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Transfer of Shares Procedure in India Under Companies Act, 2013

In this blog, we will discuss what is share transfer and its entire procedure. Transfer of shares is a process of share transfer of existing shares from one person to another. The procedure to transfer shares in a private limited company varies from the shares transfer procedure in a public company. You can even watch our video to get an idea about the share transfer procedure. Companies Act 2013 governs the transfer of title to shares.

You should know that the articles of a company govern the transfer of shares in a private company.

You can start with the transfer of shares form, which is Form No. SH-4 or, Securities Transfer Form. It is pursuant to Section 56 of Companies Act 2013 and follows the share transfer rules. This is sub-rule (1) of rule 11 of the Companies (Share Capital and Debentures) Rules 2014.

A company will need to register a transfer of securities of the company to complete the process of share transfer. To register, Companies Act 2013 states only when you lay down a proper instrument of transfer.

This is as per the format in Form No SH. 4, then you can hold such securities in the physical form.

Filling this form for transfer of shares is the first and foremost step under the procedure of share transfer.

One of the important features of the securities of a company is the transferability of shares in a private company.

Section 44 of the Companies Act, 2013 provides that the shares, debentures or other interest of the member of a company are moveable property. Hence, they're transferable in the manner as provided in the company’s articles of association.  

Need any legal advice in dealing with the transfer of shares under the Companies Act, 2013? Then consult expert lawyers from MyAdvo!

Table of Contents:

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Meaning of Transfer and Transmission of Shares in Companies Act 2013

Both Transfer and Transmission of Shares are different from each other. So, let's understand how they're different and exactly what is the transfer of shares.

  • Transfer of shares meaning transferring title to shares voluntarily, by one party to another party. Whereas, transmission of shares meaning, transferring title to shares by the operation of law and which a legal heir initiates.

  • Transfer of shares has a stamp duty that one needs to pay, based on the market value of shares, whereas in the transmission of shares procedure, there is no stamp duty that one needs to pay.

Generally, securities of a company are freely transferable though there may be certain restrictions on the transfer of shares of the private company as provided in their articles.

Such restriction on transfer of shares, if one adds any is to protect the interest of shareholders and other security holders.

Sec 56 of Companies Act 2013 provides that the transfer of shares of the company and other securities will be registered by a company only when a proper instrument of transfer of shares (share transfer form) is filed as prescribed in the Form No. SH 4.

You need to duly stamp the SH 4 format for transfer of share with adequate value, date. Also, one can execute it by or on behalf of the transferor and the transferee.

One needs to send the Form SH 4 to the company by the transferor or the transferee of the shares within 60 days from the date of execution of share transfer agreement. Along with the share transfer certificate or certificate relating to securities.

In case there is no such share transfer certificate, then one must send the application for transfer of shares along with the letter of allotment of securities.

If you partly pay the transfer of shares, you can't register it by the company unless the issuance of a notice in the form SH 5 to the buyer of shares.

Also one must obtain a No Objection Letter from the buyer within two weeks from the date of receipt of a notice.

Time Limit on Issuing Share Transfer Certificate

One has to deliver all the share transfer certificates by the company within a period of one month from the date of receipt of the share transfer agreement or the share transfer certificate by the company.

Unless the company is can't deliver due to an order of the Court or instruction by other authority.

transfer of shares

Related Read: Conversion of Loan into Shares

Stamp Duty on the Transfer of Shares

One has to duly stamp the share transfer form, Companies Act 2013 says so. It also adds that the stamp should have adequate value with the date.

Also, it should be cancelled in accordance with Section 12 of the Indian Stamp Act, when you have to send the share transfer form is to be sent to the board of directors.

The seller of the shares has to pay the stamp duty at the rate of Rs 0.25 for every Rs. 100 worth of shares. For stamping purpose in a transfer of shares special adhesive stamps having the word ‘share transfer’ shall be used.

Section 8A of the Indian Stamp Act provides that for the electronic share transfer form, India. You can pay the stamp duty on the total amount of issuing the shares or securities.

One is not liable to pay stamp duty in case of transfer of registered ownership of share from a person to a depository or from a depository to a beneficial owner.

Determination of Valuation of Shares

It is easy to find the price of the shares in case of listed companies as they are easily available on the stock exchanges. However, it is difficult to obtain the price of shares of private companies.

In such cases, generally, determination of valuation of shares for the purpose of stamp duty shall be done on the basis of the average market value of shares at the time of transfer or agreed price between the transferor and the transferee of the shares, whichever is high.

Usually, the articles of the company have provisions which provide that the shares must be sold at a fair price determined by the directors or the company’s auditors.

share transfer

Must Read: The Term 'Securities'

Procedure for Transfer of Shares under Companies Act 2013

  • The Share Transfer Procedure of Public Company

Section 56 to 59 of the Companies Act, 2013 provides for the procedure of transfer of shares of a company. The basic transfer procedure of shares is as follows:

  1. One has to execute the share transfer deed in the share transfer Form SH 4 both by the transferor and transferee of the shares.
  2. To put stamps on the share transfer deed in accordance with the provisions of the Indian Stamp Act and one has to pay the stamp duty to the respective state.
  3. Along with the signatures of the transferor and the transferee, there must be signatures of two witnesses who will also affix their name, address, and signature on the deed.
  4. One needs to attach the share transfer certificate or the allotment letter of the shares to the deed and send the same to the company either by the transferor or the transferee of the shares.
  5. One needs to submit the share transfer deed to the company within 60 days from the date of execution of the deed by or on behalf of the transferor and transferee.
  6. Once the company receives it, the board of directors shall consider the same.
  7. The board shall then register the transfer of shares if the documentation with regard to the transfer of shares is in order. The board shall register such transfer of shares only after passing a board resolution.
  • The Procedure for Transfer of Shares in a Private Limited Company

As told earlier, the articles of the company or their association, govern the share transfer procedure in private limited company. These are the following steps for transfer of shares in a private company:

  1. The transferor of the share should give notice in writing to the company about his intention to transfer of shares in a private limited company.
  2. Upon receiving the written notice from the transferor, the company will notify the members of the company about the availability of shares for purchase.
  3. Next in the procedure of transfer of shares in a private limited company, is that the company shall state the price of such shares along with the time limit in which the members should tell if they have an interested in buying the shares.  
  4. If none of the members shows interest in the share transfer procedure for a private limited company, then the transferor can transfer the shares to an outsider, to which the company cannot object.
  5. When somebody shows interest in the process of transfer of shares in a private limited company, then one has to fill up the share transfer deed, or the share transfer form for a private company as per the share transfer Form SH 4.
  6. One should duly execute the form for transfer of shares in a private company by both the transferor and transferee. For execution, the deed should be duly stamped, adequately valued, dated and cancelled.
  7. The next step in the procedure for transfer of shares of a private limited company is a relevant share certificate or the allotment letter.
  8. In respect to the transfer of share, you should attach it with the deed and send the same to the company within 60 days from the date of execution either by the transferor or the transferee of shares.
  9. Share transfer agreement and the executive shareholder agreement shall regulate the relationship between the shareholders.

procedure for transfer of shares

Further Read: Mode of Issuance of Securities under Companies Act 2013

  • The Transfer of Shares Procedure Under Depository System

Section 56(4) of the Companies Act, 2013 provides for the transfer of share under the depository system.

Under this section when a company is doing a transfer of shares or other securities through a depository, then one should inform the details of allotment of shares or securities immediately to the depository.

If one is doing the transfer of shares fraudulently by any depository or depository participant, then it shall be liable under Section 447 of the Companies Act, 2013.

Following is the stepwise procedure for share transfer by the depository system:

  • Step 1: The transferor of the share has to give delivery instructions to the Depository Participant No. 1 (DP1) to transfer the shares and debit his account against the clearing member 1 pool account with DP1. The clearing member-1 pool gives a parallel receipt instruction to DP1 to accept the transfer in his/her clearing account. Especially, if standing receipt instruction for all credits into his clearing account is not given. In turn, the securities are transferred from selling client A/c to clearing member pool A/c with DP1.
  • Step 2: Delivery instruction is given to Clearing Corporation (CC) by the clearing member 1 to debit his Clearing Member1 Pool A/c and credit his Clearing Member1 Delivery A/c. The transfer takes place on the execution date which is mentioned in the instruction. Delivery which is supposed to be given to CC instruction will be as per final/ net delivery obligation.
  • Step 3: Till settlement day securities which are to be transferred lay in the clearing member-1 Delivery A/c. Transfer of Securities lying in clearing member-1 delivery A/c automatically transferred to the Clearing Corporation/ Clearing House at the time of payment in. There is no requirement of debit instruction for this transfer. There is no set deadline time for pay-in of securities to the Clearing Corporation/ Clearing House as it varies from one exchange to another.
  • Step 4: Now, automatic transfer of securities from Clearing Corporation/ Clearinghouse to clearing member 2 pool A/c with Depository Participant 2 (DP 2) at the time of payout takes place and no instruction is required because of the automatic transfer.
  • Step 5: Securities are transferred from clearing member2 receipt A/c to clearing member 2 pools A/c. Receipt account of clearing members is nothing more than a transit account used for maintaining the audit trail.
  • Step 6: Clearing Member 2 gives a delivery instruction to DP 2 to debit his Clearing Member 2 Pool A/c and credit Buying Client A/c with DP 2. The buyer gives parallel receipt instruction to DP 2 to accept in his account securities transferred from Clearing Member 2 Pool A/c through DP 2 unless he has not given a standing instruction to receive credits to his account.
  • Step 7: Lastly, the transfer of securities takes place from Clearing Member 2 Pool A/c o Buying Client A/c with DP 2. The securities will remain in clearing member pool A/c until one receives the delivery instruction.

transfer of shares companies act 2013

Suggested Read: Company and Business Law in India

Completion of Transfer of Shares

When all the formalities related to transfer of share such as share transfer deed has been executed and handing over the share certificate is complete.

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Apeksha Pandita
Published on 16th Feb, 2019
17,111 views