Thursday, May 11, 2017

Transfer of Shares to the Investor Education and Protection Fund (IEPF)

[The following post is contributed by Pammy Jaiswal, who is an Associate at Vinod Kothari & Co, and can be reached at pammy@vinodkothari.com]

Introduction

By way of its notification dated 28 February 2017, the Ministry of Corporate Affairs (MCA) had tried to simplify the procedure for transferring shares to the Investor Education and Protection Fund (IEPF) Authority. In doing so, it had left various questions unanswered. For instance, rule 6 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Amendment Rules, 2017 (‘IEPF Amendment Rules’) stated that companies would be required to transfer the shares to the IEPF demat account. However, the same did not mention anything regarding the expected time frame by which such accounts would be open or as to the modalities of transfer at the depository level. As a result of this, corporates were faced with ambiguities regarding the ways to effect the transfer of shares to the IEPF account.

IEPF Special Demat Account

Finally, after much speculation on the above and almost two months from the release of the IEPF Amendment Rules, 2017, the MCA by way of its general circular no 03/2017 dated 27 April 2017 has untied a few of the knots contained in the said Rules. The said circular deals with the following:

1.   The IEPF Authority has decided to open a special demat account with the National Securities Depository Limited (NSDL) through a depository participant (DP) of NSDL.

2.   The said demat account will have special features and functions to support digital operations and facilitate the record keeping of the shares transferred to IEPF

(a)      Details of such accounts are yet to be circulated which makes the circular less capable of direct execution.

3.   Information related to the shareholders whose shares are being transferred will be provided to the NSDL in the prescribed format.

(a)        Here again, the incompleteness of the circular is evident in that it states that the prescribed file formats and operational procedures for transfer will be provided by 30 April 2017 and 15 May 2017.

Fees Burden on Companies

-     Fees at the time of effecting transfer will be Rs. 10 per record subject to minimum of Rs. 500;

-     Annual Maintenance fees of Rs. 11 per record subject to minimum based on paid-up capital of the company as follows:

Nominal Value of Admitted Securities (Rs)
Annual Custody Fee Payable by Company (Rs)
Up to Rs. 5 crore
2,700
Above Rs. 5 crore and up to Rs. 10 crore
6,750
Above Rs. 10 crore and up to Rs. 20 crore
13,500
Above Rs. 20 crore
22,500

-     The aforesaid charges will be in addition of the fees charged by depositories for corporate actions.

-     By mentioning a minimum limit as to the amount for maintenance fees, unnecessary burden has been created on those accounts which have barely a few folios to transfer.

Incomplete reference to the IEPF Amendment Rules, 2017

At the very beginning, the circular refers to the second proviso to rule 6 of the IEPF Amendment Rules, 2017 stating – “Pursuant to the second proviso to Rule 6 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Amendment Rules, 2017 notified on February 28, 2017, where the seven year period provided under sub-section (5) of section 124 is completed during  September 7, 2016 to May 31, 2017, the due date for transfer of such shares by companies is May 31, 2017”.

However, the actual text of the said provision is – “Provided further that in cases where the period of seven years provided under sub- section (5) of section 124 has been completed or being completed during the period from 7th September, 2016 to 31st May, 2017, the due date of transfer of such shares shall be deemed to be 31' May, 2017.

Accordingly, 31 May 2017 is the due date for transferring shares in both the following cases:

·        7 year period has already completed; or
·        7 year period will be completed during the period starting from 7 September 2017 until 31 May 2017.

Conclusion

Although the circular has set out some of the procedural requirements, it has kept users in suspense regarding the so called modalities from both the end of the MCA as well as NSDL. MCA should speed up its process to fix the modalities for effecting transfers to the IEPF demat account.

- Pammy Jaiswal


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