IEPF Recovery for Unclaimed Shares - Compliance for Companies and Procedure to reclaim shares from IEPF

IEPF Recovery for Unclaimed Shares - Compliance for Companies and Procedure to reclaim shares from IEPF . The Companies Act, 2013 provides that when the dividend on shares remains unclaimed for a period of 7 years, such shares are to be transferred to a specially designated authority for this purpose - the Investor Education & Protection Fund (IEPF). In this post, we trace the legal requirements of complying with this obligation for companies. In the last part of this article, we describe the procedure  for an aggrieved shareholder to reclaim their shares and dividend amount from the IEPF. 
“Unclaimed share” - Meaning and Purpose 
The Delhi High Court has held that the purpose behind introducing provisions of unclaimed shares is to ensure that the company does not unjustifiably enrich themselves when shares are not claimed for a reasonably long period. 
In case a claim is made within a period of seven years from the date on which the amount became due and payable; the money shall not be transferred to the IEPF. Thus, if a person makes a claim within a period of seven years, these provisions do not apply. Period of seven years is substantially long. A depositor or a person dealing with a company, therefore, should make a claim within a period of seven years. In case he makes a claim, provisions of transfer are not applicable and money cannot be transferred to the fund. (Nivedita Sharma v. The Industrial Credit & Investment Corporation of India and Others, W.P. (C) No. 10157 of 2009.) 
Investor Education and Protection Fund 
The sections 124 and 125 of the Companies Act, 2013 mention the creation and procedural aspects of the IEPF, along with associated IEPF Rules. The central government establishes the IEPF, to which amount is given by the central government by way of grants, donations given to the fund, amount in the unpaid dividend account of the companies, interest and other income received out of investments made by the fund, application money received by the company etc. 
The amount in the fund is utilised for the following purposes:

Refunds - the refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon

Investor protection - Promotion of investors’ education, awareness and protection

Court orders in favour of wrongful losses - Distribution of disgorged amounts for share or debenture holders who have suffered losses due to wrong actions by a person as per the court order

Class action suits - Reimbursement of legal expenses incurred in class action suits

Compliance Requirements for Unclaimed Shares - Here’s everything your company needs to do 
Create an Unpaid Dividend Account
Under Section 124, every company that has declared a dividend but the same has not been claimed in thirty days from the date of the declaration, is required to transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account. This must be done within seven days from the date of expiry of the said period of thirty days. 
Prepare statement of names 
The company must prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose. 
Penalty - Default in transferring amount to unpaid dividend account
In case the company commits a default in transferring the total amount due to the unpaid dividend account of the company, it shall pay interest at the rate of 12% per annum.  
Transfer all shares in respect of which dividend has not been paid to the Investor Education and Protection fund
All shares in respect of which or dividend has not been paid or claimed for the last seven consecutive years or more shall be transferred by the company in the name of the IEPF, along with the statement containing details. 
Penalty - Failure to transfer shares to the IEPF 
If a company fails to comply with the requirements of transferring dividend to the unpaid dividend account as well as transferring shares to the IEPF within the designated period , a fine of not less than five lakh rupees, which may be extended to 25 lac rupees may be applicable. Every officer in default may also be punishable with a fine up to 5,00,000.
Manner of transfer of shares under Rules 6 and 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016

Credit within 30 days - The shares shall be credited to the DEMAT account of the authority within 30 days of the shares becoming due to be transferred to the Fund.

Deemed transmission - Transfer of shares by the companies to the Fund shall be deemed to be transmission of shares and the procedure to be followed for transmission of shares shall be followed by the companies while transferring the shares to the fund.

Company secretary authorised by Board - 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.

All dividends and bonuses accrue to IEPF - All further dividends and benefits accruing on such shares like bonus shares, split, consolidation, fraction shares and the like except right issue shall also be credited to such DEMAT account [by the company which shall send a statement to the Authority in Form No. IEPF-4 within thirty days of the corporate action containing details of such transfer.

Designate a nodal officer - Every company is required to submit details of nodal officer, indicating the designation, postal address, et cetera to the IEPF through form number IEPF - 2, within 15 days of publication of the IEPF Rules, 2016.

Procedure to be followed by the company to transfer shares to the IEPF

The company must inform at the latest available address, the shareholder concerned about the transfer of shares at least three months before the due date of transfer of the shares.

A notice has to be published in a leading newspaper in English and regional language newspapers, having wide circulation about the name of such shareholders and their folio numbers along with website address.

If there is a court order against transfer of shares where shares are pledged or hypothecated, the company shall not transfer such shares.

The company shall furnish details of such shares and unpaid dividend to the authority in the Form number IEPF 3 within 30 days from the end of the financial year.

In case the shares are dealt with in a depository, the company must inform the depository by way of corporate action where the shareholders have their accounts. On receipt of this information, the depository shall affect the transfer of shares in favour of the demat account of the IEPF.

If shares are held in physical form, the CS or person authorised by the board shall make an application on behalf of the shareholders for issue of new share certificates for the purpose of transfer to the IEPF. particulars of every share certificate shall be in Form No. SH-1 as specified in the Companies (Share Capital and Debentures) Rules, 2014. The company should then inform the depositories to convert the share certificates into DEMAT form.

While effecting such transfer, the company should send a statement to the Authority inForm No. IEPF-4 within thirty days of the corporate action taken for the transfer and a copy of the public notice published.

Voting rights on such shares shall remain frozen until the rightful owner claims shares.

Whether the transfer of unclaimed shares amount to IEPF is unconstitional on grounds of depriving the owners of their legitimate share property?
In the landmark case decided in 2020 by the Madras High Court (Kamala Srinivasan Versus Union of India rep. By its Secretary to Ministry of Corporate Affairs, A Wing, Shastri Bhawan, New Delhi and Others [2020] 5 MLJ 481), a petition was filed to declare Section 124(6) and Rules made thereunder through which shares on which dividend had not been claimed for over seven years, would be transferred to Investor Education and Protection Fund (IEPF), as unconstitutional and being violative of Article 14, 21 and 300A Constitution. 
Arguments of the petition claiming transfer of shares as violative of freedom of property rights

The petitioners alleged that divesting the shareholder of their ownership in the share by mandating a transfer to IEPF without affording a hearing to the shareholder, is unjustifiable, arbitrary and violative of fundamental rights to equality as well as right to property under Article 300A of the Constitution of India.

They also contended that the erstwhile Companies Act, 1956 did not have any provision which provided for transfer of shares along with unpaid/unclaimed dividend. This was introduced only in the new Companies Act, 2013 and the procedure specified under the rules is cumbersome and lengthy.

Opinion of the court - IEPF claiming shares is justifiable and does not amount to deprivation of property 
The court held that shares on which dividend is unclaimed for more than 7 years are to be transferred to the IEPF, but that does not amount to deprivation of property. This is for two reasons.

Ownership rests with the rightful shareholder - Firstly, under Section 124(6), there is no statutory vesting of the shares so transferred to the IEPF and it does not confer ownership of the shares on IEPF. The ownership still rests with the rightful claimant of the shares.

Shareholders can always reclaim the sum - This position is reflected in the proviso to Section 124(6), which provides that a person shall always be permitted to re-claim his shares, from the IEPF. Secondly, the Rules prescribed under Section 124(6), provide for a procedure for the refund of the shares transferred to the IEPF.

Law of limitation operates - The law of limitation affords a guarantee and ensures that cause of action is not raised after a lapse of a particular period. Providing a limitation period (7 years in this case) is preventive and not curative. It ensures that litigants are diligent in seeking remedies in court and prohibits stale claims.

How can an aggrieved shareholder claim their unpaid dividend and shares from the IEPF 
Any person who is entitled to money transferred to the unpaid dividend account of the company can apply to the company for the payment of the money claimed. (Section 124(4)) 
If more than seven years have lapsed since the claim of the dividend, any person eligible to receive this amount can apply for claiming the transfer of shares from the IPF in accordance with the procedure prescribed under Rule 7, IEPF Rules. These are as follows:

An online application has to be submitted by the person, claiming such shares and the unclaimed dividend thereof, as per Form IEPF-5 available on the website www. iepf. gov. in along with fee specified by the Authority from time to time in consultation with the Central Government.

Upon submission, Form No.IEPF-5 shall be transmitted online to the Nodal Officer of the Company for verification of claim.

After verification of the claim, the IEPF, and the Disbursement Officer of the authority shall present a bill to the Pay and Accounts Office for disbursement as per the e-payment guidelines.

The shares shall be credited back to the DEMAT account of the claimant.

The legal heirs, successors or administrators may also claim the same using self attested scanned copies along with form IEPF-5.