One of the main issues that stock market investors face it that of lost money and shares, which is well on its way to getting solved with the establishment of a digital process for recovering old dividends and shares by the ‘Investor Education and Protection Fund Authority’ (IEPFA).
Section 125 of the Companies Act, 2013 (‘Companies Act’) prescribes (i) the amounts which companies are required to transfer to IEPF (such as unclaimed dividends), (ii) use of amounts lying with the IEPF and (iii) other related matters. The Central Government has also established the Investor Education and Protection Fund Authority (‘IEPF Authority’) for administration of the IEPF. The IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 (‘IEPF Rules’) govern matters relating to inter-alia the amounts to be transferred to and paid by the IEPF.
Dhirendra Kumar, CEO, Value Research, whose column appeared in Economic Times, stated that historically, the Indian law on reclaiming dividends and other payouts, as well as the underlying shares themselves has been completely unfair. Under the old Companies Act, money that was unclaimed for a number of years had to be transferred by the company to the government. If no claimant ever showed up, then the money basically belonged to the government. In theory, the law said that anyone could turn up and lay claim to the money.
However, this was no easy matter. The relevant rules had language like “Where the claimant’s title to the aforesaid money has been established to the satisfaction of the Registrar of Companies, the Registrar may direct the claimant to execute an indemnity bond with or without surety,” etc.
This is not the kind of thing that an ordinary person, who may have a suspicion that their parents had forgotten some shares, could be expected to go through with. And the kind of people (or entities) who have access to legal and secretarial help to deal with this probably do not ever forget encashing their dividend cheques or lose trace of their equity holdings. For all practical purposes, the money was eventually absorbed into the revenue account of the Government of India.
The Companies Act of 2013 changed the rules somewhat. Under the new law, dividends unclaimed for more than seven years would be transferred to the IEPFA. Additionally, shares whose dividends were unclaimed for a continuous seven years are also transferred to the ownership of this organisation, which is part of the Ministry of Corporate Affairs (MCA).
Now, finally a new digital process is also under place. Under this process, investors who did not claim dividends and whose dividends and possibly shares have been transferred to the IEPFA can register themselves on the www.iepf.gov.in.
They can then file an application with the details of their dividends and comprehensive proof of their identity. After verification of the details, their lost assets are returned to them. So far, around Rs 200 crore has been restored to the rightful claimants to whom the funds belong.
As awareness of the service of the IEPFA spreads, hopefully this problem will gradually get minimised. In any case, for shares held in a demat account, the dividends get credited straight into investors’ bank accounts. This means that as time goes by, untraceability of fresh investors should get practically eliminated and eventually most of the old funds will also get traced.
There’s another aspect of this problem, which is the equivalent untraceability of old mutual fund investments. That issue has nothing to do with the MCA or the IEPF and has to be handled by the mutual funds themselves. As far as I know, the size of untraceable money in mutual funds is actually much larger than that of corporate dividends.
This is probably because mutual funds have historically had a large number of investors who invest a small amount and then forget about it. About a year ago, there were Rs 44,000 crore of orphaned money in mutual funds. This is about 1.75% of the total money in mutual funds.
If I make the reasonable assumption that almost all of this is from individuals and not companies then the percentage could be more than double that. Again, given the KYC and PAN card norms that have now existed for many years, all of this is probably fairly old money so the problem will reduce over time as investors get traced.