Transfer of Shares - Investor Education and Protection Fund

 As per Section 124(6) of the Companies Act, 2013, every company is mandatorily required to transfer the underlying shares for which the dividend has remained unpaid or unclaimed for a consecutive period of seven years to the Investor Education and Protection Fund.

The foremost condition for transfer of shares is that the dividend on such shares shall be unpaid or unclaimed for seven consecutive years.

As per rule 6 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer, and Refund) Rules, 2016, the shares shall be credited to DEMAT Account opened by the Investor Education and Protection Fund Authority within thirty days of such shares becoming due to be transferred to the Investor Education and Protection Fund (IEPF).

Considering that the due date for transferring shares on which dividend has remained unpaid and unclaimed during the period from 7^th September 2016 to 31st October 2017, all the transfer formalities should be completed within 30th November 2017.

Pursuant to the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer, and Refund) Second Amendment Rules, 2019, it is clarified that shares in respect of which dividend has been transferred to IEPF on or before 7th September 2016, shall also be transferred by the company in the name of IEPF.

Timeline and Filing of IEPF form w.r.t transfer of shares:

Particular	Timeline	E-form
Declaration of dividend in the general meeting by shareholders	X days
Transfer of the amount declared to a separate bank account	Within X+5 days
Payment of Dividend to the shareholder	Within X+30 days
Where the dividend is declared but not claimed within 30 days from the declaration, then transfer unclaimed/unpaid amount to an Unpaid Dividend Account	Within X +30+7 days
Transfer remaining unclaimed/unpaid in Unpaid Dividend Account including shares to IEPF	Within 30 days After (X+30+7) days + 7 years
Transfer shares whose dividend is unclaimed/unpaid in Demat account of the IEPF Authority	Within 30 days of (X+30+7) days + 7 years + 30 days
Statement of shares and unclaimed or unpaid dividends not transferred to the Investor Education and Protection Fund	Within 30 days from the end of the financial year.	IEPF Form-3
Statement of shares transferred to the Investor Education and Protection Fund	Within 30 days of the corporate action containing details of such transfer	IEPF Form-4
Application to the Authority for claiming unpaid amounts and shares out of Investor Education and Protection Fund (IEPF)	No timeline prescribed	IEPF Form-5
Statement of amounts credited to IEPF on account of shares transferred to the fund	No timeline prescribed	IEPF Form-7

Brief Procedure to transfer shares to IEPF Demat Account :

1)     Company shall inform the shareholder concerned regarding the transfer of shares three months before the due date of transfer of shares to IEPF. Such details shall also be posted on the website of the company.

2)   Simultaneously, Company to publish a notice in a 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 and Client Id are available on their website duly mentioning the website address.

 

Transferring of Demat shares :                        

3)  Companies are required to inform their depository by way of a corporate action where the shareholders have their account and thereafter the depository shall effect transfer in favor of the Demat account of the IEPF

 

Transfer of physical shares :

 

4)    For effecting transfer of shares held in physical form, the following steps are to be taken by the company:

• Company to authorize the CS or any other person to make an application on behalf of the shareholder, for issuance of new share certificates;
• Company will then on an application made by such authorized person, issue new share
• certificates specifically stated on the face of it that the share certificate is “Issued in lieu of share certificate no. ……for the purpose of transfer to IEPF”;
• Recording the particulars in the register maintained for that purpose which shall be as per
• Register of Members or any separate register maintained for that purpose;
• Company to inform the depository by way of a corporate action to convert the new share certificates into Demat form and transfer in favor of the IEPF Authority.

 Penalty in case of default in transferring of shares to IEPF Fund:

As per section 124 (7) of the Companies Act, 2013, in case a company makes a default in transferring shares to the IEPF Fund, such company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of ten lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.

SOME OF THE MAJOR PRACTICAL ASPECTS OF BUYBACK

Buy-back is the process by which the Company buy-back its shares from the existing shareholders usually at a price higher than the market price. When the Company buy-back the Shares, the number of shares outstanding in the market reduces/fall. It is the option available to shareholders to exit from the Company business.

Investors benefit from BuyBack

Whether a buyback benefits an investor or not depends on the kind of returns investors expect to make from an investment.

Example: -

1. A long-term investor believes that the company is going to perform well over the next decade and decided not to sell any of his shares. A buyback is optional, so investors can very well stay invested, without reducing the shareholding.
2. A long-term investor decided to sell only a few shares to get some funds and still stay invested with the remaining shares.
3. A short-term investor or trader, needs to make sure that the buyback offer price really makes sense for him. It’s also important to factor in tax implications. The profits from the sale will be subject to short-term capital gains tax.
4. All in all, the decision to sell shares in a buyback offer is subjective.

Effect on Financial Statement of buyback

On the balance sheet, a share buyback would reduce the company’s cash holdings—and consequently its total asset base—by the amount of cash expended in the buyback. The buyback will simultaneously reduce shareholders' equity on the liabilities side by the same amount. As a result, performance measures such as return on assets (ROA) and return on equity (ROE) typically improve subsequent to a share buyback.

One can also get the amount spent on share buybacks from the statement of cash flows in the financing activities section, and from the statement of changes in equity or statement of retained earnings.

Dividend Vs Buyback

1. Buyback is an optional exercise for an investor so not all shareholders participate in it while the dividend is paid out to all depending on the dividend announced as well as in proportion to the number of shares held by the investor.
2. The number of outstanding shares decreases in the case of buyback as some portion of equity shares that are bought back by the company gets extinguished but there is no such impact in the case of dividends.
3. All of the shares offered for buyback may or may not be accepted but in the case of dividend each of the shareholders is entitled to get dividend income.
4. Companies tend to declare a reward in the form of a regular, annual, special, or one-time dividend. However, when it comes to sharing buybacks, there is no variation or type of it.

Brief Steps for Buy Back of Shares for Unlisted Company

1. Buyback authorization in Article of Association of the company
2. Approval from the Board of Directors (BOD) and shareholders (Note: Special resolution passed by the shareholders if the quantum of Buy-Back is up to 25% of the aggregate of free reserves and paid-up capital of the company, or Approval from board of directors if the quantum of Buy-Back is up to 10% of the aggregate of free reserves and paid-up capital of the company):
3. Filing of Form MGT 14 with Registrar of Companies within 30 days of passing special resolution by shareholders of the company
4. Letter of the offer has to be filed with Registrar of Companies in form SH-8 which must be signed by not less than 2 directors and one of the directors signing the document shall be the Managing Director, where there is one.
5. Filing of Declaration of Solvency with Registrar of Companies in form SH-9 and signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit as specified in the said Form.
6. The letter of offer shall be dispatched to the shareholders.
7. Offer of buyback to remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer.
8. Verification and acceptance of Buy-Back offer
9. Company shall open separate bank accounts for the shareholders who have accepted such offer and the due amount is to deposit in that account.
10. Payment of consideration within 7 days of verification to those shareholders whose shares have been accepted.
11. Return of share certificate of unaccepted shares
12. Destruction of share certificates
13. Shares and securities which have been bought back shall be properly accounted in a register of shares or securities bought-back in SH-10.
14. Return of Buy-Back in the form SH-11 shall be filed with the registrar within 30 days of completion of the process of Buy-Back.
15. Along with SH-11 form, the company shall file with the registrar compliance certificate in form SH-15 which shall be annexed with form SH-11.

Penalty for Default in Buy Back Procedure

Section 68 of the Companies Act, 2013 provides for the penalty in case of default. The company shall be liable to pay fine, not less than Rs.1 Lakhs which might be extended up to Rs.3 Lakhs. Every officer of the company who is in default shall be punishable with a fine of an amount not less than Rs.1 Lakh and which also might be extended up to Rs.3 Lakhs. 

This article has been Compiled by Swati Garg (Senior Associate).You can direct your queries or comments to the author at swati@factumlegal.com
 Disclaimer-
The contents of this article should not be construed as a legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

INSIDER TRADING

Insider trading is nothing but a ‘white collar’ crime, which also results in conflict of interests. Concerns with insider trading arises as there is a likely damage to public confidence since there is clear intention to defraud the public when those with inside knowledge use that knowledge to make profit in their dealings of securities. This is nothing but unfair use of the insider information for making private gains.

Once the instances of insider trading felt, it was then that the erstwhile regulations i.e., SEBI (Prohibition of Insider Trading) Regulations, 1992 (1992 Regulations) were recommended after taking into consideration the provisions as contained in the US and UK laws. Who will be an insider and what information should be regarded as price sensitive amongst other provisions was laid down by way of the said regulations.

The 1992 Regulations had been replaced by SEBI (Prohibition of Insider Trading) Regulations, 2015 (the “Regulations”). The Regulations contained several new features, the scope of the Regulations was widened and the net of the provisions was casted too wider to get within its ambit almost every person who can be deemed to be an insider so as to curb this unfair trade practice

Regulator

SEBI regulates insider trading. Section 11 (2) (g) of SEBI Act, 1992 specifies prohibiting insider trading in securities as a function of SEBI. Further, SEBI has been empowered under Section 12A read with Section 30 of SEBI Act, 1992 to make regulations for prohibition of insider trading. By virtue of the aforesaid power, SEBI issued the Regulations repealing the 1992 Regulations

Trading Plan

Insiders who are perpetually in possession of UPSI such persons cannot be rendered incapable of trading in securities throughout the year. In such a situation, an Insider will be permitted to formulate in advance to effect trade at a subsequent date. By that time such insider would be in possession of new UPSI and the one they possessed at the time of formulating the plan would then be generally available.

A trading plan is to accommodate firm plans to acquire/ dispose off securities typically by strategic shareholders. For example, a holding company may have plan to do disposal of its subsidiary at a pre-specific time. Also, promoters of the company may have a firm plan to do a creeping acquisition of securities in their controlled company. These plans are pre announced, and are firm plans irrespective of the prevailing price. Hence, they are insensitive to prices, and hence, are presumably immune from allegations of insider trading.

Trading plan are required to be framed by such insiders who are at all times in possession of UPSI and the plan is required to be reviewed and approve and monitor implementation of the trading plan.

 

Steps which companies are required to ensure under Regulation

• Identify and designate a compliance officer to administer the Code of Conduct and another requirements under these Regulations;
• Formulate and publish on its official website, a Code of Practices and Procedures for Fair Disclosure (Code of Fair Disclosure) of UPSI that the Board will follow to ensure uniform dissemination of UPSI;
• Having a policy for determination of legitimate purpose, which should be an approach driven policy and shall be a part of the Code of Fair Disclosure.
• Formulate a Code of Conduct to regulate, monitor and report trading by the Designated Persons and their immediate relatives as prescribed in Schedule B and or Schedule C, as the case may be.
• Maintaining a Structural Digital Database of persons with whom UPSI is shared;
• Putting in place adequate and effective system of internal controls to ensure compliance of the provisions of the Regulations in order to avoid insider trading:
• Review of the system of internal control by the Audit Committee atleast once a year, verifying whether the systems for internal control are adequate and are operating effectively
• Policy / mechanism to prevent any leak of UPSI and to set up the procedure for inquiry in case of leak of UPSI or suspected leak of UPSI.
• Ensuring compliance with initial and continuous disclosure requirements from the promoters, KMPs, directors, designated persons respectively and intimate the same to the stock exchange(s);

Disclosures Obligation

 Initial Disclosures (one time Disclosure)

Continual Disclosure (Event based Disclosure)

Discretion based Disclosure (Disclosers by other connected Person)

 

Regulations	Disclosures Requirement	Particulars	Time period	Format
Reg 7(1)(b) {One Time Disclosure}	Upon appointment as :- v  Promoter v  Members of the promoter Group v  KMP v  Director	Holding of Securities of the company as on the date of appointment or becoming a promoter	Within 7 days of appointment or becoming a promoter	Form B
Reg 7(2)(a) {Continual Disclosure}	v  Promoter v  Member of the promoter group v  Designated person v  Director	Number of securities acquired or disposed off in case the transaction or a series of transactions over any calendar quarter traded value exceed 10 lakh Rupees.	Within two trading days of such transaction	Form -C
Reg 7(2)(b) {Continual Disclosure}	Company required to notify to stock Exchange	In case the securities traded by promoter, members of promoters group, designated person or directors during the calendar quarter , traded value is in excess of 10 lakh Rupees	Within 2 trading days of receipts of such disclosure of becoming aware of such transaction.
Reg 4(1) proviso of clause “i” {Continual Disclosure}	Insiders	The transaction in off market inter se transfer between insiders who were in possession of material information without breach of regulation 3	Within 2 working days of such transaction	Not Specified
Reg 4(1) Second proviso of clause “i” {Continual Disclosure}	Company required to notify the stock exchange	Particulars of such trades to the stock exchange	Within 2 days of receipt of disclosure becoming aware of such information	Not specified
Reg 7(3) {Discretion based Disclosure}	v  Other connected Person v  Class of connected person	Holding /trading in securities	As determined by company	Form D

 

This Article has been Compiled by Swati Garg (Senior Associate)

You can direct your queries or comments to the author at swati@factumlegal.com

 

Disclaimer-

The contents of this article should not be construed as a legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.