VR Logo

Unclaimed Rights and Wrongs

The law on unclaimed investments allow the government to appropriate money belonging to investors and their descendants

If you forget about a bank account, the money in it is still yours forever. No matter how many years or decades pass by, you or your descendants can turn up and claim the funds as well as the interest earned on it. That is as it should be, since the money is your property. The same is true for almost all forms of financial investments and the returns generated from them. However, through some twisted piece of legal logic, this is not true of dividends, whether from stocks or from mutual funds. If a dividend cheque is sent to you and it is not encashed, and you don't turn up to claim the money for seven years, then the money is appropriated and spent on 'investor education'.

Not Just Dividends
Actually, on closer look, it gets even more curious. It's not about dividends alone. It seems that if your investments are in any cumulative form, then the government doesn't grab it. However, if any part of your investment (or income from it) is disbursed to you, and you or your descendants are unable to claim it, then it can be grabbed away and spent on this so-called investor education. In mutual funds, if you invest in an open-ended growth plan, it's yours forever. However, if you invest in a dividend plan, or a closed-end plan (which will get automatically redeemed at a point), then the dividends and redemption money is up for grabs. If the investor shifts residence, closes a bank account, or (as often happens) passes away without leaving complete information for descendants, then after seven years, the money can be appropriated. Even if a genuine claimant appears after seven years, the money will not be restored to him or her.

This is not a small problem. For the latest year for which numbers are available (2012-13), there are Rs 1100 crore of unclaimed dividend with companies. Do note that this is the number for just the last seven years--money which is unclaimed but not yet transferred to the investor education fund. The sum with mutual funds will easily be of the same scale but I don't have updated numbers yet. The total cumulated sum is bound to be much larger. Two years ago, an article in the Economic Times gave an estimate of Rs 22,000 crore for all forms of financial investments put together, including bank accounts and insurance policies.

Arbitrary Confiscation of Private Property
There are a number of problems here. The first is,of course, the basic principle of whether the government has the right to deprive you or your descendants of your own money merely because you may not have up to date information about your investments. Second is the relevance of the seven years period. Why seven? Why not twenty or fifty or a hundred years? Lawyers tell me that the time period is probably based on the fact that a person who is untraceable for seven years is presumed to be dead in law. However, this situation clearly is very different. When someone disappears for seven years, their property is inherited by their descendants, not spent away on some dubious cause.

The other problem is that there is no standard for how much effort should be made to trace the rightful claimants. Companies and mutual funds wait for cheques to be encashed, then perhaps send one or two more letters to the same address if they feel like spending the money, and that's that. No one cares. All the while, the investors' descendants may be in financial difficulties but their money will be spent away by someone else.

Other People's Money
Of course, part of the motive must be that spending money is fun, specially when it's other people's money. In practice, investor education turns out to be an opportunity to oblige a variety of people and organisations--like the countless useless 'investor associations' around the country, or in handing out research grants and study tours. That investors' hard-up descendants may be looking for this money which is being spent in this manner is simply unjustifiable.

A Possible Solution
It's instructive to see how other countries handle this. In both the UK and the US, such unclaimed assets are held in perpetuity. No one but the rightful descendants have a right to it, ever. Not just that, the information on unclaimed assets is available publicly and there are specialist locator companies that work to trace owners. Locator companies are specialised law firms that go through the public records of unclaimed assets, trace people and then offer to help them recover the assets for a small percentage of the value. From the investors perspective, it's better to lose a small part of the money that gets used up in searching for you, rather than lose all of it to investor education.

What we need is a change in these unjust and unreasonable law, as well as provision to spend a small part of the unclaimed money to actually trace the real claimants. Currently, it is clear that no one has any interest in making that effort.