TaxTMI 
TaxTMI 
2020 (9) TMI 128
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....any called I-Flex Solutions Limited (IFLEX). The said Company was taken over by M/s. Oracle Financial Services Software Limited, fourth respondent herein. These shares were allotted to the petitioner in the year 1992. 3. Over the years, bonus shares were issued and the petitioner was holding 3200 shares. The market value of the share as on date would be about 1.14 crores. It is also stated that after the petitioner's son passed away, the dividends which were not received and as on date, unclaimed dividends worth Rs. 29,92,000/-. It is stated by the petitioner that Section 124 (6) of the Companies Act, which deals with unclaimed dividends provides that all the shares in respect of which dividends have not been claimed for seven consecutive years or more than shall be transferred by the Company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed. Proviso to sub-Section 6 of Section 124 states that claimant of the shares shall be entitled to claim the transfer of shares from the Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed. ....
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....d for seven consecutive years or more shall be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed: Provided that any 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. [Explanation.-For the removal of doubts, it is hereby clarified that in case any dividend is paid or claimed for any year during the said period of seven consecutive years, the share shall not be transferred to Investor Education and Protection Fund.] (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 punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees." 5. In exercise of powers conferred under sub-Section 1, 2, 3, 4, 8, 9, 10 and 11 of Section 125 and sub-Section 6 ....
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.... 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 order of Court or Tribunal or statutory Authority restraining any transfer of such shares and payment of dividend or where such shares are pledged or hypothecated under the provisions of the Depositories Act, 1996 or shares already been transferred under sub-rule (1) above, the company shall not transfer such shares to the Fund: Provided that the company shall furnish details of such shares and unpaid dividend to the Authority in Form No. IEPF 3within thirty days from the end of financial year. (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 ....
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....shall also be credited to such DEMAT account [by the company which shall send a statement to the Authority in Form No. IEPF-4within thirty days of the corporate action containing details of such transfer.] (9) The shares held in such DEMAT account shall not be transferred or dealt with in any manner whatsoever except for the purposes of transferring the shares back to the claimant as and when he approaches the Authority or in accordance with sub- rule (10) and (11). (10) If the company is getting delisted, the Authority shall surrender shares on behalf of the shareholders in accordance with the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 and the proceeds realised shall be credited to the Fund and a separate ledger account shall be maintained for such proceeds. (11) In case the company whose shares or securities are held by the Authority is being wound up, the Authority may surrender the securities to receive the amount entitled on behalf of the security holder and credit the amount to the Fund and a separate ledger account shall be maintained for such proceeds. (12) Any further dividend received on such s....
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....rotection Fund Authority: Provided that a company may appoint one or more Officer as Deputy Nodal Officer to assist the Nodal Officer for the purposes of verification of claim and for coordination with Investor Education and Protection Fund Authority: Provided further that the Nodal Officer shall be solely liable for all actions of any officer appointed as Deputy Nodal Officer: Provided also that in case a company fails to appoint Nodal Officer, every director of the company shall be deemed to be nodal officer and be liable for any failure to comply with requirement of these rules. (2B)The details of the Nodal Officer and Deputy Nodal Officer duly indicating his or her designation, postal address, telephone and mobile number and company authorized e-mail ID shall be communicated to the Investor Education and Protection Fund Authority in Form No. IEPF-2within fifteen days from the date of publication of these rules and the company shall display the name of Nodal Officer and his e-mail ID on its website: Provided that any change in the Nodal Officer or his details shall be communicated to the Authority through Form No. IEPF-2within seven days of su....
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....des of share certificate generated under clause (d) of sub-rule (3) of rule 6 of these rules along with the e-verification report;(iii) The Company shall be solely responsible for collecting original physical share certificate or original bond or deposit or debenture certificate or proof of entitlement from the claimant and shall be liable for any misuse thereof. (3) The company shall, within fifteen days from the date of receipt of claim, send a verification report to the Authority in the format specified by the Authority along with all the documents submitted by the claimant. (4) After verification of the entitlement of the claimant- (a) to the amount claimed, the Authority and then Drawing and Disbursement Officer of the Authority shall present a bill to the Pay and Accounts Office for e- payment as per the guidelines, (b) to the shares claimed, the Authority shall issue a refund sanction order with the approval of the Competent Authority and shall credit the shares to the DEMAT account of the claimant to the extent of the claimant's entitlement. (5) The Authority shall, in its records, cause a note to be made of all the payments made....
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....PF-5: Provided further that the claimant shall submit in original all these documents duly signed by him, to the Nodal Officer of the concerned company at its registered office for verification of the claim. (9) In case, claimant is a legal heir or successor or administrator or nominee of any other registered security or in cases where request of transfer or transmission of shares is received after the transfer of shares by company to the Authority, the company shall verify all requisite documents required for registering transfer or transmission and shall issue letter to the claimant indicating his entitlement to the said security and furnish a copy of the same to the Authority while verifying the claim of such claimant through its e-verification report. Provided that. the authority shall dispose such request of transfer or transmission based on the e-verification report of the company subject to verification of such request. (10) ........ (11) The company shall be liable under all circumstances whatsoever to indemnify the Authority in case of any dispute or lawsuit that may be initiated due to any incongruity or inconsistency or dispar....
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.... Company. It is therefore, stated that if the dividends are not paid by the Company, then the shareholder cannot be divested of his property and such an action is completely unreasonable and unfair and is in violation of Article 14 of the Constitution of India. 9. It is contended that divesting the rights of a shareholder by transfer of such shares to the Investor Education and Protection Fund, just because the dividends are not paid, or that the dividends are unclaimed is completely unjustifiable, arbitrary and violative of Article 14, 21 and 300 A of the Constitution of India. 10. It is contended that it is well settled that before a person is divested of his rights in any property and affected person ought to be heard. Taking away the right of a shareholder even without affording a hearing, cannot be sustained and such law which permits such a procedure of divesting property is unsustainable and deserves to be struck down. 11. It is also contended by the learned counsel for the petitioner that Rules 6 and 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, is so cumbersome that it virtually makes it impossible ....
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.... even shares held in physical form could be transferred to the Authority by issuing a duplicate certificate and the Authority shall endeavour to dematerialize all such shares and retain some shares in physical form. However, vide amendment w.e.f 13/10/2017, the rule was amended where the company is forced to convert all such shares in DEMAT form. Thus, the burden is now on the company to convert such shares and incur exorbitant costs. 16. It is further contended that neither the Companies Act, 1956 nor 2013 Act stipulate any condition/list of documents to be adduced for transmission of shares to the legal heirs. However, the Rules which are procedural in nature, have gone beyond the scope of the Act and had mandated the legal heirs to produce additional documents which are never prescribed in the Act. In as much as Section 124 (6) and the corresponding Rule 6 and 7 make it mandatory that the shares in relation to which the unclaimed dividend shall be transferred to IEPF, the same is arbitrary and illegal as the shareholder is divested of his title to the shares. 17. Heard Mr.M.Sricharan Rangarajan, learned counsel for the petitioner and Ms.R.Durga Rani, Central Government Sta....
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....ection Authority Fund (Accounting, Audit, Transfer and Refund) Rules, 2016, would state that the procedure as prescribedin the said Rules are extremely cumbersome. Heavy expenditure has to be incurred by the claimants for retriving their shares. He would state that initially the 2016 rules provided for return of physical certificates of shares transferred to IEPF. However, after the 2017 amendment, such shares are to be mandatorily converted to DEMAT form while transferring to IEPF. Therefore, the claimants/legal heirs are forced to incur additional expenditure to open DEMAT accounts in order to claim back their own shares. He would state that even though some companies are not mandated to keep their shares in DEMAT form, due to the transfer of shares to IEPF, the companies are forced to incur high expenditure for the conversion of physical shares to DEMAT and to subsequently transfer the same to IEPF's DEMAT Account. 21. He would submit that Rule 7 originally provided that in case of claimants being legal heirs or representatives of the deceased claimant, they ought to complete the transmission process alone in order to obtain refund of shares and the unpaid/unclaimed dividend.....
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....exercising his voting rights as the same are frozen as per Rule 6(6). He would argue that transfer of shares/securities along with the unpaid dividend to IEPF is illegal as the property which vests with a person cannot be transferred without the permission/authority of the owner. It is the owner's prerogative to exercise all/some of his rights on the property and merely because a right is not exercised does not automatically vest with the Government to take up the property to itself. 23. In the instant case, the petitioner is an 81 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. 24. Mr.Sricharan Rangarajan, learned counsel for the petitioner, places reliance on the judgment of the Hon'ble Supreme Court in K.T. Plantation (P) Ltd. v. State of Karnataka, (2011) 9 SCC 1, paras 190,191 ....
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....and the Statement of Objects and Reasons for the introduction of the Sections is extracted below: "Clause 16.-It has been observed that large established companies have been in the practice of declaring dividends even in a year in which profits are not adequate for payment of large dividends out of reserves accumulated in previous years. Such accumulated reserves which should have been normally available as a plough-back for the furtherance of the company's business are thus used in a manner prejudicial to public interest. It is, therefore, proposed to incorporate in the statute provisions to the effect that declaration of dividend out of reserves could be made only in accordance with the rules to be prescribed by the Central Government or in special cases with the previous approval of the Government. It is also proposed to make it obligatory for companies to transfer the total amount which is to be distributed to shareholders as dividend in any year to a special account to be opened by the Company in any Scheduled Bank, within seven days from the date of the declaration. This is intended to prevent companies from declaring dividends when no profits in the shape of liquid ....
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....ade to Sections 205-A and 205-B. Under Section 205-A (5), the unclaimed dividend would after a period of 7 years, be transferred to the Investor Education and Protection Fund (hereinafter "IEPF"), established under Section 205-C. Section 205-A(5) as after the 1999 amendment, as well as Section 205-C are extracted below: "Section 205-A. (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 to the Fund established under sub-section (1) of Section 205-C. 205-C. Establishment of Investor Education and Protection Fund.-(1) The Central Government shall establish a fund to be called the Investor Education and Protection Fund (hereafter in this section referred to as the "Fund"). (2) There shall be credited to the Fund the following amounts, namely :- (a) amounts in the unpaid dividend accounts of companies; (b) the application moneys received by companies for allotment of any securities and due for refund; (c) matured deposits with companies; (d) matured d....
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....rs. After the expiry of 7 years, the amount would then be transferred to the IEPF. This amount however would not be recoverable once the transfer was made by the Company to the IEPF. The explanation appended to Sub-Section 2 of Section 205-C, read with Section 205-A(5) makes this position abundantly clear. 34. Thus, a time limit of 7 years was imposed for claiming any dividend due to a shareholder, after which the money would instead be used by the IEPF, for fulfilling its various objectives. Parliament in its infinite wisdom felt that money owed to careless shareholders ought to be put to good use, i.e. used for the purposes of the IEPF. In this manner, the right of the shareholder, to recover dividend in respect of his forgotten investments was curtailed. A shareholder could only recover dividend for upto 7 years, from the date on which he made an application to the company. 35. The vires of Section 205-C were challenged before the Delhi High Court in case Titled Nivedita Sharma Versus The Industrial Credit & Investment Corporation Of India & Ors, W.P. (C) No. 10157 of 2009. The Delhi High Court vide judgement dated 07.07.2011 dismissed the Challenge to Section 205-C, and h....
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....aw 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 and seeks to give quietus to claims which have not been enforced. It ensures that litigants are diligent in seeking remedies in court and prohibits stale claims. It ensures promptitude and assist vigilant persons who do not sleep over their rights. Laws prescribing reasonable period of limitation have been upheld, though whenever the period prescribed expires a claimant suffers, but this invariably happens as the said litigant has been grossly negligent and has failed to take steps. This has happened in the present case." 36. A Special Leave Petition, bearing SLP (CC) No. 19616 of 2011 was preferred against this Judgement before the Hon'ble Supreme Court of India. On 02.01.2012, the Petition was dismissed as withdrawn with the liberty to approach the appropriate forum, once again. 37. Consequently, W.P. (C) No.1098 of 2012, titled Nivedita Sharma Versus Ministry Of Corporate Affairs & Ors, was preferred before the Delhi High Court. This Petition too was dismissed vide Judgement and order dated 20.04.2012. 38. Thus....
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....ore 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 unclaimed and unpaid for a period of seven years from the date it became due for payment. (3) The Fund shall be utilised for- (a) the refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon; (b) promotion of investors' education, awareness and protection; (c) distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any person, in accordance with the orders made by the Court which had ordered disgorgement; (d) reimbursement of legal expenses incurred in pursuing class action suits under Sections 37 and 245 by members, debenture- holders or depositors as may be sanctioned by the Tribunal; and (e) any other purpose incidental thereto, in accordance with such rules as may be prescribed: Provided that the p....
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.... 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 New Act, shares for which dividend had not been paid for over 7 years, would also now be transferred to the IEPF, by virtue of Section 124(6). The proviso to Section 124(6) however protected the right of a shareholder to recover the share from the IEPF. A shareholder, whose shares stood transferred to the IEPF, could make an application in accordance with the Rules laid down. 41. For the purposes of Section 124(6), the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 were brought into force by the Central Government in exercise of its powers under Sections 124, 125 and 469 of the Companies Act, 2013. 42. Under Rule 3(2)(b), all shares in accordance with Section 124(6) were to be transferred to the IEPF. 43. The present Petition seeks to challenge, Section 124(6) of the 2013 Act, and the rules made thereunder. It is the case of the Petitioner, that the provisions related....
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.... 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 intellectual property and embraces every possible interest recognised by law. 169. This Court in State of W.B. v. Vishnunarayan and Associates (P) Ltd.94, while examining the provisions of the West Bengal Great Eastern Hotel (Acquisition of Undertaking) Act, 1980, held in the context of Article 300-A that the State or executive officers cannot interfere with the right of others unless they can point out the specific provisions of law which authorises their rights. 170.Article 300-A, therefore, protects private property against executive action. But the question that looms large is as to what extent their rights will be protected when they are sought to be illegally deprived of their properties on the strength of a legislation. Further, it was also argued that the twin requirements of "public purpose" and "compensation" in case of deprivation of property are inherent and essential elements or ingredient....
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....00-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, remarked about the nature of the transfer contemplated under Section 124(6), and held as under: "23. 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 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. As far as the operationalisation of this provision goes, the Rules, especially the first and second amendments had the effect of gi....
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....ts 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 India [Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] stated that it was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction between the two types of legislation when it comes to this ground of challenge under Article 14. The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subordinate legislation under Article 14. Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrarine....