Know Your Compliance for Share Transfer
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Basic Facts on Share Transfer
- The shareholding of the Company decides the ownership of a Private Limited Company in India. For inducting new investors or transferring the Company's ownership, the Company's shares must be transferred. The Company's interest could be sold to attract new investors or to pass control of the Company.
- The share transfer is possible only through a contract or arrangement between two or more persons. The provisions of the Companies Act majorly deal with the transfer and transmission of securities.
- The transmission of the securities due to death, succession, inheritance, bankruptcy, etc. The transfer of securities is possible through any contract or arrangement between two or more persons.
- The provisions of the Companies Act deal with the transfer and transmission of securities. Transmissions of the securities mean the loss of titles on these securities due to death, succession, inheritance, bankruptcy, etc.
What is a Share Transfer?
- Transfer of shares means handing a company member's rights and duties voluntarily.
- The rights and the duties of the share transfer happen from the shareholder who wishes to not be a member of the company anymore to a person who is willing to be a member of the company.
- Thus the shares in a company are transferable like any other movable property in the absence of the expressed restrictions under the Articles of the Company.
Who is involved in Share transfer?
Subscribers to the memorandum
The legal representative in the case of a deceased
Transferor
Transferee
Company (Whether listed or unlisted)
Procedure to transfer the shares of Private Limited Company
There are certain restrictions over the transfer of the shares of the Private Limited company. The following procedure should be followed to transfer the shares:
- At first, it is necessary to obtain the share transfer deed as required in the prescribed format.
- The transferor and the transferee must duly sign this deed.
- Stamp this transfer of share transfer deed with their name, address, and signature.
- The transfer document or the allocation letter will be attached to the share certificate and sent to the company.
- The company should process the paperwork, and the transferor should be granted a new certificate if accepted.
- The transferor will request the company to transfer his shares.
- The Company will notify all the existing members that the shareholder mentioned above has shown the intention to transfer the shares.
- If no existing member has shown interest in the company, the company will inform the transferor that he can sell his shares to a nonmember.
Form SH-4:
- Execution date
- CIN of the company
- Name of the Company
- Class of the securities
- Nominal value/ Amount called up/ Amount paid up of the securities.
- The securities to be transferred at a consideration or ₹___ Distinctive no. of shares, certificate no.
- Name of the transferor along with his Folio No, Signature. Also, the same should be witnessed.
- Name of the transferee and details like Father’s name, address, Email id, occupation, Folio, and Signature.
- The instrument of the transfer should be duly stamped as per the Indian Stamp Act. of 1899.
Transfer of share by Physical mode
The delivery of the possession can transfer the ownership of the shares. Still, there is a contractual relationship between the members and the company.
When the transfer of the shares happens, an instrument of transfer is required. Transferring the shares is a lengthy procedure that starts with the agreement to sell, and there is an execution of the transfer deed and, finally, the transfer registration.
Transfer Deed
- The transferor transferee should execute the share transfer deed as an instrument. This share transfer deed is to be duly signed and delivered to the Company along with the certificate relevant to the transferred shares.
- The Company will not accept any instrument of the transfer which is not in confirmation with these provisions. The transfer should be executed in Form SH 4 in the physical mode.
Acknowledgement
At times, the companies send an acknowledgement of the instrument to the transferor who has lodged a transfer with the Company before scrutinising the documents. This notice comes in the form of a letter with a checklist for scrutinising the transfer documents.
Some companies also issue transfer receipts. In case the transferor and payment make the transfer application for the shares of the Company is partly made. The Company should not have any objection to transferring the shares within 2 weeks from the receipt of the issued notice.
The Company is not statutorily obliged to notify the transferor when the transferee lodges the transfer of the documents.
Scrutiny
Scrutiny should be done on the receipts of all the transfer documents to endure that all the documents are in place. If the transfer of the documents is unacceptable, they should be returned to the transferee.
Also, in case the signature of the transferor is different in the transfer instrument and the signature in the Company's record, then the documents will be returned.
Approval
- The Board of Directors or the committee must approve every share transfer. The registration happens only after the approval. The right authority is required to approve it if everything is accepted after the scrutiny, and the board must allow the transfer of shares.
- Suppose the Articles of Association of the Company empowers the board to delegate the power of approval of share transfer. In that case, it may also delegate to another committee which does not include the directors of the Company.
Registration
Any share transfers us complete with the registration of the share transfer. A share transfer form is a document through which the transferee agrees to accept the shares. This becomes a legal contract with the Company.
Once the Company approves and also registers the transferee’s name that is entered in the registry, it qualifies him as a member of the Company. Maintenance of the register of the transfer is not a statutory requirement.
Delivery of Share Certificate
The transfer is effective only on registering such shares by the Company. The Company has to deliver the share certificate within 1 month from the receipt by the Company's instrument that is relevant to the transfer. The instrument of the transfer should be endorsed with the respective name of the transferee.
Timelines
Businesses with a share capital
The Company should not (within 60 days of the execution) register any shares or ownership interest transfer to any beneficial owners with proper instruments.
Application by the transferor
The transfer should only be registered once the Company has notified the transferor within 2 weeks of the notice of the receipt.
No opposition certificate
In the following events, the following timelines should be followed
For memorandum subscribers
Within 2 months from the date of incorporation.
Allocating all the shares of the Company
Within 2 months from the allocation date.
Debenture allocation within 6 months of the allocation date.
Penalties
For the Company
Minimum penalty of ₹25,000 and a maximum of ₹5,00,000.
For an officer in default
The minimum penalty levied on an officer in default is ₹10,000, and the maximum is ₹1,00,000.
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