Unpaid dividend accounts: Return benefits for India Inc

November 22, 2019 12:16 AM

Dividends remain unpaid for many reasons, including death of original holder, change of address, incorrect bank details, etc

Section 123 of this Act deals with the process of declaration of dividend, including transfer to a separate bank account of the amount of dividend payable. (Representational image)Section 123 of this Act deals with the process of declaration of dividend, including transfer to a separate bank account of the amount of dividend payable. (Representational image)

By Subramaniam R Iyer

The only reference to the term “dividend” in the Companies Act 2013 is perhaps in the Section 2(35), which states that the dividend includes any interim dividend. In general terms, the word “dividend” refers to the distribution of profits of a company to its shareholders.

A company usually distributes part of the profits, as deemed appropriate by the Board of Directors, to its shareholders. A distribution made in the course of the financial year is referred to as “interim dividend” while a dividend paid after closing of accounts of a financial year and approval by the shareholders is referred to as “final dividend”.

Section 123 of this Act deals with the process of declaration of dividend, including transfer to a separate bank account of the amount of dividend payable. The company issues dividend warrants and posts the same to each shareholder who must deposit the instruments in their bank account to receive the payment. In the case of demat shares, the transfer of funds happens electronically to the designated accounts of the shareholders.

Section 124 of the Act deals with the unpaid dividend account. The law mandates that each company shall, within seven days of the date of expiry of a time period of 30 days from the date of declaration of the dividend, transfer unpaid dividend to a separate account. In addition, various other rules and procedures are defined.

Usually, companies open a separate bank account for each dividend payout into which the exact amount of dividend declared/payable is transferred. All these accounts with banks are current accounts (non-interest bearing).

Dividends remain unpaid for a variety of reasons, including death of original holder (it can take years for getting the shares transferred to the heirs as per the cumbersome processes followed even for the smallest holdings), change of address, incorrect bank details, etc, to name a few.

Banks do not permit companies to retain unpaid dividends in fixed deposits. The amount thus outstanding in the unpaid dividend accounts, which may aggregate into hundreds of crores in rupee terms, at the national level, are earning no interest for the companies that have declared and paid dividends. In fact, the funds belonging to the public are lying idle and are only benefiting bankers who enjoy a free float on these sums.

A via media for this situation could be that the balances in unpaid dividend accounts are treated as savings bank accounts, which will enable corporates and hence the shareholding public to earn some returns on these balances while retaining the liquidity required at the bank’s end to pay any claims that are received from members. This would be akin to cheques issued by individuals maintaining savings accounts with banks.

As it is, a dividend has a history of receiving the proverbial “step-motherly treatment,” and is now subject to tax three times. First it is taxed as profits in the hands of the company, second by the corporates having to pay a substantial percentage of the dividend payout as dividend distribution tax, and third in the hands of the shareholders in excess of the prescribed limits.

It is time that this process is revisited to examine how to generate income for the shareholders of companies from these non-interest-bearing amounts lying in current accounts. RBI, SEBI, MCA should be requested to jointly formulate a scheme that balances the need to give some returns to the corporates while maintaining the liquidity in the account to pay claims immediately.

A good policy on unpaid dividend account balances will definitely “pay dividends” to all the stakeholders, i.e. the companies, shareholders and bankers.

The author is a Delhi-based chartered accountant

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