TRANSFER OF DISPUTED UNPAID DIVIDEND TO IEPF

[Dr. Sanjiv Agarwal]

            Background

According to provisions of the Companies Act 1956, companies have  been transferring the unclaimed / unpaid dividend amount of various dividend declarations made by the Company to Investor Education and Protection Fund after expiry of statutory period of seven years.

However, in many  companies, there are  several cases where dividend payment has been kept in abeyance due to issues pertaining to ownership dispute, court injunction orders, objections from transferor etc. However, in some cases,  the company  receives various claims from shareholders whose dividend amounts have been kept in abeyance by it  pursuant to legal disputes.  Among other things, such investors also keep on  requesting the company not to transfer the dividend amount which is in abeyance to Investor Education and Protection Fund and pay the same to concerned party only after resolution of the dispute.

In such cases ,it becomes very difficult for the companies to take a call on keeping the dividend in abeyance or to transfer to it to Investor Education and Protection Fund. The companies are faced with the issue as to  whether the company can hold back the transfer of unpaid amount of dividend to Investor Education and Protection Fund in respect of disputed cases where title to ownership of shares it self is under dispute and if it does so, whether it can pay the amount of unpaid  dividend to the concerned party after the resolution of the dispute?

            Statutory Provisions

            The provisions for payment of dividend, unpaid dividend and Investor Education & Protection Fund (IEPF) are contained in the following provisions of Companies Act, 1956 -

Section	Provision
205	Dividend to be paid out of profits
205A	Unpaid dividend to be transferred to special dividend account
205 B	Payment of unpaid or unclaimed dividend
205 C	Establishment of Investor Education and Protection Fund (IEPF)
206	Dividend not to be paid except to registered shareholders or to their order or to their bankers
206 A	Right to dividend, right shares and bonus shares to be held in abeyance pending registration of transfer of shares
207	Penalty for failure to distribute dividend within thirty days

 

Apart from the above provisions, the following rules govern the transfer of      

             unpaid dividend amount to IEPF :-

 Investor Education and Protection Fund (Awareness and Protection of Investors) Rules, 2001.

            Analysis of Provisions

Only the registered holders of shares are entitled to Dividend.

Dividend should be paid (i) in respect of shares held in electronic form, to those persons whose names appear as beneficial owners in the statement(s) furnished by the Depository (ies) as on the close of the market day prior to book closure or, in the case of interim dividend, on the record date; (ii) in respect of shares held in physical form, to those Shareholders whose names appear on the company’s register of members after giving effect to all valid share transfers in physical form lodged with the company before the date of book closure or, in the case of Interim Dividend, on the record date; and (iii) in respect of share warrants, to the holders of such warrants.

 Dividend should be paid within thirty days of declaration.

The amount of dividend after deducting tax at source, if applicable, should be deposited in a separate bank account within five days from the date of declaration of dividend.  Dividend should be paid out of such bank account within thirty days of declaration.

The amount of dividend in respect of shares for which an instrument of transfer has been tendered to the company but which have not been registered for any valid reason should be transferred to Unpaid Dividend Account.

If a member authorizes the company in writing to pay the dividend to the transferee specified in the instrument of transfer, the company should act upon such authorization. However, in the case of shares which have not been transferred because the ownership thereof is in dispute, or where attachment/prohibitory orders have been passed by a court or statutory authority, dividend should be held in abeyance by transferring to the Unpaid Dividend Account.

Unpaid Dividend

The amount of dividend which remains unpaid or unclaimed after thirty days from the date of declaration should be transferred to a special dividend account, to be called ‘Unpaid Dividend Account’ of the company, within seven days from the date of expiry of the thirty days period provided for payment of dividend.

The company should maintain the details of unpaid or unclaimed dividend and reconcile the amounts thereof with the concerned bankers, periodically.  Any amount in the Unpaid Dividend Account of the company which remains unclaimed and unpaid for a period of seven years from the date of transfer of such amount to the Unpaid Dividend Account should be transferred to the Investor Education and Protection Fund.  Any transfer to the Investor Education and Protection Fund should be made within thirty days of the expiry of seven years from the date of transfer to the Unpaid/Unclaimed Dividend Account.

Before transferring any amount to the Investor Education and Protection Fund, the company should give individual intimation to the members in respect of whose unclaimed dividend the amount is being transferred, at least six months before the due date of such transfer.

After the expiry of the period of seven years from the date from which unclaimed and unpaid dividends were transferred to the Unpaid Dividend Account, no claims shall lie against the Fund or the company in respect of any such amounts. Hence, the company should intimate the concerned members individually of the amount of dividend remaining unclaimed which is liable to be transferred to the Investor Education and Protection Fund and advising the member to claim such amount of dividend from the company before such transfer.

In terms of Section 206, dividend in respect of a share has to be paid to the registered holder of the share or to his order or to his bankers. However, where the registered shareholder has authorized the company, in writing, to pay the dividend to the transferee, as specified in the instrument of transfer, the company should act upon such authorization as permitted under Section 206A.

Dividend is payable to the shareholder whose name appears in the register of members on the relevant date even if, prior to that date, he has sold the shares but the transfer deed in respect thereof has not been lodged with the company [Chunilal Kuhshaldash Patel v. HK Adhyaru, AIR 1956 SC 655 26 Com. Cases 168].

Section 41(3) provides that every person holding equity shares and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the company.

In terms of Section 206-A, where any instrument of transfer of shares has been delivered to a company for registration and the transfer of such shares has not been registered by the company, it shall transfer the dividend in relation to such shares to the special account referred to in Section 205-A, viz., Unpaid/Unclaimed Dividend Account, unless the company is authorised in writing by the registered holder of such shares to pay such dividend to the transferee specified in the instrument of transfer.

The instrument of transfer so lodged with the company should be a valid instrument, duly stamped and executed and accompanied by the share certificate(s). In case the instrument of transfer is invalid, the company is not required to transfer the dividend in relation to such shares to the Unpaid/Unclaimed Dividend Account and hence should pay the dividend to the transferor whose name appears in the register of members.

In S V. Nagarajan v. The Lakshmi Vilas Bank Ltd and another (1997)4 Comp L J 112 (CLB), it was held that where the company had refused the transfer on valid grounds, the registration was not pending.

In section 206A, so far as it relates to dividend, it is stipulated to -

a)      transfer the dividend in relation to such shares to the special account referred to in section 205A unless the company is authorized by the registered holder of such share in writing to pay such dividend to the transferee specified in such instrument of transfer; and

b)      keep in abeyance in relation to such shares any offer or rights shares and any issue of fully paid-up bonus shares.

It is pertinent to note that for keeping in abeyance, only right shares or bonus shares are mentioned, not the unpaid dividend. Also, as per section 205A, any  money transferred by the company to the unpaid dividend account and remaining unclaimed for a period of seven years from the date of such transfer shall be transferred to a fund called ‘The Investor Education and Protection Fund’ set up by the Central Government. No claims shall lie against the fund or the company in respect of amount so transferred.

DCA Circular No 6/2004 dated 10.8.2004 also clarifies that all amounts transferred to the ‘unpaid dividend account’ of company on or after 30^th October, 1995 or which have remained unpaid or unclaimed for a period of seven years from the date of such transfer should be transferred to the Investor Education and Protection Fund together with interest accrued thereon, unless they have already been transferred to the general revenue account of the Central Government prior to the enactment of the Companies (Amendment) Act, 1999.

However, In CR Desai and Others v. ROC and Others (1999) 95 Comp. Cases 138: (1998) 4Comp L J 463 (AP), it was held that where the company had not registered the shares in favour of the transferee on the advice of the solicitors, the transferee was entitled not only to the dividend for all the years during which it was kept in abeyance but also to the interest accrued thereon.

Conclusion

The companies should  transfer the amount of unpaid dividend to the unpaid dividend account as stipulated in section 205A and after the expiry of seven years, the balance of unpaid dividend for particular year under reference should be transferred to IEPF. There is no provision for any eventuality or contingency in the provision for transfer of such unpaid or unclaimed dividend to IEPF. However, this could be held back only on specific directions from any Court or Tribunal or Consumer Forum to that effect. In case there is a dispute regarding shares on which dividend is payable, the company should transfer the amount of such dividend to the Investor Education and Protection Fund after the expiry of seven years from the date of declaration of dividend, unless a court order provides otherwise.

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