Private limited companies are closely held companies with less than 200 members. The transfer of share of a private limited company are governed by the provision of the Companies Act, 2013. According to the Companies Act of 2013, a private limited company cannot invite the public to subscribe to any securities of the company. Also, a private company enjoys a special right of restricting the transferability of shares, which enables them to maintain ownership. However, the restriction on transfer of shares in a private company is not applicable in certain cases such as, on the right of a member of the company to transfer his share to his legal representative & in event of death of a shareholder, the transfer of share to his legal heir cannot be restricted. It is also to be noted that the restriction cannot be made as prohibition but only by the Articles of Association (AoA) of the company.
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 'transfer of shares'.
- Transfer of shares means transferring title of shares voluntarily, by one party to another. Whereas, the transmission of shares means, transferring title of shares by the operation of law 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 the articles.
Such restriction on transfer of shares, if one adds any is to protect the interest of shareholders and other security holders.
Section 56 of Companies Act 2013 provides that the transfer of shares of the company law and other securities will be registered by a company only when a proper instrument for transfer of shares (share transfer form) is filed as prescribed in Form No. SH 4.
You need to duly stamp the SH 4 format for transfer of share with adequate value and date. Also, one can execute it by or on behalf of the transferor and the transferee.
One needs to send Form SH 4 to the company by the transferor or the transferee of the shares within 60 days from the date of execution, of the 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.
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 can't deliver due to an order of the Court or instruction by other authorities.
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(2), 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 the 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 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:
- Step 1: The transferor of the share should give notice in writing to the company about his/her intention to transfer the shares in a private limited company
- Step 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
- Step 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 interest in buying the shares
- Step 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
- Step 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
- Step 6: The next step in the procedure for transfer of shares of a private limited company is a relevant share certificate or the allotment letter
Step 7: 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
Step 8:In respect to the transfer of shares, 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
Step 9: Share transfer agreement and the executive shareholder agreement shall regulate the relationship between the shareholder.
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 Member 1 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.
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.
For more information visit Taxaj