Transfer of Shares and Restrictions on a Transfer

Introduction:

The ability to transfer a company’s shares is a significant feature. Shares and debentures are both examples of movable property. They are transferable in accordance with the business’s articles, particularly the shares of any member of a public corporation. Any contract or arrangement between two or more people can be used to transfer securities. The Companies Act contains provisions that govern the transfer and transmission of securities. Death, succession, inheritance, bankruptcy, and other events can result in the loss of title to securities. In a nutshell, it’s not the same as the transfer.[1]

Shares

Shares are ownership units that represent an equal share of a company’s capital. It gives the holder an equal claim on the company’s profits as well as an equal responsibility for the company’s debts and losses.[2]

What does Share Transfer Mean?

The voluntary handing up of a company member’s rights and maybe duties is referred to as a transfer of shares (as represented in a share of the company). The rights and obligations of a share transfer occur when a shareholder wanting to no longer be a member of the firm transfers his or her shares to someone who wishes to join.[3]

In the absence of any specific restrictions in the articles of incorporation, shares in a corporation are transferable like any other movable property.

Share Transfer Participants and Memorandum Subscribers

• In the event of a decedent, a legal representative is appointed.
• Transferor.
• Transferee.
• Company (listed or unlisted).

Procedure of Share Transfer[4]

To begin, receive the transfer deed in the necessary format, i.e. The prescribed authority must sign Form SH-4.

In the following situations, the transfer instrument must not be in the prescribed form (Form SH-4):

1. Under section 187 of the Companies Act, 2013, a director or nominee transfers shares on behalf of another body corporate.
2. When a director or nominee transfers stock on behalf of a government-owned or controlled corporation;
3. If they are created using any of the following, shares transferred by way of deposit as a security for repayment of any loan or advance:
4. State Bank of India.
5. Any other scheduled bank.
6. Financial Institution.
7. Central Government.
8. State Government;
9. Any corporation held by the Central or State Government; or
10. Trustees who have made the declarations.
11. A standard format can be utilised as the instrument of transfer for transferring debentures.
12. Get the Articles of Association for shares, the trust deed for debentures, and the transfer deed registered in line with the Companies Act, 2013, either by the transferor and the transferee or on their behalf.
13. The transfer deed shall have stamps according to the Indian Stamp Act and the stamp duty notification in effect in the state concerned. The current stamp duty rate for share transfers is 25 paise per one hundred rupees of the share’s or part’s value. That means the stamp duty on shares worth Rs. 1,050 will be Rs. 2.75.
14. Verify that the stamp on the transfer deed has been cancelled at the moment of signing or shortly before.
15. The transferor and the transferee must sign the share/debentures transfer deed in person before a person can submit his signature, name, and address as consent for the transfer.
16. The transfer deed must be accompanied by the applicable share/debenture certificate or allocation letter, which must be provided to the corporation.
17. If the transferor’s application is for partially paid shares, the corporation must advise the transferee of the amount owed on the shares/debentures. In addition, the transferee must submit a no objection letter within two weeks after receiving the notice.
18. If the signed transfer deed is missing, stamp a written application with the equivalent value stamp. In this scenario, the board may register the transfer on the basis of certain indemnity terms that it deems appropriate.
19. If the firm’s shares are traded on a recognised stock market, the corporation cannot charge a fee for the registration of share and debenture transfers.

Documentation Needed for Share Transfer [5]

• The transferor’s notice to the company.
• Board Resolution to Consider the Transferor’s Notice to the Company.
• Company’s letter of offer to existing shareholders.
• Existing shareholder dissent letter.
• SH-4 form share transfer deed with stamp duty paid.
• Distribute certificates.
• Share transfer registration resolution by the board of directors.

Time Constraints to Share Transfer

1. A company with a share capital: A company with a share capital shall not register a transfer of the company’s securities or a member’s interest in the company other than beneficial owners without a proper instrument of transfer within 60 days of execution.
2. Application by the transferor alone: The transfer will not be registered until the company notifies the transferor of the application and the transferee provides a no-objection certificate within two weeks of receiving the notice.
3. In the following instances and within the time restrictions specified, the company shall deliver certificates of all securities allotted, transferred, or transmitted:-

In the event of memorandum subscribers, within two months of the date of formation.

• If any of its shares are allotted, it must be claimed within two months of the date of allotment.
• Within one month after the date of receipt, the corporation receives the instrument of transfer/intimation of transmission.
• Debenture allotment — within six months of the date of allocation.

Penalties

The Companies Act may specify the maximum and lowest penalty amounts for a specific offence. However, the Act should also state that when determining the amount of a penalty, the levying authority must examine the size of the company, the nature of its business, the harm to the public interest, the kind and gravity of the default, the frequency of the default, and other factors.

Any person who acquires a stake in violation of section 108A [6] is subject to imprisonment for a term of up to three years, a fine of up to fifty thousand rupees, or both. The minimum and maximum amounts for a company are Rs. 25,000 and Rs. 5,00,000. For a defaulting officer, the minimum salary is Rs. 10,000 and the maximum salary is Rs. 1,00,000.

Penalty Recoveries

The Central Government shall be allowed to collect penalty sums as land revenue arrears by attaching and selling the person in default’s moveable/immovable property, or by appointing a Receiver to handle the person’s properties. For late payment of the penalty, the authority imposing the penalty may charge interest or extra penalties. In order to discourage the filing of frivolous appeals, the appellate authorities may be given the power to award costs.

Case Related to Share transfer

M/S. Harinagar Sugar Mills Ltd vs Shyam Sundar Jhunjhunwala[7]

M/s. Harinagar Sugar Mills, Ltd. is a public limited company that was established in 1913 under the Indian Companies Act 7. The company’s directors have entire authority under Article 47B of its Articles of Association to refuse to record any transfer of shares. “The directors may, in their sole discretion and without giving any reason, refuse to register any transfer of any shares, whether such shares are fully paid or not,” reads the article. If the directors decline to register the transfer of any shares, they must notify the transferees and the transferor within two months of the date on which the transfer was filed with the business. A block of 9500 fully paid up shares of the company is held by one Banarasi Prasad Jhunjhunwala. In January 1953, he executed transfers in respect of 2500 out of those shares in favour of his son Shyam Sunder and in respect of 2100 shares in favour of his daughter-in-law Savitadevi and lodged the transfers with the company for registration of the shares in the names of the transferees. The company’s directors, purportedly exercising their powers under Art. 47B of the Articles of Association, denied registering the shares in the names of the transferees by decision dated August 1, 1953. Banarasi Prasad and the transferees then filed petitions in the Bombay High Court of Judicature for orders under Section 38 of the Indian Companies Act, 1913, for rectification of the company’s register, claiming that the board of directors’ refusal to register the transfer of the shares was “mala fide, arbitrary, and capricious,” and that the directors had acted improperly and capriciously. These petitions were dismissed by the High Court, which held that in summary proceedings under S. 38, contentious questions of law and fact could not be tried and that the transferees’ proper remedy was to sue. If so advised, the next step was to initiate a civil lawsuit for remedy. The transferees wrote to the firm again on February 29, 1956, requesting the company to record the transfers made by Banarasi Prasad in 1953. The company’s directors reaffirmed their earlier decision not to register the shares transferred in the names of the transferees at their meeting on March 15, 1956. Appeals were filed with the Central Government against the company’s actions under S. 111, cl. (3) of the Indian Companies Act, 1956, which had been in effect since April 1, 1956. The appeals were considered by K. R. P. Ayyangar, Joint Secretary, Ministry of Finance, who denied to order registration of transfers since, in his opinion, the issues addressed in the appeals could only be resolved in a civil matter, as advised by the High Court of Bombay. Banarasi Prasad then transferred a block of 100 shares to his son Shyam Sunder and another block of 100 shares to his daughter-in-law Savitadevi, and the transferees wrote to the firm on November 21, 1956, requesting that the corporation transfer the shares to them. The company’s directors decided not to register the transfers during a meeting on January 12, 1957, and informed the transferees of their decision. Shyam Sunder and Savitadevi filed separate appeals to the Central Government under Section 111, clause (3) of the Indian Companies Act, 1956, in response to this decision. The rejection to register the transfer of shares was claimed to be without “any rationale, arbitrary, and untenable” in paragraph 4 of the petitions of appeal. The corporation submitted representations claiming that the refusal was legitimate and not “arbitrary and untenable” as claimed. Shyam Sunder and Savitadevi responded to the representations, claiming that they never claimed that the rejection to transfer the shares was “arbitrary or untenable,” only that it was “without any basis.” The Deputy Secretary to the Government of India, Ministry of Finance, set aside the resolution passed by the board of directors in the exercise of the powers conferred by sub-sections (5) and (6) of Section 111 of the Indian Companies Act, 1956, and directed the company to register the transfers by separate orders dated May 29, 1957. The Deputy Secretary provided no justifications for this directive. The corporation prefers these two appeals against the Deputy Secretary’s instructions, which were issued with special leave under Article 136 of the Constitution. In these appeals, two issues must be resolved. (1) Whether the Central Government, in exercising appellate powers under S. 111 of the Companies Act, 1956, prior to its amendment by Act 65 of 1960, is a tribunal with judicial functions subject to this Court’s appellate jurisdiction under Art.136 of the Constitution, and (2) whether the Central Government acted in excess of its jurisdiction or otherwise acted illegally in directing t

Restriction of Share Transfer

One of the hallmarks of a private company is its restriction on share transferability; in order to be a private company, it must provide for such restrictions in its Articles of Association (hereinafter referred to as “AoA”), which is one of the three constitutional documents of a company [the other two being the Memorandum of Association (hereinafter referred to as “MoA”), which is one of the three constitutional documents of a company [the other two being the Memorandum The AoA is a document that lays out the rules for a company’s operations, defining the firm’s purpose and laying out how duties are to be completed inside the company. Because they explain the methods for doing the day-to-day tasks that must be accomplished, this set of rules might be considered a user’s handbook for the organisation.[8]

This has been statutorily codified in Section 2(68)(i) of the Companies Act, 2013 (hence referred to as the “2013 Act”), which states that a private company is defined as one that restricts the rights to transfer its shares through its Articles[9]

The purpose of a private corporation is twofold: To begin with, to make it easier for a small, close-knit group of members to conduct business and trade by allowing them to make use of corporate trading and company forms. When opposed to a partnership, the structure of a company provides several advantages and also reduces the liability of each member by separating the business from the individual. Second, private corporations are preferred over public companies due to the massive volume of corporate filings and obligations that a public company must comply with.[10]

The Partnership Principle, which is the soul and foundation of private corporations, imposes restrictions on the transfer of shares in those companies. As previously indicated, these constraints are regarded as necessary in a private firm, which is typically a collection of traders connected together by tight familial and/or friendship connections. These close bonds are difficult to form with just anybody, hence these members try to maintain the shares of such a company within the group. This pushes them to set a variety of restrictions in order to prevent the admission of members who may be unfriendly or antagonistic to the existing members, hence preventing the dilution of control over the organisation.[11]

These restrictions on share transfers aim to preserve the company’s “spirit and base.” The reason for these restrictions in a private company has been consistently affirmed by the courts, and as a result, they have acted as guardians of private firms, allowing them to keep a significant amount of control over who they admit as members.[12]

Transferability of Shares is Restricted in Comparison to Other Assets: Companies (Private and Public)

Despite what has already been stated, and at the risk of redundancy, it is vital to state that the transferability of a business’s shares is nearly entirely reliant on whether the firm is public or private. Having said that, the courts have given diverse interpretations as to what is and isn’t acceptable by way of a restriction, as well as whether shareholders of a public business are entirely banned from dealing with their own shares as they like.

In Private Companies, There is a Restriction on the Transferability of Shares

As previously noted, imposing these limits is a requirement for a company wanting to be classified as a private company; it is one of the distinguishing characteristics of a private company. The right of pre-emption in favour of other members and the ability of the Board of Directors (hereafter referred to as “BoD”) to refuse to register the transfer of shares are the most common restrictions on the transfer of shares in private firms.

There are two types of restrictions on a shareholder’s right to transfer their shares:

1. Preemption right in favour of the other members
2. The Board of Directors has the authority to refuse to register a transfer of shares.

Preemption Right

The terms “right of first offer” and “right of first refusal” are commonly used to describe pre-emption rights. The restriction essentially incorporates the notion that if a private company’s shareholder decides to sell any shares, existing shareholders have the right to be offered these shares first, and if they refuse or do not act within a certain amount of time, the shares can be sold to a third party. The goal of this restriction is to keep the promoter’s and other important shareholders’ stakes in the company from dilution. This right of preemption is generally stipulated in shareholder agreements between the company’s numerous stakeholders.[13]

The Board of Directors has the Authority to Refuse to Register a Transfer

A private company’s articles usually provide the Board of Director’s discretion over whether or not to accept a share transfer. The Board’s authority is fiduciary in nature, which means it must be exercised in good faith and for the benefit of the firm, not for personal gain. According to Section 58 of the 2013 Act, the BoD must notify the firm of the denial within 30 days of receiving the instrument of transfer, or the intimation of such transmission, as the case may be, and must provide grounds for the refusal. This denial can be challenged before the National Company Law Tribunal (hereafter referred to as “NCLT”), which will issue any instructions it sees fit. The Company Law Board (the precursor of the NCLT and hereinafter referred to as “CLB”) has been given several rulings about its authority to hear appeals against refusals to register transfers under Section 111 of the Companies Act, 1956. (This Section corresponds to Section 58 under the 2013 Act).

Case Law Related to Restrictions of Shares.

Chiran ji La lJasrasaria and Anr. v. Mahabir Dhelia and Ors.[14]

This is the appeal of the defendants. Defendant No. 3, Dhelia Brothers Private Ltd. WHS, was established in 1951 as a private limited company under the Indian Companies Act 1913, with its registered office in Ouphalia Tea Estate, Moran district, Lakhlmpur. The company’s permitted capital is Rs. 1,00,000, divided into 10,000 ordinary shares of Rs. 10 each, with Rs. 48,000 in subscribed and fully paid-up capital. This corporation had four shareholders. Mrs. Nanki Dhelia Plaintiff No. 2 held 200 shares, Keshoredeo Dhelia Defendant No. 4 had 4,200 shares, Sheokishon Dhelia Plaintiff No. 3 had 200 shares, Mohahir Dhelia Plaintiff No. 1 had 200 shares, and Keshoredeo Dhelia Defendant No. 4 had 4,200 shares. As a result, the Plaintiff-Respondents controlled 600 shares of the company. Defendant No. 4 was initially appointed as the Company’s Managing Director. The Plaintiffs learned that Defendant No. 4 transferred 1300 shares to Defendant No. 1 Sri Chiranjilal Jasrasaria and 1200 shares to Defendant No. 2 Srimati Bhawani Debi Jasrasaria out of his 1200 shares. The Plaintiffs further learned that Defendant No. 1 had been declaring himself to be the company’s legitimately elected managing director. In these circumstances, the Plaintiffs filed a lawsuit seeking a determination that Defendant No. 4’s transfer of 2500 shares of Defendant No. 3 to Defendants Nos. 1 and 2 were illegal and without jurisdiction and that Defendants 1 and 2 were not shareholders of the corporation. Defendants 1 and 2 were sued for a permanent injunction prohibiting them from interfering with the affairs and administration of Defendant No. 3 Company. A mandatory injunction was also requested against Defendant No. 1, requiring him to surrender the company’s books to the Plaintiffs. The trial court, on the other hand, has decided the complaint about a declaration that Defendant No. 4’s transfer of the shares to Defendants Nos. 1 and 2 was illegal, as well as a permanent injunction prohibiting Defendants Nos. 1 and 2 from interfering with the company’s business and management. The defendants have filed this appeal against the trial court’s decision. The Appellant’s first argument is that the litigation could not be maintained. His argument is that the complaint is effectively a request for the revision of the company’s register, which can only be allowed by the High Court under its business jurisdiction. The rectification of the company’s register can be done by the High Court under Section 38 of the Indian Companies Act, 1913, since the High Court is the court as stated under the Companies Act. However, a civil complaint about a determination that the transfer is illegal is not barred. In fact, a civil court is a proper forum for resolving difficult disputes of title, and such matters cannot be resolved in a short action under the provision.

Conclusion

Thus, the aforementioned provisions indicate that the shares of a public limited company are movable property, freely transferable and that this transferability is unrestricted even by the Company’s Articles of Association, and is only subject to the statutory checks set forth in Sec. 111A (3). As a result, the free transferability of public limited company shares is ensured, with the ability to impose reasonable restrictions on transferability.[15]

The restrictions on share transfers sound reasonable, especially given that the proposed transferee has the option of filing a complaint with the Tribunal if the BoD appears to have employed its refusal powers arbitrarily or in bad faith. These limits assist preserve the private business’s purity while also allowing the founders/promoters to keep majority ownership and therefore steer the company in the desired direction. The Companies Act of 1956, Section 155, corresponds to Section 38 of the Indian Companies Act of 1913. We completely agree with the opinions given in the cases cited above in which the question of the interpretation of Section 38 of the Act of 1913 was at issue. As a result, the Appellants’ claim that the complaint was not maintainable is without merit.

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References:

[1]https://cleartax.in/s/share-transfer

[2]www.businessdictionary.com/definition/share.html

[3]https://www.inniaccounts.co.uk/knowledge-hub/article/what-is-a-share-transfer/

[4] Under the Companies Act of 2013

[5]https://www.google.com/amp/s/taxguru.in/company-law/transfer-share-draft-documents-companies-act-2013.html%3famp

[6] Companies Act, 2013

[7]1961 AIR 1669

[8] Articles of Association’; Available at http://www.investopedia.com/terms/a/articles-of-association.asp,

[9] Section 2 of the Companies Act, 2013

[10] Restriction on Transfer Of Shares’, Available at https://www.lawteacher.net/free-law-essays/finance-law/restriction-on-transfer-of-shares.php;

[11] Ibid.

[12]Section 58 of the Companies Act, 2013.

[13]Avtar Singh, “Company Law” Annual Survey of Indian Law, Vol. XV (1979) .

[14]AIR 1966 Gau 48.

[15]http://www.legalserviceindia.com/article/l232-Share-Transfer-Restrictions.html