Before we can talk about the primary topic of Transfer of Shares in a Private Company, we need to understand the two key terms involved – “Private Company” & “Shares or Share Capital”.
What is a Private Company?
Private Limited Companies are those types of companies in which the number of members range from two to two hundred. A private limited company has the limited liability of members, which extends to the share capital they hold in the company. According to the Companies Act of 2013, a private 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. Section 2(58) (I) of the Companies Act, 2013 provides that the Articles of private company shall restrict the right to transfer the company’s shares. 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 or By-Laws) of the company.
What is Share Capital?
The share capital in a private limited company is the amount of money invested by its owners in exchange for shares of ownership. Company directors are typically shareholders in their own companies. Shareholders exercise certain powers over how the company is run such as electing the board of directors.
Main Provisions related to Transfer of Share:
Now that we have read about the two key terms, we are to examine the legal angle of transferability of shares in a private company. The transfer of share capital in a private or public company are to be done in accordance with the provisions of Companies Act of 2013. The major provisions related to the transferability of shares are listed below:
- Instrument for Transfer of Share is compulsory:
According to Section 56 of the companies act, a company shall not register a transfer of shares unless a authentic transfer deed in Form SH.4 as per the Rule 11 of Companies (Share Capital & Debentures) Rules 2014 is duly stamped and executed by transferor or his agent and by transferee or his agent, clearly specifying the name, address and occupation(if any) of the transferee, along with the certificate relating to the shares (or if no such certificate is in existence, along with the letter of allotment of the shares).
- Time Period for deposit of Instrument for Transfer:
Form SH. 4 or the instrument for transfer of shares, with date of execution as mentioned thereupon must be in all circumstances delivered to the company within sixty days from the date of aforementioned execution by the transferor and the transferee or by their respective agents.
- Value of share transfer stamps to be affixed on the transfer deed:
As per the notification dated 28th January 2004, by the Ministry of Finance (Department of Revenue), the stamp duty for transfer of shares is fixed to 25 paise for every hundred rupees.
- Time limit for issue of certificate on transfer:
According to Section 56(4), Every company is required to deliver the certificates of all shares transferred within one month (30 days) of application for the registration of transfer of the any such shares.
- Time Limit for Refusal of registration of Transfer:
Section – 58 of the Companies Act deals with the Refusal of Registration for the transfer of shares by the company and also with the appeal against such refusal. According to the section. The company has the power of refusal of registration for transfer of shares but it should be exercised within thirty days of delivery of the instrument of transfer to the company.
- Time Limit for appeal against refusal to register Transfer by Private Company:
According to Section – 58 (3) of the Act, a transferee of shares may appeal to the Tribunal about such refusal within the period of thirty days from the receipt of notice of refusal of transfer of shares by the company. In case, there is no such notice issued by the company, the transferee may appeal within sixty days of delivery of the instrument of transfer or the intimation of transfer, as the case may be, to the company.
- Penalty for Non-compliance:
As per the provisions of the Act, where there is a non-compliance by the company of the provisions relating to the transfer of shares, the company shall be punishable with the fine not less that Twenty-Five Thousand Rupees but which may extend to Five Lac Rupees and every officer in default will be punishable with a fine not less than Ten Thousand Rupees but which may extend to One Lac Rupees.
Before coming to the steps involving the transfer of shares in a private company, we need to discuss a few points important to be taken care of before initiating any such transfer. First of all, there must be a review of Articles of Association (AoA) or By-Laws of the company, if there is any restriction regarding the transfer of the shares, it must be duly addressed before following up to the further steps. Once the transfer is in line with the Articles of Association, the shareholder must submit a notice to the Director of the company, stating his intention about such transfer. The next step involves the determination of prices of shares in accordance with the Articles of Association, the usual practice in this course is that the Director or the Auditor of the company determines the price of shares. The last step before the initiation of transfer of shares is that the concerned company should give a notice to the shareholder about availability of the share, last date of purchase and also the price as such shares to be transferred. It is to be duly noted that if any present share holder comes forward for the purchase of share, such shares shall be allotted to them by the company. In case, there are no present shareholders coming forward, such shares will be then allotted to the outsiders.
The Process of Initiation of Transfer of Shares can be easily understood by the following Points –
- Review AoA – Review the AoA of private limited company and understand restrictions, if any.
- Give Notice – Give notice to the director of the company about intention to transfer shares.
- Determine Pricing – Company will then determine the price of shares to be transferred. Usually done by the director and auditor of the company.
- Transfer Shares – Transfer the shares to either the shareholders or an outsider, as the situation may be.
Procedure for Transfer of Share in a Private Company:
The first step is to obtain the share transfer deed in a format as prescribed by the provisions of Companies Act of 2013. For the sample of such transfer deed.
Once the share deed is obtained in prescribed format, it is to be duly executed by the transferor and transferee or their agents, as the case may be. In the event of death of transferor or the transferee, their legal representatives may duly sign the deed.
The duly signed and executed share deed should bear stamps as per the provisions of Indian Stamp Act and also the stamp duty notification in force in the concerned state where the deed is being executed. The present rate of stamp duty is 25 paise for every hundred rupees of the value of shares or the part of such shares. It is to be carefully noted that the stamps affixed needs to be cancelled at the time or before signing of the transfer deed.
The signing of transfer deed by the transferor and transferee or their agents is to be witnessed by a person, who is supposed to give his signature, name and full permanent address on the said deed.
The next step involves attaching the relevant share certificate or allotment letter with the share transfer deed in the prescribed format and deliver the same to the company. P.S. the share transfer deed must be delivered to the company within sixty (60) days from the date of execution of share deed by or on behalf of the transferor and by or on behalf of the transferee.
Once the share transfer deed is delivered to the company, the board of directors shall consider the same. If the documentation for transfer of share are found to be in order, the board shall register the transfer by passing a resolution. This step embarks completion of transfer of shares in a private limited company.
However, if the board of director feels that the documentations are not in or order, or the steps aforementioned are not complied with, the board retains the right of refusal of transfer of such shares to the transferee. But such refusal by the board of directors must be intimated to the transferee within thirty days of receipt of such transfer deed by the company. Also, If the transferee feels that such refusal is arbitrary and unreasonable, an appeal lies with the Tribunal within thirty days of receipt of notice by the company of such refusal for the transfer of shares or in case there is no notice served by company, the appeal lies in the tribunal within sixty days of delivery of such share transfer deed to the company.
The Procedure for Transfer of Share in Private Company can be well explained by the following points :
- Obtain the Share Transfer Deed as Prescribed
- Duly Executed by the Transferor and Transferee or their agents
- Should bear stamps as per the provisions of Indian Stamps Act and Stamp Duty Notification
- Witness to sign the deed with name and permanent address
- Attaching the share certificate with the share transfer deed and delivering it to the company.
- If all the documents are found to be in prescribed order, the board of director shall register the transfer by passing a resolution.
- However, on refusal of such transfer of shares, a notice is to be served to the transferee within thirty days of receipt of such share deed.
- An Appeal lies to the tribunal against the refusal within thirty days of receipt of notice served by the company.
It is to be duly noted that in case of any transfer of share in the company, The Registrars of Companies (ROC) need not be informed with a notice or intimation. The Share transfer details shall be given to the registrars of companies in annual return of the company in form MGT-7.
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