Declaring a dividend is the easy part. What trips companies up is what happens to the money no one claims: a chain of deadlines that ends, after seven years, with both the dividend and the underlying shares leaving the company for a government fund.
Two clocks: pay declared dividends within 30 days; after 7 years unclaimed, the dividend and the shares transfer to the IEPF.
A company declares a dividend; most shareholders collect it, but a handful of old, untraceable folios never do. The instinct is to leave that money parked indefinitely. The law won't allow it: unpaid amounts move to a special account within days, and after seven years the unclaimed dividend — and the shares it relates to — are transferred to the Investor Education and Protection Fund. Shareholders who ignore their dividends can quietly lose their shares. Understanding this chain is what keeps a company compliant and its shareholders whole.
BOTTOM LINE
- Source: Dividend only out of profits (current or past, after depreciation) — never from revaluation or notional gains.
- Pay: within 30 days of declaration; deposit the amount in a separate account within 5 days.
- Unpaid → IEPF: unpaid amounts go to the Unpaid Dividend Account within 7 days; unclaimed for 7 years, they (and the related shares) transfer to the IEPF.
Where can a dividend come from?
Governs this section: Section 123(1), Companies Act, 2013
A dividend can be paid only from legitimate profits: the current year's profits (after providing for depreciation), undistributed profits of previous years, or both — or money provided by a government for a guarantee. Crucially, it cannot be paid out of revaluation reserves, unrealised gains or notional gains. Where profits are inadequate, a company may dip into free reserves only within the limits set by Rule 3 of the Dividend Rules.
Interim vs final dividend
Governs this section: Section 123(3)
A final dividend is recommended by the Board and declared by shareholders (ordinary resolution) at the AGM — and can't exceed the Board's recommendation. An interim dividend is declared by the Board during the year (or between year-end and the AGM), out of current surplus. One guardrail: if the company has made a loss in the current year up to the preceding quarter, an interim dividend can't be declared at a rate higher than the average of the last three years' dividends.
The 5-day and 30-day rules
Governs this section: Section 123(4) & Section 127
THE TWO DEADLINES
- 5 days: the declared dividend must be deposited in a separate scheduled-bank account within 5 days of declaration.
- 30 days: the dividend must be paid to shareholders within 30 days of declaration. Fail this, and under Section 127 every director knowingly party to the default faces imprisonment up to 2 years and a fine, and the company owes interest at 18% per annum.
The Unpaid Dividend Account
Governs this section: Section 124(1)–(2)
If a dividend is unpaid or unclaimed for 30 days, the company must transfer the unpaid amount to a special Unpaid Dividend Account in a scheduled bank within 7 days of that 30-day expiry. Within 90 days of that transfer, the company must place a statement of unpaid dividends — names, last-known addresses, amounts — on its website, so shareholders can find and claim what's theirs.
The 7-year transfer to IEPF — money and shares
Governs this section: Section 124(5)–(6) & Section 125
THE PART THAT COSTS SHAREHOLDERS THEIR SHARES
Money in the Unpaid Dividend Account that stays unclaimed for 7 years is transferred, with any interest, to the Investor Education and Protection Fund (IEPF). And the shares on which dividends have gone unpaid or unclaimed for 7 consecutive years are also transferred to the IEPF. The one reprieve: if the dividend is claimed even once during those seven years, the shares are not transferred. Dormant shareholders can lose their holdings purely through inattention.
Claiming back from the IEPF
Governs this section: IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016
Transfer to the IEPF isn't forfeiture — it's custody. A shareholder (or legal heir) can reclaim the dividend and the shares by filing Form IEPF-5 online at iepf.gov.in, then sending the signed form and documents to the company for verification before the IEPF Authority refunds. It's recoverable, but the process is slow and paperwork-heavy — far better not to let it get there.
What does non-compliance cost?
Governs this section: Section 124(7) & Section 127
PENALTY
Default under Section 124 makes the company liable to ₹1 lakh (plus ₹500/day, up to ₹10 lakh) and every officer in default ₹25,000 (plus ₹100/day, up to ₹2 lakh). Failure to pay a declared dividend within 30 days is harsher: imprisonment up to 2 years for directors knowingly in default, plus 18% interest.
Worked example
Mini-case — the shareholder who stopped checking
A shareholder holds shares but never updates her bank details, so dividends declared each year go uncollected. Each year's unpaid dividend moves to the Unpaid Dividend Account within 7 days of the 30-day window. Seven years on, the first year's unclaimed dividend transfers to the IEPF — and because no dividend on those shares has been claimed for seven straight years, the shares themselves transfer to the IEPF too. To get them back, she (or her heirs) must file IEPF-5 and run the verification process. Nothing was confiscated unfairly; the deadlines simply ran their course.
Common mistakes
- Paying dividend from revaluation/notional gains. Only real profits qualify.
- Missing the 30-day payment window. Section 127 brings director imprisonment and 18% interest.
- Leaving unpaid amounts in the operating account. They must move to the Unpaid Dividend Account within 7 days.
- Not publishing the unpaid-dividend statement. Required on the website within 90 days of transfer.
- Ignoring the 7-year share transfer. Both the money and the shares go to the IEPF — tell long-dormant shareholders to claim.
Checklist
- Confirm the dividend is sourced only from eligible profits (no revaluation gains).
- Declare correctly: final by shareholders at AGM; interim by the Board within its limits.
- Deposit in a separate account within 5 days; pay shareholders within 30 days.
- Move any unpaid amount to the Unpaid Dividend Account within 7 days of the 30-day expiry.
- Publish the unpaid-dividend statement on the website within 90 days.
- Track the 7-year clock and transfer unclaimed dividends and shares to the IEPF; help shareholders claim via IEPF-5.
FAQ
Can a dividend be paid from revaluation reserves? No. Dividends come only from profits (current or past, after depreciation), not from revaluation or notional gains.
Within how long must a declared dividend be paid? Within 30 days of declaration; otherwise Section 127 penalties (including director imprisonment) and 18% interest apply.
When does unpaid dividend go to the IEPF? After it has remained unclaimed in the Unpaid Dividend Account for 7 years; the related shares also transfer after 7 consecutive years of non-claim.
Can shares transferred to the IEPF be recovered? Yes — by filing Form IEPF-5 online and completing the company's verification and the IEPF Authority's refund process.
What's the penalty for breaching Section 124? ₹1 lakh on the company (plus ₹500/day up to ₹10 lakh) and ₹25,000 on each officer in default (plus ₹100/day up to ₹2 lakh).
Primary sources
- Sections 123, 124, 125 & 127, Companies Act, 2013
- Companies (Declaration and Payment of Dividend) Rules, 2014
- IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016; Form IEPF-5
Disclaimer: This article is general information on a fast-changing area of company law, current at the time of writing. It is not legal or professional advice for any specific company. Verify the position against the live MCA rules and consult your company secretary.