In the name of protection of investors, here is another salvo
from the Ministry of Corporate Affairs (MCA). With effect from September 7,
2016, an Investor Education and Protection Fund Authority has been constituted under the Investor Education
and Protection Fund Authority Rules, 2016. The Authority will have the
responsibility to maintain the Fund and do other related acts. And the
companies, on their part, have to follow the Rules with respect to unclaimed
and unpaid shares in respect of the dividends which have remained unclaimed for
the past seven years continuously. It’s as simple as that.
Or is it? Simple, I mean. Of course not. When the regulator
is stepping in, things and business cannot remain simple. There are plethora of
rules to comply with, deadlines to be met, statements and returns to be filed,
investors to be chased and if you dare to blink and miss, you get penalized.
Well, coming back to the Investor Education and Protection Fund
(IEPF) which has been proposed, but yet to be set up under the Companies Act,
2013 wherein the companies would transfer all unclaimed/unpaid shares and
dividends for distribution to innocent investors who lose their money by
investing in illegal or unlawful funds. The Government would also deposit all
disgorged amounts to the IEPF. Interestingly, the Authority has been
constituted but the Fund itself is yet to be set up.
The companies have to traverse a detail path in order to
transfer the unclaimed/unpaid shares and dividends under the IEPF Rules. First,
the companies have to identify such shares with respect to unclaimed dividends,
within a period of 90 days after holding its AGM, and every year thereafter,
for a period of seven years. Once these amounts are identified, it has to
prepare a statement and upload it on its own website and on the website of the
IEPF through the prescribed forms for this purpose. The Company Secretary of
the company has been assigned this task.
At the completion of seven years, the company has to notify
each investor whose dividend has remained unclaimed for seven years. Mind you,
the company cannot transfer the funds to the IEPF unless the shareholder has
been notified and informed 90 days in advance from the date of transfer. The detailed
step-wise procedure for such notification to the shareholder has been provided
in Rule 6 of the IEPF Rules, 2016. Let us see what the steps entail:-
1.
Shareholder has to be informed at the current
available address;
2.
A notice has to be published in the newspapers
in English and regional language having a wide circulation;
3.
Publish information of all such share and their
beneficiaries on the company’s own website.
After all this, if the shares and dividends still remain
unclaimed, the companies have to transfer the amounts to the IEPF. Any
non-compliance with the Rules and the procedures attracts a penalty of minimum
five lakh of rupees going upto a maximum of 2 lakh rupees and the officer
responsible for the compliance shall be penalized separately up to a maximum of
five lakh rupees.
The most interesting aspect of these Rules is that if the
concerned shareholder decides to suddenly become aware, after a period of seven
years, of his rights as a shareholder and the fruits he was supposed to reap
from the investments he had forgotten he had made, he can claim them from the
IEPF Authority by simply filling up a form and paying some fee. And the company
shall, after verifying his credentials, be obligated to disburse the shares and
the dividends earned on those shares.
It is agreed that the poor gullible innocent investors need
to be protected from the bad wolves, that is, the companies. At the same time,
the investors also need to be educated and careful of their belongings and
possessions. The companies bear so much cost in terms of employing resources to
maintain and record all the information and seven years is a long time. In my personal
opinion, after seven years all unclaimed shares and dividends ought to be
forfeited and all claims ought to be rejected, except under most special and
genuine circumstances.
Not surprisingly, as a corporate lawyer, I caution my
clients to ponder and think at least a dozen times before they are serious
about incorporating a company and not less than a hundred times before they
would like to see their company listed on one of the national stock exchanges. Because
it’s easier to incorporate a company, somewhat arduous to list, but without a
doubt, almost impossible to remain fully compliant year after year.
An afterthought - shouldn’t the government also move its hawk-eye
to vanishing and fly-by-night companies? What about the money lost by investors
in IPOs raised by such companies who just disappear after collecting huge
amounts?
Ciao!!!
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