What is Transfer of Shares and its Procedure Under Companies Act 2013?

The securities of a company including the shares are generally freely transferable. The Companies Act, 2013 provides for the procedure of transfer of shares by both public and the private company. The Form SH 4 for transfer of share needs to be filled.

By Apeksha Pandita in Corporate Law

Nov. 21, 2018, 7:35 p.m.

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Transfer of shares of the private company is governed by the articles of the company. You can start with the transfer of shares form. This is known as the Form No. SH-4 - Securities Transfer Form, which is pursuant to section 56 of the Companies Act, 2013 and sub-rule (1) of rule 11 of the Companies (Share Capital and Debentures) Rules 2014.

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 their transferability. Companies Act, 2013 under Section 44 provides that the shares, debentures or other interest of the member of a company are moveable property and hence are transferable in the manner as provided in the company’s articles of association.  

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What is transfer of shares and transmission of shares?

Transfer of shares means transferring title to shares voluntarily, by one party to another party. Whereas, transmission of shares means the transferring title to shares by the operation of law and is initiated by a legal heir.

Transfer of shares has a stamp duty to be paid based on the market value of shares, whereas in the transmission of shares, there is no stamp duty to be paid.

Generally, securities of a company are freely transferable though there may be certain restrictions imposed on the transfer of shares of the private company as provided in their articles. Such restrictions, if any are added to protect the interest of shareholders and other security holders. 

Section 56 of the 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

The SH 4 format for transfer of share needs to be duly stamped, with adequate value, dated and executed by or on behalf of the transferor and the transferee.

Form SH 4 is needed to be sent to the company by the transferor or the transferee of the shares within sixty 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, the application for transfer of shares must be sent along with the letter of allotment of securities.

Transfer of shares partly paid shall not be registered by the company unless a notice in the form SH 5 has been issued to the buyer of shares and has obtained 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

All the share transfer certificates have to delivered 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 prevented from such delivery due to an order of the Court or instruction by other authority.

Stamp Duty on the Transfer of Shares

Companies Act, 2013 provides that share transfer form has to be duly stamped with adequate value and should be dated and canceled as in accordance with section 12 of the Indian Stamp Act when the share transfer form is to be sent to the board of directors. 

Stamp duty has to be paid by the seller of the shares. Stamp duty is paid 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 the stamping is not needed providing that the stamp duty is paid on the total amount of the shares or securities issued. 

Stamp duty is also not liable to be paid in case of transfer of registered ownership of share from a person to a depository or from a depository to a beneficial owner.

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Related Read: Conversion of Loan into Shares under Companies Act, 2013

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 the 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. 

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 procedure of transfer of shares is given below -

  • Share transfer deed in the share transfer Form SH 4 to be duly executed both by the transferor and transferee of the shares.

  • Stamps to be put on the share transfer deed as in accordance with the provisions of Indian Stamp Act and the stamp duty has to be paid to the concerned state.

  • Signatures of the transferor and the transferee of the shares must be witnessed by two witnesses who will also affix their name, address, and signature on the deed.

  • Share transfer certificate or the allotment letter of the shares to be attached to the deed and the same to be sent to the company either by the transferor or the transferee of the shares.

  • Share transfer deed must be submitted to the company within sixty days from the date of execution of the deed by or on behalf of the transferor and transferee.

  • Once it has been received by the company, its board of directors shall consider the same. 

  • 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.

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Must Read: The Term 'Securities'

Steps of the Private Company Share Transfer

The transfer of shares of a private company is generally governed by their articles of association. Following are the steps for share transfer in private limited company:

  • The transferor of the share should give a notice in writing to the company about his intention to transfer his shares.

  • Upon receiving the written notice from the transferor the company shall notify the members of the company about the availability of shares for purchase. 

  • The company shall state the price of such shares along with the time limit in which the members should tell if they are interested in buying the shares.  

  • If none of the members shows interest in the transfer of shares then the transferor can transfer the shares to an outsider, to which the company cannot object.

  • When somebody is interested in the transfer of shares then the share transfer deed has to be filled up in the prescribed share transfer Form SH 4.

  • It should be duly executed by both transferor and transferee. For execution, the deed should be duly stamped, adequately valued, dated and cancelled.

  • Relevant share certificate or the allotment letter in respect of the transfer of share should be attached with the deed and the same should be sent to company within sixty days from the date of execution either by the transferor or the transferee of shares.

  • Share transfer agreement and the executive shareholder agreement shall regulate the relationship between the shareholders.

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

The procedure of Transfer of Share 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 the details of allotment of shares or securities should be immediately be informed to the depository. If the transfer of shares is being done 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 transfer of shares by 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. Parallel receipt instruction is given by the clearing member 1 pool to DP1 to accept the transfer in his clearing account 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. Securities lying in clearing member1 delivery A/c are 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, securities are transferred to Buying Client A/c from Clearing Member 2 Pool A/c with DP 2. The securities will remain in clearing member pool A/c until the delivery instruction is given by him.

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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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