Pursuant to the power conferred upon the Central Government under Section 125 of the Companies Act, 2013 (hereinafter referred to as “the Act”), an Investor Education and Protection Fund (hereinafter referred to as “IEPF”) has been established. The Ministry of Corporate Affairs recently notified the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 (hereinafter referred to as “the IEPF Rules”) which have come into effect from September 7, 2016 for promotion and protection of the interests of investors.

Now, vide the IEPF Rules, the Companies registered under the Act are required to transfer all unclaimed/unpaid shares in respect of the dividends which have remained unclaimed for the last seven years continuously to the IEPF suspense account.

Highlights of the notification:

1. Scope:

It is notable that along with the Companies registered under the Act, these rules also apply to ‘corresponding new bank’ as defined in sub-section (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and clause (b) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

2. Transfer of amount to the IEPF:

Rule 3 describes what comprises of “Fund” and provides details as to which of the amounts are to be credited to the Fund. This inter alia also includes accounts to be remitted as prescribed under Section 125(2) of the Act.

Such amounts shall be transferred within a period of thirty days of becoming due to the Fund along with challan to the specified Bank Branches of any of the authorized banks under the MCA-21 system. The amount may also be remitted through Electronic Fund Transfer.

3. Companies to identify unclaimed shares:

Every company is required to, within a period of ninety days, after holding its Annual General Meeting or the date on which it should have been and every year thereafter, till the completion of seven years’ period, identify the unclaimed amounts, as on the date of the AGM and separately furnish and upload on its own website and also on the website of the IEPF Authority or any other website as may be specified by the Government, a statement or information through the relevant Forms.

4. Procedure for transfer:

Rule 6 provides a step-wise procedure to be followed by companies to ensure the transfer of amount to the Fund. It enlists the duties of the Company Secretary in this regard. It is pertinent to note that according to Rule 6, no shares can be transferred unless notice of the same is deemed to be provided, three months in advance, to the shareholders by the following channels:

  • inform at the latest available address, the shareholder concerned regarding transfer of shares three months before the due date of transfer of shares;
  • publish a notice in the leading newspaper in English and regional language having wide circulation; and
  • on their website giving details of such shareholders and shares due for transfer.

Rule 6 also establishes a detailed procedure for effecting the transfer of physical shares and where the shares are dealt with in a depository.

5. Penalties:

The Rules prescribe for a detailed procedure for Companies to be followed while transferring amounts to the Fund and strict compliance has to be adhered to as noncompliance would attract penalty under Section 124(7) of the Act, wherein a company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees. Also, every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

6. Dematerialization of physical shares:

Once the physical shares are transferred in the name of the Authority, the Authority shall dematerialise these shares and it shall keep only those shares in physical form, where dematerialisation of shares is not possible.

Can shareholders claim their shares from the Fund at a later date?

Yes. Any person, whose shares, unclaimed dividend, matured deposits, matured debentures, application money due for refund, or interest thereon, sale proceeds of fractional shares, redemption proceeds of preference shares, etc. has been transferred to the Fund, may claim the said shares by making an application in the prescribed Form IEPF- 5 available online on website along with prescribed fee, under his own signature. These applications will be verified by the concerned Company and thereby the shares will be disbursed or transferred to the demat account, in accordance with the applicant’s request.

Another important aspect to be noted from the shareholder’s point of view is that the voting rights on shares transferred to the Fund shall remain frozen until the rightful owner claims the shares. However, it is pertinent to note that for 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.