TMI Blog2020 (9) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... year old woman who was not aware even about the existence of the shares until recently on 2019. Since the shares were acquired by her son who died on 1993 in Oman, the petitioner had no way of knowing the shares on her own. Therefore, the shares were dormant for more than 7 years and in such a case, the shares are also unreasonably transferred to IEPF where the shareholder had actually died and the claimants were unaware of their existence. The procedure for transfer of shares is onerous as the Claimant/legal heir of the claimant is forced to undergo an ordeal of procedure to get back their own property. The procedure given under the Rules after the amendment is not in conformity with the substantial due process and fairness, as mentioned above, the Section and the Rules are manifestly arbitrary - Neither the Section nor the rules provide for any checks and balances and effective adjudicative mechanism through which its civil right in shares can be divested. It is an essential facet of law and matter of fundamental policy in India that a person, whose rights are affected, ought to be heard. Therefore, the lack of such opportunity and effective mechanism by itself renders the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso to Setion 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 so transferred to the IEPF.Rule 7, of the IEPF Rules, 2016 a procedure is prescribed for the refund of the shares by the IEPF to the owner of the shares. Thus, no deprivation of property is taking place, under the Impugned Provisions, and as such Article 300-A is not attracted in this case. Petition dismissed. - W. P. No. 1538 of 2020 - - - Dated:- 14-2-2020 - THE HON'BLE MR. A. P. SAHI, CHIEF JUSTICE And THE HON'BLE MR. JUSTICE SUBRAMONIUM PRASAD For the Petitioner : Mr.M.Sricharan Rangarajan For the Respondents : Mr.R.Durga Rani, CGSC for R. R. 1 and 2 ORDER SUBRAMONIUM PRASAD, J. The instant writ petition challenges the vires of Section 124 (6) of the Companies Act, 2013 and Rule 6 and 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 as unconstitutional being violative of Article 14, 21 and 300 A of the Constitution of India. 2. The petitioner states that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther particulars as may be prescribed. (3) If any default is made in transferring the total amount referred to in sub-section (1) or any part thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve per cent per annum and the interest accruing on such amount shall ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them. (4) Any person claiming to be entitled to 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 shall send a statement in the prescribed form of the details of such transfer to the authority which administers the said Fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptember, 2016 to 31st October, 2017, the due date of transfer of such shares shall be deemed to be 31st October, 2017. Provided further that in cases where the period of seven years provided under sub-section (5) of section 124 has been completed or being completed during the period from 7th September, 2016 to 31st October, 2017, the due date of transfer of such shares shall be deemed to be 31st October, 2017. Provided further that 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. Explanation.-For removal of all doubts, it is hereby clarified that all shares in respect of which dividend has been transferred to Investor Education and Protection Fund on or before the 7th September 2016, shall also be transferred by the company in the name of Investor Education and Protection Fund. (2) 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. (3) The company shall follow the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and transfer in favour of the Authority. (4). The company shall make such transfers through corporate action and shall preserve copies for its records. (5).While effecting such transfer, the company shall send a statement to the Authority inForm No. IEPF-4within thirty days of the corporate action taken under clause (c) of sub-rule (3) of rule 6 containing details of such transfer and the company shall also attach a copy of the public notice published under clause (a) of sub-rule (3) of rule 6 in Form No. IEPF-4. (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 voting rights. (7) The company shall maintain all such statements filed under sub rule (5) in the same format along with all supporting documents and the Authority shall have the powers to inspect such records. (8) All benefits accruing on such shares like bonus shares, split, con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er proviso to sub-Section (3) of Section 125, as the case may be, to the Authority by submitting an online application in Form IEPF-5 available on the website www.jepf.gov.in along with fee specified by the Authority from time to time in consultation with the Central Government. (2). Upon submission, Form No.IEPF-5 shall be transmitted online to the Nodal Officer of the Company for verification of claim: Provided that the claimant after making an application in Form No.IEPF-5 under sub-rule 1, shall send original physical share certificate, original bond, deposit certificate, debenture certificate, as the case may be, along with Indemnity Bond, Advance Receipts, any other document as enumerated in Form No.IEPF-5, duly signed by him, to the Nodal Officer of the concerned company at its registered office for verification of the claim. 2 A. Every company which is required to credit amounts or shares to the fund or has deposited the amount or transferred the shares to the Fund shall nominate a Nodal Officer, who shall either be a Director or Chief financial Officer or Company Secretary of the company, for the purposes of verification of claims and coordination with Inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority after the expiry of sixty days from the date of filing of Form No. IEPF-5, the Authority may reject FForm No. IEPF-5, after sending a communication to the claimant and the concerned company, on the e-mail address of the claimant and the company, to furnish response within a period of fifteen days: Provided also that for failure to submit verification report of the claim in accordance with these rules, the company and its Nodal Officer shall be punishable as per the provisions of the Act. Explanation.- In case (i) loss of original physical share certificate or original bond or deposit or debenture certificate or proof of entitlement, the company and the claimant shall follow the procedure as laid down in the Companies (Share Capital and Debenture) Rules, 2014 , the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulation, guidelines, procedures and circulars issued from time to time and Schedule III of these rules and attach certified copies of all documents as may be required under the said rules or guidelines with the e-verification report; (ii) In addition, the company shall attach a scanned copy of both sides of share c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpleteness is called from the claimant, he shall file the e-form and shall send such documents as called for within fifteen days, duly signed by him, to the Nodal Officer of the concerned company at its registered office for verification of the claim and company shall send a revised verification report: Provided further that if any such information or incompleteness is called from the company, the company shall file the revised verification report and shall send such documents as called for within thirty days: Provided also that the provisions of sub-rule (3) of rule 7 shall apply mutatis mutandis to this sub-Rule. (8)In case, claimant is a legal heir or successor or administrator or nominee of the registered share holder, the claimant shall ensure to submission of self-attested scanned copy of all documents detailed inScheduleIIof these rules online along with theForm No. IEPF-5: Provided that in case of loss of securities held in physical form, he has to ensure to submission of self-attested scanned copy of additional documents detailed in Schedule III of these rules online along with the Form No. IEPF-5: Provided further that the claimant shall submit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expiry of 30 days period,and if the money transferred to the unpaid dividend account remains unclaimed for a period of seven years, it got transferred to the Investor Education and Protection Fund (IEPF). 7. It is the contention of the petitioner that under the erstwhile Section, the title in the shares never got transferred and the shares continued to remain with the share holder. It is therefore, submitted that by virtue of 124 (6), of the Companies Act 2013, the share holder looses his shares, which is property and is violative of 300 A of the Constitution of India. It is contended that a share is a bundle of rights and is movable property cannot be taken away merely because the dividends which is a share in the profits given to the share holder has not been claimed. 8. It is the contention of the petitioner that failure to claim dividends cannot amount to divesting the rights in the shares which is property. It is further contended that there is no public purpose for bringing out under Section 124 (6). It is contended that Section 124 (b) also applies where dividends are not paid by the Company. It is therefore, stated that if the dividends are not paid by the Company, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be sent by the legal heirs to the IEPF. The list clearly stipulates that for shares held in physical form without any nomination and for value above ₹ 2,00,000/-, obtaining of Succession Certificate or probate or will or letter of administration is mandatory. Therefore, the legal heirs are constrained to take legal recourse and incur additional expenses instead of being entitled to the shares simply by transmission. 14. It is further contended that Schedule III renders an even more arduous case where the legal heirs are compelled to furnish surety affidavit of value equal to the market value of shares as on the date of execution in case of loss of original share certificates/documents. It is contended in the petition that in the instant case, the claims are around ₹ 22 lakhs and the petitioner being a senior citizen, who had just realised the existence of such shares is now compelled to file such a surety affidavit to claim the shares that she is legally entitled to otherwise under law as the sole surviving legal heir. 15. It is further contended that Rule 7 (3) initially held that even shares held in physical form could be transferred to the Authority by iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be misused by vested parties, but no explanation had been given as to who are the vested parties and how it could be misused. No rationale has been accorded as to the introduction of transfer of shares along with unpaid/unclaimed dividend. He would state that the report submitted by the Parliamentary Standing Committee of Finance dated 26.06.2012, the Ministry had remarked that provisions are retained to achieve a broader objective of safety and security in capital market since unclaimed securities could be misused by unscrupulous persons for money laundering activities, but there is no explanation as to who such unscrupulous persons and the manner of such misuse are. No rationale has been given for the introduction of transfer of shares along with unpaid/unclaimed dividend. He would therefore that the legislative intent behind the introduction of the Section is non-existent and no reason has been cited by the Legislature as to its introduction and implementation. 20. Mr.Sricharan Rangarajan, learned counsel for the petitioner, in his challenge to Rule 6 and Rule 7 of the Investor Education and Protection Authority Fund (Accounting, Audit, Transfer and Refund) Rules, 2016, wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a movable property, with all the tributes of such property. A person whose name is entered in the Register as a member of the company holding such shares is entitled to exercise all or any rights that emanate from such shares. Mr.Sricharan Rangarajan, learned counsel for the petitioner, would argue that shares constitute a bundle of rights and sharing of profits in the company is only one of the many rights that a shareholder is entitled to. Merely because a shareholder does not exercise one right in the share does not entitle the Government to divest the shares from the shareholder. The deprivation of right without any purpose is manifestly arbitrary (as held in Shayira Banu vs Union of India 2017 9 SCC 1). There is no intelligible differentia as to how the right to claim dividend is given primacy over other rights. He would state that there might be a case where a shareholder who actively participates in the management and exercises his voting right does not claim dividends for a period of 7 years. In such a case, merely because he fails to claim dividend, his shares are transferred and he is restrained from exercising his voting rights as the same are frozen as per Rule 6(6). H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. The procedure for transfer of shares is onerous as the Claimant/legal heir of the claimant is forced to undergo an ordeal of procedure to get back their own property. The procedure given under the Rules after the amendment is not in conformity with the substantial due process and fairness, as mentioned above, the Section and the Rules are manifestly arbitrary. 27. Neither the Section nor the rules provide for any checks and balances and effective adjudicative mechanism through which its civil right in shares can be divested. It is an essential facet of law and matter of fundamental policy in India that a person, whose rights are affected, ought to be heard. Therefore, the lack of such opportunity and effective mechanism by itself renders the section and the rules arbitrary and unconstitutional. 28. Lastly he would submit that simplified procedure of transmission done away with: Parliament noted a large and growing trend of companies, in improperly declaring and distributing dividend. It is for this reason that the Companies (Amendment)Act, 1974 was enacted. Sections 205-A and 205-B were introduced, and the Statement of Objects and Reasons for the introduction of the Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment vest in the Central Government. Section 205-A(5) as it was enacted is extracted below: (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 three years from the date of such transfer, shall be transferred by the company to the general revenue account of the Central Government but a claim to any money so transferred to the general revenue account may be preferred to the Central Government by the person to whom the money is due and shall be dealt with as if such transfer to the general revenue account had not been made, the order, if any, for payment of the claim being treated as an order for refund of revenue 30. Section 205-B, on the other hand provided a remedy for such shareholder, who would have been entitled to the dividend, if he had claimed the dividend. It provided the shareholder the right to approach the Central Government to recover the money he was entitled to. 31. In the year 1999, these provisions underwent a drastic change. Section 205-C was introduced, and amendments were made to Sections 205-A and 205-B. Under Section 205-A (5), the unclaimed dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in separate accounts and other relevant records in relation to the Fund in such form as may be prescribed in consultation with the Comptroller and Auditor-General of India. (5) It shall be competent for the authority or committee appointed under sub-section (4) to spend moneys out of the Fund for carrying out the objects for which the Fund has been established. 32. Before 1999, in the event that dividend was unclaimed or unpaid for a period of 3 years from the date of its declaration, the money would be transferred by the company to the Central Government. Any shareholder retained the right to obtain such unclaimed dividend either from the company itself, within 3 years from the date of declaration of the dividend. In the event that the shareholder was unable to avail of this opportunity, the shareholder could recover such dividend by making an application under Section 205-B, to the Central Government. 33. After the amendments introduced in 1999, any company declaring dividend was required to maintain a dividend account for a period of 7 years. After the expiry of 7 years, the amount would then be transferred to the IEPF. This amount however would not be recoverable on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial and advantageous and in public interest. The petitioner is aggrieved because she did not stake her claim for refund within seven years. She did not inform change of address and, therefore, could not be communicated and informed about the premature redemption. The petitioner also did not bother to read the terms and conditions of allotment including the early redemption clause. These are serious lapses on the part of the petitioner. It is because of these lapses that the petitioner is in the present infelicitous situation. However, these cannot be a ground to strike down Section 205 C, which has been enacted in public interest and has a public purpose. Another contention during the course of arguments raised was that forfeiture clause should be struck down as unreasonable. It is not possible to agree with the said contention. The investors or public when they deposit the amount must make a claim within seven years otherwise, they will lose their right to make the claim. Rules oflimitation are founded on consideration of public policy. The law of limitation affords a guarantee and ensures that cause of action is not raised after a lapse of particular period. Limitation is preve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act, 1956 (1 of 1956), as it stood immediately before the commencement of the Companies (Amendment) Act, 1999 (21 of 1999), and remaining unpaid or unclaimed on the commencement of this Act; (e) the amount lying in the Investor Education and Protection Fund under Section 205-C of the Companies Act, 1956 (1 of 1956); (f) the interest or other income received out of investments made from the Fund; (g) the amount received under sub-section (4) of Section 38; (h) the application money received by companies for allotment of any securities and due for refund; (i) matured deposits with companies other than banking companies; (j) matured debentures with companies; (k) interest accrued on the amounts referred to in clauses (h) to(j); (l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for seven or more years; (m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more years; and (n) such other amount as may be prescribed: Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such amount has remained unc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the Fund in such form as may be prescribed after consultation with the Comptroller and Auditor-General of India. (9) It shall be competent for the authority constituted under sub- section (5) to spend money out of the Fund for carrying out the objects specified in sub-section (3). (10) The accounts of the Fund shall be audited by the Comptroller and Auditor-General of India at such intervals as may be specified by him and such audited accounts together with the audit report thereon shall be forwarded annually by the authority to the Central Government. (11) The authority shall prepare in such form and at such time for each financial year as may be prescribed its annual report giving a full account of its activities during the financial year and forward a copy thereof to the Central Government and the Central Government shall cause the annual report and the audit report given by the Comptroller and Auditor-General of India to be laid before each House of Parliament. 40. Sections 124 and 125 of the New Companies Act, 2013, replaced Sections 205-A, 205-B and 205-C. The mechanism of the transfer of unpaid dividend to the IEPF, remain unchanged. However, under the N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact situation of a case. Deprivation connotes different concepts. Article 300-A gets attracted to an acquisition or taking possession of private property, by necessary implication for public purpose, in accordance with the law made by Parliament or a State Legislature, a rule or a statutory order having force of law. It is inherent in every sovereign State by exercising its power of eminent domain to expropriate private property without owner s consent . 47. Additionally, it must be remembered that Article 300-A protects the private property of a person from Executive Action. In addition to affirming the Judgement in Jilubhai s case, the Constitution Bench in the case of K.T. Plantation (P) Ltd. v. State of Karnataka, (2011) 9 SCC 1 has held as under: 168.Article 300-A proclaims that no person can be deprived of his property save by authority of law, meaning thereby that a person cannot be deprived of his property merely by an executive fiat, without any specific legal authority or without the support of law made by a competent legislature. The expression property in Article 300-A confined not to land alone, it includes intangibles like copyrights and other intellect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the owner of the shares. Rule 7(1) is extracted below: 7. Refund to claimants from Fund.-(1) 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 shares under proviso to sub-section (6) of Section 124 or apply for refund under clause (a) of sub-section (3) of Section 125 or under proviso to sub-section (3) of Section 125, as the case may be, to the Authority by submitting an online application in 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. 50. Thus, we are of the view that no deprivation of property is taking place, under the Impugned Provisions, and as such Article 300-A is not attracted in this case. The Delhi High Court in INDIA AWAKE FOR TRANSPARENCY versus UNION OF INDIA REP. BY SECRETARY, MINISTRY OF CORPORATE AFFAIRS AND ANR W.P.(C) 10589/2017, which was a Public Interest Litigation seeking directions for the strict enforcement of the Rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as under:- 87. The thread of reasonableness runs through the entire fundamental rights chapter. What is manifestly arbitrary is obviously unreasonable and being contrary to the rule of law, would violate Article 14. Further, there is an apparent contradiction in the three-Judge Bench decision in McDowell[State of A.P.v.McDowell Co., (1996) 3 SCC 709] when it is said that a constitutional challenge can succeed on the ground that a law is disproportionate, excessive or unreasonable , yet such challenge would fail on the very ground of the law being unreasonable, unnecessary or unwarranted .The arbitrariness doctrine when applied to legislation obviously would not involve the latter challenge but would only involve a law being disproportionate, excessive or otherwise being manifestly unreasonable. All the aforesaid grounds, therefore, do not seek to differentiate between State action in its various forms, all of which are interdicted if they fall foul of the fundamental rights guaranteed to persons and citizens in Part III of the Constitution. 101. It will be noticed that a Constitution Bench of this Court in Indian Express Newspapers (Bombay) (P) Ltd. v. Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduly enrich themselves, as the depositors have failed to stake claim and have not been paid for a period of seven years from the date the amount became due. We do not see any reason to hold that the said provisions areunconstitutional or they violate Article 14 or any other provisions of the Constitution. It cannot be said that the aforesaid provisions are faulty and violate the fundamental rights guaranteed in the Constitution. To strike down Section 124(6) of Investor Education and Protection Authority Fund (Accounting, Audit, Transfer and Refund) Rules, 2016, Rules will amount to negating and striking down a worthy and meritorious legislation which is on the whole beneficial and advantageous and in public interest. As observed by the Delhi High Court while upholding Section 205 of the Companies Act 1956, the investors or public when they deposit the amount must make a claim within seven years otherwise, they will lose their right to make the claim. Rules oflimitation are founded on consideration of public policy. The law of limitation affords a guarantee and ensures that cause of action is not raised after a lapse of particular period. Limitation is preventive and not curative ..... X X X X Extracts X X X X X X X X Extracts X X X X
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