Unpaid & Unclaimed Dividend: Treatment and Transfer to Investor Education and Protection Fund (IEPF)

The shareholders in a Company except Company registered under Section 8, are eligible to get a portion of the Company’s profit depending on the number of shares held, this is known as a dividend. It is a distribution of gains by a Company to its members/ shareholders. As a key mechanism for sharing financial success, dividends provide investors with a return on their investment which are typically paid out in cash or additional shares/stock. Dividend is a vital element in evaluating a company’s financial health and investment attractiveness.

In India, Dividend declaration is regulated by the Companies Act, 2013 (“Act”). The following dates are prominent when it comes to the declaration and payment of dividends and are helpful guide in the dividend distribution process:

• Dividend Declaration Date is the date on which companies declare dividends for its members.
• All the recently purchased and sold shares as on the Ex-Dividend Date are not entitled to the dividend declared.
• The members whose names appear in the list of shareholders as on the Dividend Record Date are eligible to receive dividends.
• Dividend Payment Date is the date on which Company pays dividend to the shareholders.

Unpaid Dividend:

An Unpaid Dividend is a dividend that has become due to the shareholders but not yet been distributed. Dividends may remain unpaid due to timing differences between dividend declaration date and dividend payment date. The occurrence of unpaid dividends affects both the Company and its Shareholders. For Companies, unpaid dividends can indicate operational inefficiencies or issues in the dividend distribution process whereas for shareholders, it can lead to delays in receiving expected returns and may impact their investment plans. Unpaid dividends are eliminated from the books of account once they are paid on the dividend payment date.

Any company who has declared and paid dividend but which is not collected/claimed by the shareholders is known as Unclaimed Dividend. Dividend which is unpaid or remains unclaimed by any of the shareholder entitled, shall be transferred to a separate bank account to be called ‘Unpaid Dividend Account’ to be opened by the Company for this purpose. Such amount of dividend which remains unpaid or unclaimed for more than thirty days from the date of its declaration shall be transferred to this account. Such transfer should take place in seven days of expiry of the period of thirty days as mentioned.

In jurisdictions such as India, unclaimed dividends are eventually transferred to the Investor Education and Protection Fund (IEPF) after a specified period. The IEPF is a government initiative designed to protect investors and promote financial literacy and established under sub-section (1) of section 125 of the Act. Any money transferred to the Unpaid Dividend Account of a company in pursuance of the Act 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 and the company shall send a statement in the prescribed form of the details of such transfer to the IEPF authority.

All dividend-paying companies are required to abide with Sections 124 and 125, and they must be complied on immediate basis. Here’s how to transfer the unpaid and unclaimed dividend on expiry of period of seven years:

1. Credit the shares and dividends to the account of IEPF Authority established for this purpose within a period of thirty (30) days from the date of such shares becoming due to transfer.

2. The 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 shall be followed while transferring the shares to the fund by the Companies.

Note: Under the erstwhile Companies Act, 1956 there was no requirement to transfer the shares for which the dividend is unpaid or unclaimed to the IEPF. However, under section 124 of the Act, every Company is mandatorily required to also transfer the shares for which the dividend has remained unpaid or unclaimed for a period of seven consecutive years. Here it is pertinent to note that the foremost condition for transfer of shares is that the dividend on such shares shall be unpaid or unclaimed for seven consecutive years. Accordingly, the underlying shares of unpaid or unclaimed dividend are also required to be transferred to IEPF apart from the amount of unpaid or unclaimed dividend. 

3. The Company shall, three months prior to the date of such transfer, issue a notice to the concerned shareholder at the address registered with the Company and host such notice on the website of the Company. The Company shall also publish a notice in one English newspaper and one Regional newspaper having wide circulation, mentioning the address of the website of the Company.

4. No shares and unpaid dividend can be transferred by the Company to the Fund if any order is passed by the Court or Tribunal or statutory Authority restraining such transfer. Also in case the shares are pledged or hypothecated under the provisions of the Depositories Act, 1996 or the shares have already been transferred by the company.

5. The statement of shares transferred and information of shares and unclaimed or unpaid dividend not transferred to the IEPF shall be provided in Form IEPF-4.

6. The person whose shares and unclaimed dividend or interest thereon, etc. has been transferred to the Fund, may claim the shares by submitting an application to the IEPF Authority in Form IEPF-5 available on the website iepf.gov.in along with fee specified by the Authority from time to time in consultation with the Central Government.

The management of unpaid and unclaimed dividends, and their subsequent transfer to funds like the Investor Education and Protection Fund (IEPF), represents a critical aspect of corporate governance and investor protection. In cases where dividends become unclaimed and are transferred to IEPF, shareholders still have avenues to recover their funds. By familiarizing themselves with the claim process and utilizing available resources, shareholders can effectively reclaim their dividends and benefit from their investments. For shareholders, staying vigilant about dividend declarations and maintaining up-to-date contact information with the company are key to preventing dividends from becoming unclaimed.

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Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement