A share certificate is a prima facie evidence of the title of the person holding the shares in the company. The shares are movable property and transferable in nature. Shares of a company can be in physical or Demat form. Every share in a company having share capital is distinguished by its distinctive number.
As the shares are transferable, how to transfer them? In this article, we will understand the procedure to be followed by a shareholder when he is holding shares of a private limited company and wishes to transfer his shares. Also, on the contrary, the necessary steps which a company should take to give effect to such transfer.
Transfer of shares meaning
Transfer means an act by parties by which the title to the property is conveyed from one person to another. In other words, it is the passage of title to property from the owner to another person. Therefore when shares are transferred from one shareholder to another, the title to the shares are transferred from old shareholder to new shareholder and name of new shareholder is entered in the register of members of the company. Such transfer can with or without consideration or can be in the form of a gift.
Judicial interpretation for the word “Transfer”
The meaning of the word “transfer” was examined in the case of Lyle and Scott Ltd. V. Scott’s Trustees, (1960) the view presented is as under:
“Transferring a share involves a series of steps, first and agreement to sell, then the execution of the deed of transfer and finally the registration of the transfer. The word ‘transfer’ can mean the whole of these steps. Moreover, the ordinary meaning of ‘transfer’ is simply to hand over or part with something, and a shareholder who agrees to sell is parting with something. The context must determine in what sense the word is used.”
Section 56 of the Companies Act 2013
The procedure to transfer shares from one person to another is provided under Section 56 of the Companies Act, 2013 read with Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014.
Below is the detailed analysis of Section 56 with respect to the transfer of shares read with Rule 11 of Companies (Share Capital and Debentures) Rules, 2014
- The transfer shall be executed by a proper instrument of transfer i.e. Form SH-4, duly stamped, dated and executed by or on behalf of the transferor and the transferee, specifying the name, address and occupation, if any, of the transferee.
- The duly executed transfer deed shall be delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities.
- Where shares to be transferred are partly paid, and the application for transfer is made by transferor alone, the transfer shall not be registered, unless the company gives the notice of the application, in Form SH-5, to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of the notice.
- The company shall within a period of one month from the date of receipt by the company of the instrument of transfer, shall deliver share certificates to the transferee. In the case of specified IFSC Private Limited company within a period of 60 days from the date of receipt of the instrument of transfer.
- The transfer of any security of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.
Restrictions on Share Transfer of private limited company by Articles of Association
The important feature of a private company is restricting the right to transfer its shares and such restriction is provided by the Articles of Association of the company. The restriction on rights of shareholders to transfer shares are usually in two forms:
- Right of preemption : It means offering shares first to the existing shareholders of the company. If a shareholder wishes to sell some or all of his shares, then such shares must first be offered to the existing shareholders of the private limited company at a price determined by the Directors or the Auditor of the Company. The value of the shares can be determined on the basis of formula / method prescribed in the Articles of Association. If no existing shareholder is interested, then shares of the Company can be freely transferred to an outsider.
- Directors power to refuse : The Articles of Association of the company may provide such circumstances under which the Directors of the company shall have right to refuse registration of transfer of shares.
Here it is important to note that the restrictions contained in the Articles of Association shall be binding on the company and the shareholders and not any other private agreement between the parties or company. Also, the Articles cannot provide for the total prohibition on the right to transfer shares by the shareholders.
- Share Transfer in violation of Articles of Association of the company is Void
- Share Transfer without consideration is Void and
- If the Articles of Association provides for any specific procedure for transfer of shares in the company, then the same shall be adhered to.
Share Transfer Form or Instrument of Transfer
Transfer between 2 persons, where shares are held in physical form shall be executed by a proper instrument of transfer i.e. Form SH-4. Every instrument of transfer with the date of its execution specified thereon shall be delivered to the company within sixty days from the date of such execution.
Market Value of Shares and Stamp Duty on Transfer of shares
The recent amendments in the Indian Stamp Act, 1899, has introduced a new term “Market value” for levying and collection of stamp duty on issue or transfer of securities. The amended Indian Stamp Act became effective from 1st April 2020, which streamlines the process of levying and collection of Stamp Duty on the Instruments related to issue or transfer of securities, by all the States through common agencies i.e. Stock Exchanges or Clearing Corporations or Depositories, as the case may be. The Stamp Duty shall be levied and collected on the basis of the market value of securities.
The term ‘Market Value’ has been newly introduced in the Indian Stamp Act. The “Market Value”, in relation to an instrument through which—
(a) any security is traded in a stock exchange, means the price at which it is so traded;
(b) any security which is transferred through a depository but not traded in the stock exchange, means the price or the consideration mentioned in such instrument;
(c) any security is dealt otherwise than in the stock exchange or depository, means the price or consideration mentioned in such instrument;”
Therefore from the above definition one can understand that the Market Value is the price at which any security is traded on a Stock Exchange. whereas if the security is not listed on the stock exchange but traded through Depository, the Market Value of such security shall be the price or consideration mentioned in the instrument of transfer.
In case the shares are held in physical form, the market value will be the amount of consideration at which such shares will be transferred.
Stamp Duty on Principle Instrument Only
The Amended Stamp Act also clarifies that no stamp duty shall be charged on any instrument (other than the principal instrument) on a single transaction.
Onus of Payment of Stamp Duty
In case of Transfer of security through a stock exchange or depository - Transferor
In case of Transfer of security otherwise than through a stock exchange or depository - Transferor
Rate of Stamp Duty on Transfer of security
Prior to the introduction of the Amended Stamp Act, stamp duty was payable at a flat rate of 0.25% of the consideration on a transfer of shares. The rates of stamp duty are provided under Section 9A and Section 9B read with Schedule I Below are amended rates of stamp duty charged on transfer of shares:
When to pay Stamp Duty
Stamp duty on transfer of shares shall be paid before or at the time of execution or immediately thereafter on the next working day following the day of execution.
Procedure for Transfer of Shares held in Physical Form
Steps to be followed before initiating the process of transfer of shares
Step 1: Review the Articles of Association of the company
Before initiating the process of transfer, it is important to review the Articles of Association of the company, and if Articles provide any restrictions or conditions or procedures, the same shall be well addressed.
Step 2: The shareholder must give notice in writing regarding intention of transfer of shares of the company.
Step 3: The price of the shares to be transferred will be determined by the Directors or Auditor of the company.
Step 4: The shares shall first be offered to the other existing shareholders of the company.
Step 5: The company shall inform the existing shareholders by giving notice in writing about the availability of shares, the last date to purchase the shares and the price at which shares are available.
If the existing shareholders do not come forward to accept the offer to purchase shares, then such shares can be made available to an outsider and can be transferred to the outsider.
Transfer of shares involve series of steps,
Step 1: Execution of share transfer deed or Form SH-4 and Submission of duly executed share transfer deed to the company
Share transfer in physical mode is executed by Form SH-4. Duly executed means share transfer deed means:
- The share transfer deed or Form SH-4 must be duly signed by the transferor and transferee.
- The date of execution of the deed must be present on Form SH-4.
- Stamp duty shall be paid in accordance with the consideration at which shares will be transferred.
- Form SH-4 shall be signed by a witness with his name, address and signature.
- Attach share certificates along with the share transfer deed and deliver the same to the company.
Step 2: Verification and scrutiny of share transfer deed
Upon receipt of duly executed share transfer deed and other accompanied documents, the company shall verify and conduct scrutiny of the documents and the details mentioned in the share transfer deed such as, name of transferor, name of the transferee, date of execution, signature of the transferor, transferee and witness, stamp duty paid or share transfer stamps affixed to the deed, share certificates attached along with the deed. Such scrutiny may require 5 to 6 days from the receipt of the duly executed share transfer documents.
In case the documents are incomplete with any respect, the same shall be returned to the transferor.
Step 3: Approval of share transfer by the company
Once the share transfer deed and other accompanied documents are verified and the same are in compliance with the requirements, the company shall approve the same. Every transfer shall be placed before the Board of Directors for their approval. The approval is given by way of resolution in this regard.
Step 4: Registration of Share Transfer
Registration of share transfer means, transferee obtaining the status as a member of the company.. Once the company approves the transfer, the name of the transferee qualifies to be entered in the Register of Members. The transfer is effective only after the name of the transferee is entered in the register of members.
Step 5: Delivery of share certificate
The share certificates to the transferee shall be issued and delivered within 1 month from the date of receipt of duly executed share transfer deed or instrument.
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