Procedure for Transfer of Shares
Transfer of shares is done by Companies on regular basis. It plays a crucial role in the identity of the Company. The Companies Act 2013 lays down the provisions related to the Company’s transfer and transmission of shares.
Transfer of shares is when the title of shares is transferred from one person to another. The person whose shares are getting transferred is called the ‘Transferor’ the person to whom the shares are transferred is called the ‘Transferee’.
Transmission of shares is done by operation of law in case of death, insolvency, lunacy, or inheritance. It also happens when a Company is wound-up, and the Company is the shareholder. In case of death, it gets transferred to the legal representative and in case of insolvency, it gets transferred to the assignee.
As per Section 56,58 of the Companies Act, 2013 read with Rule 11 of Companies (Share Capital & Debenture) Rules, 2014.
Procedure for Share Transfer
- The transferors and the transferee must inform the Company of transferring the shares.
- Execute an instrument in form SH-4 along with stamp duty. It should be duly signed by both the transferor and transferee, and it should be given to the Company within 60 days from the date of execution instrument.
- Company should check Articles (AoA) for provisions for the transfer of shares.
- Board resolution for registration of transfer of shares.
- Within 1 month of receipt of SH-4 Company shall issue a share certificate to the transferee.
The Company can Refuse the Transfer of Shares in the Following Cases:
- If partly paid-up shares are transferred and the transferee is known to be financially incapable of paying balance calls.
- If partly paid-up shares are transferred to a minor incapable of entering a contract.
- In case due call money is not paid by the transferor.
- When the transferor is a debtor of the Company, and the Company has a lien on such shares.
- If the instrument is incomplete, irregular, defective, and not properly stamped.
- For other reasons, just and equitable are in the Company’s general interests.
What Happens When the Company Refuses to Transfer the Shares
- When the Company rejects the transfer then within 30 days of receipt of form SH-4 Company shall send a refusal notice to both the transferor and transferee.
- If a refusal notice is sent then the transferee can appeal to National Company Law Tribunal within 30 days in the case of a Private Company and 60 days in the case of a Public Company from receipt of the refusal notice.
- If the Company does not send a refusal notice, then the Private Company can appeal to NCLT within 60 days of delivery of SH-4 and in the case of a Public Company 90 days of delivery of SH-4.
- NCLT after hearing both parties will either reject the appeal or order the Company to register such transfer within 10 days of such order.
Restriction on Transfer of Shares
The most common types of Companies are Private Companies and Public Companies. The major difference between them is the transferability of shares. In the case of a Public Company, the shares are freely transferable. But when it comes to Private Companies the share are not freely transferable.
According to sec 2(42) of The Companies Act 2013, “Private Company” means a Company which by its articles, restricts the right to transfer its shares except in the case of One Person Company, it limits its members to two hundred and prohibits any invitation to the public to subscribe to any securities of the Company.
The Company must include in the Articles of Association of the Company to restrict the transfer of shares. The Act does not talk about how this restriction should be made. The Company can restrict the transfer of shares by right of pre-emption or right of first refusal.
Pre-Emption Clause or Right of First Refusal
The pre-emption clause is the most common clause of restriction on the transfer of shares of Private Companies. The pre-emption clause means when a shareholder wants to transfer his shares, then the shares must be offered to the Company’s members. The member may purchase the shares at a fair price determined as per the articles. In general, Private Companies consist of limited members mostly family and friends. This clause protects the members of the Company in case of any conflict, the shares will be first offered to the existing members of the Company and then to the outsider.