Share Transfer of a Company

Introduction:

Share in layman terms means a portion or small percentage of ownership in a company and its owner is called a shareholder. Many times, companies generate more capital or obtain a loan but not from a bank, creates its shares. The companies break down the ownership of the company into small -small percentages or proportions and then sell it to the people, banks, financial institutions, or other companies. Thus, these buyers are called a shareholder and/or creditors of the company since by way of buying these they invest money into the companies. These companies in return offer interests and dividends at the end of every fiscal year. These shares for the investor are an asset as well as a measure of interest or right in the assets of the company[1] . This is because by the sale of the shares and even just by owning it one earns profits and interests respectively.

Concept of Share Transfer

Now since shares are an asset and as per the companies act, they have been classified a movable property, these assets can be transferred to any other person, with respect to the rules provided in Articles of association.[2] Here transfer of shares means the intentional transfer of the title of the shareholder from one person( transferor) to another ( transferee ). Therefore, passing on the title of the share to someone else is called the transfer of shares of a company. many times when one buys a share, he/she also has to sign some allied contracts related to the usage, sale or interest so attained, etc.[3]

These shares can be in form of physical certificates/ documents or dematerialized or electronic documents. When in physical form they are owned as share certificates, which is a legal document, whereas in the online form they are electronically owned in a “Demat account”. A Demat account is a trading and shareholding account that is provided by banks or government institutions so as to trade and invest in shares of the companies. Having a Demat account negates the need of having physical share certificated and physical transfer of shares through Depository slip/form.

One can own shares of any company be it private or public, and all these shares are transferable however in the case of private companies there are certain restrictions. Further, these shares need to be transferred in a prescribed manner. This prescribed manner in the case of private companies is listed in the Articles of Association( AOA) of the company.

Share Transfer Limitations in the AOA

Articles of association are an integral legal document required by almost all businesses. To govern its internal affairs, every company requires a set of rules and regulations, and the AOA describes the company’s internal regulations. In simple terms, the AOA comprises the company’s bye-laws, which govern how the director and other members must carry out their duties. the companies act provides for forms or pre-determined structures under the various table( F, G, H, I, and J) in accordance to which every company has to formulate its AOA.[4] This AOA also consists of rules and regulations regarding the sale, purchase, and transfer of shares. Thus, every company especially private companies has been given discretion on forming policies on regulating the sale and transfer of shares.

Therefore, when one can only a share of a private company if the AOA of the company permits and similarly in case of transfer the AOA specified rules. For instance, an AOA may bind the shareholder to retain the shares for a fixed time period.

On the other hand, in many private companies, the share can only be transferred to another existing shareholder of the company and not in public.

Share Transfer Procedure

 Under section 58-59 of the Companies Act, 2013, the law provides for complete rules and provisions for the transfer of shares.

1. An Instrument for Transfer to be presented to the Company: A company may not register or transfer securities of the company unless and until a proper instrument of transfer has been delivered to the company, duly stamped, dated, and executed by or on behalf of the transferor and the transferee, along with the certificate relating to the securities, according to section 56(1) of the Companies Act 2013. If no such certificate exists, the associated letter of allotment of securities must be produced instead.
2. Rule 11 of Companies (Share Capital & Debentures) Rules 2014: An instrument of transfer of securities held in physical form must be in Form No. SH.4, and every instrument of transfer must be delivered to the company with the date of execution mentioned on it.
3. The period for deposition of Instrument for Transfer: Within sixty days of the date of such execution by or on behalf of the transferor and by or on behalf of the transferee, the instrument of transfer of shares, i.e., Form No. SH.4, with the date of its execution mentioned thereon, shall be delivered to the company.
4. Stamp Duty on Share Transfer: A firm cannot register a share transfer unless the transfer instrument is properly stamped and presented to the company. The company must not register the transfer of shares until a properly written and duly stamped instrument of shares has been submitted to the company, according to section 56(1) of the Companies Act 2013, which corresponds to section 108(1) of the Companies Act 1956.[5]
5. Affixation and Cancellation of Stamps: Drawing a line through a stamp on a separate sheet of paper and adding it to the transfer application or cancellation of stamps was not improper and would not invalidate the application.[6]
6. The value of Share Transfer Stamps to be Affixed on the Transfer Deed: The stamp duty on share transfers is 25 paisa for every Rs. 100 or fraction thereof in value of the shares.
7. Time Limit for the Issue of a Certificate of Transfer: [7]According to Section 56(4), unless prohibited by law or by order of a court, tribunal, or other authority, every firm must submit the certificates of all shares transferred within one month after the application for registration of the transfer of any such shares, debenture, or other security.
8. Time Limit for Refusal of Registration of Transfer:[8] According to Section 58 of the Companies Act 2013, the company must exercise its right to refuse registration of a transfer of shares within thirty days of the day on which the instrument of transfer or notification of transfer, as the case may be, is delivered to the company.

Share Transfer Procedure: Private Company

A private company is defined as A company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed.[9] As mentioned before there is a certain restriction and limitation in case of transfer of shares of a private company. also, there is a different procedure for it in law.

The right of shareholders to move their shares is usually governed in one of two ways:

1. Pre-emption Rights:[10] When a shareholder intends to sell any or all of his securities, the securities must first be sold to the individual registered private limited partnership members at a price agreed upon by the firm’s directors or auditor. The value of a share can be calculated using the formula/method specified in the Articles of Association. The company’s shares can be freely transferred to an outside group if there are no present shareholders.
2. Directors’ Denial Powers: The Manager may have the authority to deny, under certain circumstances, the registration of a securities transfer as provided for in the AOA.

Process of Share Transfer[11]

1. The articles of association of a Private Limited Company must be reviewed and limits discussed.
2. The shareholder will notify the Company’s Manager in writing of his or her intention to sell the company’s stock.
3. Determine the price in accordance with the company’s articles of association, in which the company’s shares are sold first to its present shareholders. (The Company Directors or the Company Auditor normally decide on this pricing.)
4. The corporation will then notify the other shareholders of the availability of shares and the stock’s final purchase date. If any present shareholders wish to purchase additional shares, they must be allotted these shares. When no existing shareholder is interested in the shares or there are excess shares available, they might be transferred to an external partner.
5. Get both the transferor and the transferee to sign the SH-4 Share Transfer Act.
6. The transfer certificate shall be stamped in accordance with the Indian Stamp Act and the Stamp Duty Notice in effect in the state in question. For every 100 rupees of share value or part thereof, the official share transfer rate is 25 paisa. Remember to invalidate any stamps that were issued at the time the transfer deed was executed or prior.
7. The signatures of the transferor and the transferor of a share transfer deed must be witnessed by a person who gives his or her signature, name, and address.
8. Replace the share certificate or allocation letter with the share transfer deed and send it to the corporation. Within sixty ( 60 ) days of the date of execution, and in or on behalf of the client, a share transfer deed must be deposited with the firm, in or on behalf of the customer.
9. After receiving the share transfer deed, the Board will consider it. The Board will register the transfer by resolution if the share transfer documentation is in order.

In this process, certain time limits are to be followed:

1. Businesses with a share capital: The Firm shall not register any transfer of shares of the company or any ownership interest in it other than beneficial owners without an appropriate transfer instrument within 60 days of its execution.
2. Application by the transferor alone: The transfer will not be registered unless the company notifies the transferor and the transferor notifies the company within two weeks of receiving the notice.
3. Certificate of no opposition: The corporation shall issue certificates to all stocks allocated/transferred/transmitted in the following scenarios and within the following time limits: –

Ways of Transfer [12]

A share can be transferred by way of gift or by way of inheritance. When someone acquires shares by way of inheritance after the death of the original shareholder it is called transmission of shares[13]. In the case of gift,s the procedure for transfer of title is the same as discussed above.

DIS- depository instruction slip, is a form by which one can physically transfer shares. The original shareholder fills this form with the details of an account of the transferor and transferee, the name, number and value shares, etc. this form is then submitted physically to the broker, and he/she then transfers the said amount shares to the other person. When this slip is filled electrically or online, it is called EDIS.

Demat account- as discussed before it is a trading account for transfer sale and purchase of shares. This is survives provided by govt instructions, private banks, and even start-up e-commerce like Zerodha. These organisation let you operate a Demat account through which one can easily transfer shares with respect to the rules and resections of the owner company

Delivery of Share Certificates[14]

 A share certificate is a document provided by a company that certifies that the individual identified on the certificate is the owner of the Company’s shares as stated on the certificate. Following their incorporation, companies are required by the Indian Companies Act to issue share certificates. Following the company’s incorporation, the company must issue share certificates within two months of the incorporation date. When new or existing shareholders are allocated extra shares, the share certificates should be issued within two months after the allotment date. In the case of share transfers, the share certificates should be issued to the transferees within one month of the Company receiving the instrument of transfer.

Share Certificates: Preparation and Printing

The company secretary must arrange the form of the share certificate in accordance with the Articles of Association’s recommendations. According to the terms of the governing law, the secretary must have the form printed with all of the relevant details. With the help of the application register and allotment sheets, the secretary must fill in all of the details on the share certificate.

Share Certificates: Delivery 

The company secretary must notify all shareholders that share certificates are available and will be handed in exchange for allocation letters and a banker’s receipt confirming payment of the allotment money. A public notification should be produced for the members’ general information. Members who submit their allotment letters will get their share certificates via registered mail. Local shareholders can pick up their share certificates at the company’s registered office or from an agency designated to send them out.

Conclusion

Conclusively, it can be understood that shares have been recognized as movable assets under the Companies act 2013. Thus, like other assets one gives away the title of its shareholding to someone else, with respect to the rules and regulations applicable. These shares can be gifted or also be inherited after the original holder’s death, however, then it would be called transmission of shares. In the case of public companies, there aren’t many of restrictions and the share can be easily transferred. However private companies reserve the right of rotating the share amongst their already listed shareholders. Further, it is pertinent to note that with the advent of digitalization the concept of Demat accounts has emerged. These accounts have made share trading and transfer easy and remove the hassles of dealing with brokers. Moreover, the laws applied by the government are such that they ensure safety and security at every step by providing numerous compliances and checks in the whole process. Hence one can seriously consider investing in shares and considering it a part of their asset building.

---

References:

[1] Section 2(84) of the Companies Act, 2013.

[2] Section 44 of the Companies Act 2013

[3] Section 56 of Companies act 2013

[4] Schedule 1 of companies act 2013

[5] SHRI PARVEEN SHARDA V. CHOPSANI ICE AERATED WATER AND OILS MILLS LTD

[6] VARDHMAN PUBLISHERS LTD. V. MATHRUBHUMI PRINTING & PUBLISHING CO. LTD

[7] Section 56(4) of the companies act 2013

[8] Section 58 of Companies act 2013

[9] Section 2(68) of Companies Act, 2013

[10] Section 62 of the Companies Act 2013

[11] Section 56 of companies act and Rule 11 of Companies (Share Capital & Debentures) Rules 2014

[12] Subsection 6 of section 124, companies act 2013

[13]section 56 (2) of companies act 2013

[14] Section 88 of the companies act and Rule 5(4) of Companies Rules, 2014