Section 124(6) does not result in statutory vesting of shares in IEPF which holds them as custodian

Section 124(6) of the Companies Act, 2013 does not result in a statutory vesting of shares, it merely transfers shares to IEPF which then holds them as a custodian-High Court

ABCAUS Case Law Citation:
ABCAUS 2148 (2017) (12) HC

Section 124 of the Companies Act, 2013 contains the provisions mandating transfer of unpaid dividend to a special account called Unpaid Dividend Account (UDA). As per sub section (5) provides that unpaid or unclaimed dividend for a period of seven years or more shall be transferred to Investor Education and Protection Fund (IEPF).

Sub-section (6) of said Section 124 also provides that even the shares in respect of which dividends have remained unpaid or unclaimed , shall also be transferred to IEPF.

A non-profit company filed a writ petition with the Hon’ble High Court, under Article 226 of the Constitution in public interest. The petition sought 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 IEPF.

It was submitted that by virtue of Section 124(6), if for some reason shareholders are unable to en-cash their dividends for seven years, they would face asset deprivation. It was urged that such radical change had to be carefully introduced and not in a tardy manner. It was submitted that the share transfer mandated by Section 124(6) is not limited to those holding physical scrips, but to all dematerialized (“demat”) shares. In the case of the latter, the demat accounts would be automatically debited or altered and the shareholding would be automatically depleted.

It was submitted that According to Rule 6, shares can be transferred only when notice in that regard is given, or is deemed to be provided, three months in advance, to the shareholders. It was claried by the petitioner that the validity of Section 124(6) of the Companies Act, 2013 was not being questioned; but what the lack of clarity in the Rules and amendments by the Circulars issued by the Central Government, have resulted in confusion.

The amendment to provisos to Rule 6, provided 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. It was argued that these amendments enabled the shareholder to approach the company with appropriate requests to reclaim their shares; the public purpose was to notify such shareholders in the manner prescribed by the Rules.

It was argued that there is complete lack of clarity with 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 was argued that various companies are flagrantly violating the Act and the Rules – either in ignorance or deliberately, and indicating that the vesting of shares would take place on 30.11.2017. Such notices are provided by publication in the website or notice in the public domain as late as in October barely giving the three-months mandated period.

Observations made by the High Court:

The Hon’ble High Court observed 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 loses agency. The company concerned is relieved of the responsibility of holding the shares or reflecting it in its list of shareholders. At the same time, it is not as if the existence of such shares (which are to be accounted for other purposes) is entirely obliterated. The only consequence spelt out in Section 126 is transfer of dividends in relation to such shares to the Fund and keeping in abeyance any offer of rights shares and any issue of fully paid-up bonus shares. Proviso to Section 126 very 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.”

The Hon’ble High Court opined that 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 a mechanism for reclamation of such shares.

The Hon’ble High Court observed that Rule 6 underwent changes twice. The first amendment was on 28.02.2017, which substituted the original Rules. The second amendment of 13.10.2017 came into force immediately, substituted the second proviso by extending the date of transfer to 31.10.2017 and added the third proviso.

The Hon’ble High Court observed that in sum and substance, Rules I mandated companies to follow two crucial steps –

(i) inform the shareholders about the manner of vesting of shares and in that regard provide three clear months before the date of statutory transfer and

(ii) ensure that the further conditions and changes introduced by the first and second amendments, granting relief to certain classes of shareholders who might have either in the interregnum encashed dividends or approached them to reclaim the shares, were protected.

The Hon’ble High Court observed that Rule 6(3)(a) obliges the companies to inform the shareholders in the manner prescribed three months from the due date of transfer. The due 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 encashed dividends needed to be protected. Therefore, appropriately, first and second provisos were introduced to Rule 6(1). For whatever reasons, perhaps on account of the difficulties experienced by several companies, the Rules were again amended and the date of transfer shifted to 31.10.2017. Here again, the second proviso was appropriately amended to reflect the date changed. The third proviso clarifying beyond doubt that the transfer of shares would be deemed to be transmission and the procedure for transmission was to be applicable was prescribed.

The Hon’ble High Court opined that changes brought about, especially by the second amendment to the Rules, 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.

The Hon’ble High Court opined that opinion that Rule 6(3) did 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. 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 date as 31.05.2017. It also gave some manner of relief to those who had approached the companies or encashed dividends in the interregnum between 07.09.2016 and 31.05.2017. The same spirit was continued in the second amendment which merely extended the date of transfer. All this meant that at least from 28.02.2017, the companies were obliged to provide notice and were given that time. The extension of date to 31.10.2017 meant that if any company was in the dark or could not for some reason, give adequate notice, it was enabled to do so during the extended period.

Decision/ Conclusion/Held:
The Hon’ble High Court summarized by holding 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 to reclaim their property in the shares, by an appropriate procedure.

For the duration of transfer of the shares, the companies cannot issue bonus shares or add anything prohibited under Section 126.

The Rule 6, especially the first and second amendments had the effect of giving companies adequate time to notify and comply with the three month public notice period to their shareholders about the event of transfer.

That 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.

Download Copy of Judgment Click Here >>