Shares are essentially the most important part of a firm’s ownership and issuance structure. In India, share transfer and share allotment represent two important vehicles for acquiring or issuing new ownership shares. Share transfer refers to the transfer of existing shares between individuals, whereas share allotment is considered to be the issue of issuing new shares that raise funds. Both processes have different legal frameworks, objectives, and consequences under the Indian law regime.
This blog explains the differences between share transfer and share allotment, making it very easy to understand and a clear comparison chart.
Introduction
The Indian corporate sector operates on the principles of ownership and investment through shares and is regulated by the Companies Act of 2013. Ownership of a company is reflected through shares, and companies issue shares to raise capital or in an exchange between investors.
While the terms share transfer and share allotment are usually used interchangeably, they have different natures and applications.
To businesses, investors, and legal professionals, share transfer and allotment form essential distinctions in understanding regulatory compliance, investment decisions, and strategic planning.
What is Share Transfer?
Share transfer is the process where ownership of existing shares from one shareholder to another can be transferred voluntarily. This does not raise the share capital of the company; instead, it shifts ownership rights.
Features
- Existing Shares– The Shares already issued by the company are bought and sold by two different parties.
- Voluntary Nature– It mostly occurs because of sales, gifts, inheritance, and other agreements.
- Legal Framework– Governed by Section 56 of the Companies Act, 2013 and the company’s Articles of Association (AOA).
- Stamp Duty– Paid on the value of the consideration for transferring the shares.
Illustration
If Mr. Punit sells his 2,000 shares of Horizon Ltd. to Ms. Nidhi, the ownership of those shares transfers from Mr. Punit to Ms. Nidhi through proper documentation and approval.
What is Share Allotment?
Share allotment refers to the new issuance of shares by a company to individuals or other institutions. It’s mainly for the purpose of raising more capital, seeking new investors, or sometimes rewarding shareholders. An allotment of shares increases the share capital of a company.
Features
- Issuance of new shares- The new shares are issued, and it may be either for new or current investors
- Purpose- Usually for the purpose of raising funds or increasing the stakeholder or bonus issue shares.
- Legal provisions- It is governed by sections 42 and 62 of the Companies Act, 2013.
- Stamp duty- The stamp duty is payable as a percentage of the face value of newly issued shares.
Illustration
If Maxx Ltd. decides to issue 20,000 new shares through a private placement to raise funds, it will allow these shares to investors willing to subscribe.
Key Differences Between Share Transfer and Share Allotment
| Aspect | Share Transfer | Share Allotment |
|
Nature of Shares |
Transfer of shares is a share transfer deal between two parties. The shares are issued and already exist and thus form part of the company’s current share capital. | Share allotment involves the company creating and issuing fresh shares to investors or shareholders. In this process, new shares are added to the company’s total share capital. |
|
Parties Involved |
The transaction happens between two persons or entities- the transferor (current shareholder) and the transferee (new shareholder).
The company itself does play a limited role in the process. |
Share allotment happens directly between the company and the investor or shareholder. The company offers the shares, and investors subscribe to them by paying a certain price. |
|
Purpose |
The purpose of share transfer is to enable an existing shareholder to exit the company, sell their holdings, or transfer shares for personal or financial reasons.
It does not impact the company’s overall capital structure. |
Share allotment is primarily aimed at raising capital for the company, rewarding existing shareholders, or bringing in new investors. It is an effective tool that companies employ to raise funds for their expansion, development, or other operational needs. |
|
Impact on Capital |
Share transfer has no impact on the company’s share capital. The total number of shares remains the same. Only the ownership of the shares changes hands. | Share allotment increases the company’s share capital. However, this process can dilute the ownership percentage of existing shareholders. |
|
Legal Framework |
The share transfer is regulated under Section 56 of the Companies Act 2013.
Further, the company’s AOA may impose certain restrictions in private companies, where transfers need board approval. In public companies, shares are generally freely transferable unless restricted by law. |
Share allotment is governed under Sections 42 (Private Placement) and 62 (Rights Issue) of the Companies Act, 2013.
The company must comply with detailed rules regarding board approval, statutory filings, and disclosures. |
|
Stamp Duty |
Stamp duty is applicable to the consideration value of the shares being transferred.
The transfer deed must be duly stamped as per the Indian Stamp Act, and failure to do so makes the transaction invalid. |
Stamp duty on share allotment is calculated on the face value of the newly issued shares.
Since it involves fresh issuance, the rate of stamp duty is lower than that of share transfer transactions. |
|
Approval Requirement |
In the case of private companies, the transfer of shares needs approval from the Board of Directors.
Public companies have fewer restrictions, and shares are freely traded on stock exchanges. |
Share allotment always requires the approval of the Board of Directors.
The company must also file Form PAS-3 with the Registrar of Companies (ROC) within 30 days of the allotment. |
|
Document Used |
The document required for share transfer is the Share Transfer Deed (Form SH-4).
Proper stamping and signing by both parties are mandatory. |
Share allotment requires the investor to submit an Application for Allotment to the company.
The company issues share certificates after the allotment is approved and updates the Register of Members. |
Conclusion
Share transfer and share allotment are two important procedures in India’s corporate sector. Share transfer refers to the transfer of existing shares among shareholders. Share allotment refers to the procedure for creating and issuing new shares to raise funds or to bring in new investors.
Businesses and investors need to be familiar with these concepts because the capital structure of a company is maintained by these concepts, and hence, such transactions have to follow Indian law for transparency and compliance purposes.
Recognizing these nuances helps businesses manage ownership structures effectively while investors navigate opportunities with greater clarity and confidence. Both processes are vital for business development and investor participation in India’s dynamic corporate environment.
Reference
The Companies Act, 2013 (Act No. 18 of 2013)
