed by both the depositories NSDL and CDSL for transferring the underlying shares as on the due date to the IPF authority D-mat account as per the documents shared by the company. Then afterwards, e-FormIPF-4 is required to be uploaded on MCA portal and the excel sheets detailing the list of shareholders whose shares have been transferred to be uploaded and confirmed on IEPF portal.

Step 6: Financial year-end 

Lastly, at the end of the financial year the company is required to report the shares being eligible for transfers but has not been transferred to IEPF due to any specific order of court or tribunal or statutory authority or due to the shares be pledged or hypothecated restraining such transfer of shares and payment of dividend. This report is to be made in e-FormIEPF-3.

Objectives of IEPF

• To educate the investors about how the market operates.
• Making investors educated enough so that they can analyse and make informed decisions.
• To educate investors about the dynamism of the markets.
• Making investors realise their rights and various laws about investing.
• Promoting research and surveys to spread knowledge among investors.

Changes in IEPF provisions by recent amendments

• A new concept of e-Form IEPF-1 has been introduced for reporting dividends already transferred but reporting not made till notification of IEPF authorities.
• e-Form IEPF-2 is required to be filed to for updating nodal officer details till September 4 for the first time and thereafter within 7 days of any change in nodal officer along with the board resolution.
• e-Form IEPF-5 is the form through which the shareholders can claim refund of their shares and dividend of IPF authority with the help of nodal authorities.

Conclusion 

Hence, Investor Education and Protection Fund (IEPF) is a fund set up to accumulate all kinds of dividends, matured deposits, share applications, debentures and interest which are unclaimed for seven years to benefit the investors for their education and awareness. Initially only clause(3) and clause(11) of section 125 of the Companies Act, 2013 was notified but with due course of time, all its clauses were notified by the government.

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