Unclaimed shares in banks caught in legal limbo

State-owned and private banks are regulated by different laws, complicating the task of investor protection. A solution could be incorporating all banks under the Companies Act of 2013

The Banking Regulation Act, 1949, empowers the Reserve Bank of India (RBI) to regulate banks, but many of its provisions do not apply to those owned by the government. A similar problem arises with the Companies Act, 2013, which applies to private banks since they are incorporated under it. State-run banks, on the other hand, are constituted under special statutes: the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, and the State Bank of India Act, 1955. Therefore, state-run banks are not strictly bound by the Companies Act. This creates peculiar problems for stakeholders, including investors. Policymakers are reportedly grappling with the problem of investor protection.

Earlier, companies would retain unpaid or unclaimed dividends in current accounts and use the funds for business purposes. To check this malpractice, Section 205A was inserted into the Companies Act, 1956, in 1976. Companies were required to open Unpaid Dividend Accounts (UDA) with any scheduled bank. Any dividend declared but not paid or claimed within 30 days was required to be transferred to a UDA. To further protect investors, Section 205C was inserted into the 1956 Act in 1999 and the Investor Education and Protection Fund (IEPF) was set up. It became mandatory for companies to transfer to the IEPF any fund lying unclaimed in the UDA for more than seven years.

These norms were automatically applicable to private banks since they were subject to company law. Consequently, these norms were specifically extended to state-run banks: Section 10B was inserted into the 1970 Act and the 1980 Act in 2006, and Section 38A was inserted into the SBI Act 1955 in 2010.

Company law is, however, not static. The Companies Act, 1956,  was replaced by the Companies Act, 2013. The new statute not only retains the earlier investor protection norms on unclaimed dividends, but goes even further. Section 124 (6) requires companies to also transfer to the IEPF any share in respect of which dividend has not been paid or claimed for seven consecutive years or more.

The IEPF is a custodian of the transferred shares. The shares do not become the property of the central government nor are they entirely obliterated. The company concerned is relieved of the responsibility of holding the shares or reflecting such shareholders in its records. The voting rights remain frozen till the rightful owner claims the shares. The shareholder continues to retain title but loses agency. The shareholder can reclaim the shares following the process laid down in the IEPF (Accounting, Audit, Transfer and Refund) Rules, 2016.

To appreciate the practical implications of these provisions, some statistics would provide further insights. At the end of FY22, the cumulative balance of unclaimed dividends with IEPF was Rs 5,262 crore and 1.0552 billion shares remained in its custody. In FY22, IEPF settled 26,044 claims, distributed 6.121 million shares and returned Rs 10.85 crore worth of dividends to rightful claimants. Evidently, IEPF is a significant institution for investor protection; shareholders in state-run banks should also be able to avail of benefits from its services.

While amending governing laws may allow state-run banks to transfer unclaimed shares to IEPF and resolve the immediate legal obstacle, the underlying problem will persist. Investor protection norms under Companies Act (2013) will keep evolving. The governing laws on these banks have to be amended each and every time to keep up with the evolving company law standards.

A simpler solution lies in ownership neutrality. The legal mechanics for this was put forth by the P J Nayak Committee in 2014. It had recommended that the Bank Nationalisation Acts of 1970 and 1980 along with SBI Act, 1955, and SBI (Subsidiary Banks) Act, 1959, be repealed; and instead all banks be incorporated under the Companies Act, 2013.

The writers are Partner; and Associate Director (Research) at Shardul Amarchand Mangaldas & Co