Dividend Held in Abeyance: Section 126 Explained
Dividend held in abeyance is what section 126 of the Companies Act, 2013 requires when a share transfer has been lodged but not yet registered. The company does not choose between the seller and the buyer. It parks the dividend in a statutory account and freezes the rights and bonus entitlements on those shares until the register catches up.
Definition
Dividend held in abeyance
is the treatment section 126 of the Companies Act, 2013 requires where an instrument of transfer has been delivered to a company but the transfer is not yet registered. The dividend goes to the Unpaid Dividend Account, and rights and bonus entitlements on those shares are kept in abeyance. Source: Companies Act, 2013, section 126.
What does a dividend held in abeyance mean under section 126?
The section describes one situation and gives it two consequences. The situation is Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company, and the company must then act notwithstanding anything contained in any other provision of this Act.
Clause (a) deals with the money. The company shall transfer the dividend in relation to such shares to the Unpaid Dividend Account referred to in section 124 unless the company is authorised by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer.
Clause (b) deals with the entitlements. The company shall keep in abeyance in relation to such shares, any offer of rights shares under clause (a) of sub-section (1) of section 62 and any issue of fully paid-up bonus shares in pursuance of first proviso to sub-section (5) of section 123.
The asymmetry between the two clauses is the point. The dividend has a default destination and one written override. The rights and bonus entitlements have no override at all in the section; they are simply held.
Written authorisation
The only route in section 126(a) of the Companies Act, 2013 by which a pending transfer's dividend reaches the transferee instead of the Unpaid Dividend Account, and it must come from the registered holder of the shares
Source: Companies Act, 2013, section 126(a)
Why does the dividend go to the Unpaid Dividend Account?
Because the company cannot safely pay either party. Section 123(5) provides that no dividend shall be paid in respect of any share except to the registered shareholder of such share or to his order or to his banker, so the transferee has no standing to be paid while the register still shows the seller. Paying the seller, meanwhile, hands the transferee's economics to someone who has parted with the shares. Section 126 resolves that by sending the money somewhere neutral rather than by deciding the question.
The account it names is the one in section 124, which exists for dividends that have been declared but not paid or claimed within thirty days. That account and the escalation that follows from it are set out in the unpaid dividend account, and the transfer of long unclaimed amounts and the underlying shares to the Investor Education and Protection Fund is described in IEPF transfer of shares.
The single override is narrow and directional. The authorisation has to be in writing and it has to come from the registered holder, not from the transferee who is waiting. A buyer whose transfer is stuck cannot authorise the company to pay the buyer.
Which rights and bonus issues are caught?
Only the two the clause names, and both are named by their exact provision.
| Entitlement | The provision section 126(b) points at |
|---|---|
| An offer of rights shares | clause (a) of sub-section (1) of section 62 |
| An issue of fully paid up bonus shares | first proviso to sub-section (5) of section 123 |
The rights issue machinery in section 62(1)(a), including the offer period and the right to renounce, is covered in further issue of share capital section 62. The distinction between a bonus issue and a split, which changes the arithmetic on a holding without either being a dividend, is set out in stock split vs bonus issue.
What does this change for someone reading a shareholding record?
It explains a gap that otherwise looks like an error. During the period a transfer sits unregistered, the register still shows the seller, the dividend sits in the Unpaid Dividend Account rather than against either name, and any rights or bonus entitlement on those shares is suspended rather than allotted. None of that is visible as a separate line in a shareholding pattern, which reports holdings as at a date rather than instruments in transit.
Physical transfers are where this most often bites, since a depository transfer settles without an instrument being lodged for registration in the same way. The declaration and payment rules that sit upstream of a dividend held in abeyance are covered in section 127 failure to pay dividend, and the difference between the two occasions on which a dividend is declared is set out in interim dividend vs final dividend.
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Frequently asked questions
When does section 126 apply?
Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company. Section 126 of the Companies Act, 2013 then governs what happens to the dividend, rights shares and bonus shares on those shares. Source: Companies Act, 2013, section 126.
Where does the dividend go while a transfer is pending?
To the Unpaid Dividend Account referred to in section 124, unless the company is authorised by the registered holder of such shares in writing to pay such dividend to the transferee specified in the instrument of transfer. Section 126(a) states both limbs. Source: Companies Act, 2013, section 126(a).
Are rights and bonus shares also held in abeyance?
Yes. Section 126(b) requires the company to keep in abeyance, in relation to such shares, any offer of rights shares under section 62(1)(a) and any issue of fully paid up bonus shares in pursuance of the first proviso to section 123(5). Source: Companies Act, 2013, section 126(b).
Can a company's articles or another provision of the Act displace section 126?
No to both, on different grounds. Articles cannot displace a statutory duty at all. And section 126 applies notwithstanding anything contained in any other provision of the Act, so the duty to divert the dividend and hold the entitlements in abeyance also operates over the ordinary dividend and rights machinery. Source: Companies Act, 2013, section 126.
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