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India Awake For Transparency Versus Union of India Rep. By Secretary, Ministry of Corporate Affairs And Anr.

2017 (12) TMI 510 - DELHI HIGH COURT

Directions for strict enforcement of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 by every company transferring shares to the second respondent (the Investor Education and Protection Fund) and ensure that officials transferring the shares are made responsible for due certification of compliance with the Rules - Held that:- What is clear is that the combined effect of the first and second amendments to the Rules, results in companies be .....

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interest proceedings. - To summarize, the Court holds that Section 124(6) does not result in a statutory vesting of any property; it merely transfers through transmission of shares in companies which have yielded dividends for seven years that have not been claimed. Such shares are then transferred to the Fund which then holds them as a custodian – in whichever manner one would wish to say it. The Central Government further is mandated to devise appropriate procedures to enable shareholders .....

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at the transfer of such shares or classes of shares is not a one-time measure but an ongoing event given the obligation of each company to identity such shares after the holding of every AGM. - It is imperative that the Central Government gives publicity to the transfer of shares, by virtue of the provisions (not of individual companies) to inform the public, and ensures a simple as well as compact form with attendant procedure is notified, for reclaiming them. - W.P.(C) 10589/2017, C.M. APP .....

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scribes itself as a non-profit company, primarily focused on working in areas of governance and efficient resource management, whether in the public or private sphere. It seeks directions for strict enforcement of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 [ the 2016 Rules ] by every company transferring shares to the second respondent (the Investor Education and Protection Fund, hereafter described as the Fund ) and ensure that offi .....

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o or available with, such companies. The Act also provided for transfer of funds from UDA to the Fund if no payout were made for seven years. 3. It is submitted that the Companies Act, 2013 (hereafter the 2013 Act ) not only retains the feature with respect to transfer of amounts from the UDA of all companies to the Fund, but goes further, in that shares that yield dividends, which remain unpaid for over seven (7) years, would be transferred to the Fund, by virtue of operation of Section 124 (6) .....

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of the latter, the demat accounts would be automatically debited or altered and the shareholding would be automatically depleted. 4. The magnitude and enormity of the consequence of Section 124 (6) is sought to be highlighted by a few examples; the petitioner submits that the extent of shareholding transferred by operation of law varies from its impact to as much as 3384 shareholders holding (in Axis Bank) to 10519 shareholders in ACC Cement Ltd. In both cases- as well as other cases, cited in .....

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unts 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. These amounts are to be transferred within a period of thirty days of becoming due to the Fund. It is stated that every company has to, within ninety days of holding its Annual General Meeting (AGM) 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 .....

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e provided, three months in advance, to the shareholders in the following manner: * Informing at the latest available address, the shareholder concerned regarding transfer of shares three months before the due date of transfer of shares; * Publishing a notice in the leading newspaper in English and regional language having wide circulation; and * Furnishing details of such shareholders and shares due for transfer on the company s website giving details. 7. Rule 6 also establishes a detailed proc .....

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et, what is of concern is that the lack of clarity in the Rules and amendments by the Circulars issued by the Central Government, have resulted in confusion. It is submitted that according to the operation of the Rules, vesting occurs, as a certain event - and had in fact occurred, on 31.05.2017. This was on the basis of the first amendment which fixed that as the date. Yet, by the notice of 27.04.2017, it was notified that National Securities Depository Limited (NSDL) which had to hold the spec .....

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which stated that if a shareholder had encashed any dividend warrant, such shares would not be transferred to the Fund even though some share warrants have not been encashed and that the second proviso provided that after the seven-year period was completed between 07.09.2016 to 31.05.2017, the date of transfer of such shares would be deemed to be 31.05.2017. 9. It was argued that these amendments enabled the shareholder to approach the company with appropriate requests to reclaim their shares; .....

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respect to the three month period to be given to shareholders for the purpose of applying to claim their shares from the respective companies before vesting. It is submitted that unless there is a mandate to the companies with appropriate consequence, the effect of 2013 Act and the Rules is that the shareholders would be deprived of their valuable property without any intimation or notice. It is argued that various companies are flagrantly violating the Act and the Rules - either in ignorance or .....

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e other companies, instead of displaying the names and folio numbers on their websites, have obliged the shareholders to enter their names and folio numbers to check if their shares were transferred, wholly in violation of the Rules. It is urged that all these resulted in a hopeless situation for shareholders who, upon subsequent transfer of their shares, would be confronted with a herculean task of reclaiming them. 10. On the first date of hearing when the petition was listed, after it was rece .....

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transfer of shares issued by the Union Ministry of Corporate Affairs on 29.05.2017. The clarification reads as follows: Subject: Clarification regarding due date of transfer of shares to IEPF Authority Sir/Madam, Pursuant to second proviso to Rule 6 of Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Amendment Rules, 2017 notified on February 28, 2017, where the seven year period provided under sub-section (5) of Section 124 is completed during September .....

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n. 3. Companies, are advised to complete all formalities, as laid down in the aforesaid Rules without waiting for the fresh dates. Companies which have already published notice in newspaper and send notices to the shareholders, need not give the fresh notices again due to this extension. 4. This issues with the approval of the Competent Authority. 12. It is urged that the scheme of the Rules is such that by Rule 5(8), every company within 90 days after holding of each Annual General Meeting (AGM .....

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newspapers as well as provide such information on their website. Realizing that it was difficult for companies to comply with the Rules immediately, the first amendment was made on 28.02.2017. This also provided relief to a class of shareholders who might have in one go or more than one year have encashed dividend warrants within such seven years, such that their shares were not to be transferred. The second proviso to Rule 6(1) postponed the date of transfer to 31.03.2017. The second amendment .....

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ine that is not less than ₹1 lakh but extendable upto ₹5 lakhs. It is stated by ASG that in the event the Central Government notices any difficulty in the implementation of Section 124(6) or the Rules, it would step in and take suitable remedial action. 13. As is evident from the discussion, this petition is concerned with the transfer of shares to the Fund collected by the Companies Act. For a better resolution of the controversy it would be necessary to extract Section 124: 124. Un .....

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vidend Account. (2) The company shall, within a period of ninety days of making any transfer of an amount under sub-section (1) to the Unpaid Dividend Account, 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 web-site of the company, if any, and also on any other web-site approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed. (3) If any default .....

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any money transferred under sub-section (1) to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed. (5)Any money transferred to the Unpaid Dividend Account of a company in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along with interest accrued, if any, thereon to the Fund established under sub-section (1) of section 125 and the company s .....

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claimant of shares transferred above shall be entitled to claim the transfer of shares from Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed: (7) If a company fails to comply with any of the requirements of this section, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be p .....

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the Fund, appointment of its personnel, date and information are outlined in the other provisions of Section 125. Section 126 enacts as follows: 126. Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company, it shall, notwithstanding anything contained in any other provision .....

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b-section (5) of section 123. 15. At the heart of the controversy in this case is the operationalistion of the Section 124(6) which statutorily transfers shares - which are valuable property - to the Fund in the eventuality of dividends lying unclaimed for over seven years. What is of significance is that such shares are merely transferred for safekeeping by the Fund and do not become the property nor do they vest in the Central Government. Thus, the shareholder continues to retain title but los .....

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ery carefully enacts that claimants of shares so transferred shall be entitled to claim transfer of shares from Fund in accordance to such procedure and submission of such documents such as may be prescribed. In the opinion of this Court, the net result of Section 124(6) is that whilst it introduces a new regime of not merely transferring the amounts lying in the UDA, but also directs the transfer of shares which yield unclaimed dividend for seven years or more; it also enables the provision of .....

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an IEPF suspense account (on the name of the company) with one of the depository participants as may be identified by the Authority within a period of thirty days of such shares becoming due to be transferred to the Fund: Provided that, in case the beneficial owner has encashed any dividend warrant during the last seven years, such shares shall not be required to be transferred to the Fund even though some dividend warrants may not have been encashed. (2) For the purposes of effecting transfer o .....

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ng details of such shareholders and shares due for transfer: Provided that in cases, where the seven years as provided under sub-section (5) of section 124 have been completed or are being completed within three months from the date of coming into force of these rules, the company shall initiate the aforesaid procedure immediately and transfer the shares on completion of three months; (b) In case, where there is a specific order of Court or Tribunal or statutory Authority restraining any transfe .....

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ps of the depository participants where the shareholders had their accounts for transfer in favour of IEPF suspense account (name of the company); (ii) on receipt of the delivery instruction slips, the depository shall effect the transfer of shares in favour of the Fund in its records. (d) For the purposes of effecting the transfer where the shares are held in physical form,- (i) the Company Secretary or the person authorised by the Board shall make an application, on behalf of the concerned sha .....

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ificate; (iii) particulars of every share certificate issued as above shall be entered forthwith in a register of renewed and duplicate share certificates maintained in Form No. SH 2 as specified in the Companies (Share Capital and Debentures) Rules, 2014; (iv) after issue of duplicate share certificates, the Company Secretary or the person authorised by the Board, shall sign the necessary Form No. SH 4 i.e., securities transfer Form as specified in the Companies (Share Capital and Debentures) R .....

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ffecting such transfer, the company shall send a statement to the Fund in Form No. IEPF 4 containing details of such transfer. (6) The voting rights on shares transferred to the Fund shall remain frozen until the rightful owner claims the shares: Provided 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 vo .....

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he Fund.- (1) The shares shall be credited to DEMAT Account of the Authority to be opened by the Authority for the said purpose, within a period of thirty days of such shares becoming due to be transferred to the Fund: Provided that, in case the beneficial owner has encashed any dividend warrant during the last seven years, such shares shall not be required to be transferred to the Fund even though some dividend warrants may not have been encashed: Provided further that in cases where the period .....

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company shall inform, at the latest available address, the shareholder concerned regarding transfer of shares three months before the due date of transfer of shares and also simultaneously publish a notice in the leading newspaper in English and regional language having wide circulation informing the concerned that the names of such shareholders and their folio number or DP ID - Client ID are available on their website duly mentioning the website address. (b) In case, where there is a specific .....

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(c) For the purposes of effecting the transfer, where the shares are dealt with in a depository- (i) the Company shall inform the depository by way of corporate action, where the shareholders have their accounts for transfer in favour of the Authority. (ii) on receipt of such intimation, the depository shall effect the transfer of shares in favour of DEMAT account of the Authority. (d) For the purposes of effecting the transfer where the shares are held in physical form- (i) the Company Secreta .....

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d the word duplicate shall be stamped or punched in bold letters on the first page of the share certificate; (iii) particulars of every share certificate issued as above shall be entered forthwith in a register of renewed and duplicate share certificates maintained in Form No. SH-2 as specified in the Companies (Share Capital and Debentures) Rules, 2014; (iv) after issue of duplicate share certificates, the company shall inform the depository by way of corporate action to convert the duplicate s .....

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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. 17. The second amendment of 13.10.2017 which came into force immediately, substituted the second proviso by extending the date of transfer to 31.10.2017 and added the third proviso in the following terms: (I) in sub-rule (1),- (a) for the second proviso, the following proviso shall be .....

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n 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. . 18. In Rule 6(3), clause (d) was substituted in the following terms: (II) in sub-rule(3), for clause (d), the following clause shall be substituted, namely;- (d) For the purposes of effecting the transfer shares held in physical form- (i) the Company Secretary or the person authorised by the Board shall make an application, on behalf of the conce .....

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(Share Capital and Debentures) Rules, 2014; (iv) after issue of a new share certificate, the company shall inform the depository by way of corporate action to convert the share certificates into DEMAT form and transfer in favour of the Authority. 19. The sum and substance of the Rules is that the companies were mandated to follow two crucial steps - one, inform the shareholders about the manner of vesting of shares and in that regard provide three clear months before the date of statutory transf .....

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ue date of transfer was an unclear concept under the old Rules - originally notified on 05.09.2016. This brought in uncertainty and inchoateness because in the absence of a terminus quo as it were, or a prescribed cut-off date, the companies were at liberty to pick any date without any objective standard. Realizing this, the first amendment introduced the cut-off date as 31.05.2016 and further recognized that the class of shareholders who might have approached the company in between or even enca .....

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e for transmission was to be applicable was prescribed. The changes brought about, especially by the second amendment to the Rules, in the opinion of the Court, have lent some uncertainty. The samples of advertisements issued by the various companies after the Rules were notified on 05.09.2016 indicated that the three month period provided was apparently not adhered to, at least in the case of five of them. The notices were published in newspapers etc. in the first week or mid-November with the .....

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Companies MD & CEO NSDL MD & CEO NSDL Subject: Transfer of Shares to IEPF Authority Pursuant to second proviso to Rule 6 of Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 as amended time to time, wherein the seven years period provided under sub-section (5) of section 124 is completed for unpaid/unclaimed dividends during September 7, 2016 to October 31, 2017, the due date for transfer of such shares by companies is October 31st, 20 .....

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litate record keeping of shares Transferred to the IEPF Authority to meet the requirements of the Rules. 4, All companies which are required to transfer shares to IEPF Authority under the aforesdid. Rules, shall transfer such shares, whether held in dematerialised form or physical form, to the demat accounts of IEPF AuthPrity by way of corporate action. The information related to the shareholders, whose shares are being transferred to IEPF‟s demat accounts with PNB or SBI CAP shall be prov .....

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ebsite www.iepf.gov.in on finalization. NSDL and CDSL shall, based on these discussions, separately notify the charges, which shall not be more than those finalized in the MOU, NSDL and CDSL are required to allow the servies with immediate effect. 6. Any cash benefit accuring on account of shares transferred to IEPF such as dividend, proceeds realized on account of delisting of equity shares of the company, amount entitled on behalf of security holder if the company is being wound up as per Rule .....

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nies would not be accountable for the mandate of Rule 6(1), i.e. three months notice. This Court is of the opinion that Rule 6(3) has not undergone any change. Its clause (a) retains its original character which means that every company had to necessary give three months clear notice to all concerned about the date of transfer. Undoubtedly, the absence of any date in the original Rules might have led to some uncertainty, even confusion. However, the first amendment clarified that and fixed the d .....

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adequate notice, it was enabled to do so during the extended period. 22. As far as the non-compliance with requirement of notice by various companies goes, this Court is of the opinion that in public interest proceedings, those violations and non-compliances cannot be gone into. What is clear is that the combined effect of the first and second amendments to the Rules, results in companies becoming aware adequately in advance of their obligations, especially towards notifying the shareholders abo .....

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