A private limited company’s ownership is decided by the Company’s shareholding. The share of the private limited company would need to be transferred in order to accept new investors or transfer ownership of the company. In this blog, we discuss how to transfer shares of a private company. Prior to that, we briefly discuss what share transfer means and its associated terminology.
What is “Share Transfer”?
The term “share transfer” signifies the voluntary transfer of a share’s title from one party to another. However, Articles of Association (AOA) may pose certain limitations regarding the transfer of shares. Therefore, the AOA of a company must be evaluated before initiating the share transfer process.
Share Transfer Restrictions in AOA
We have already noted that the AOA may restrict the share transfer in a private limited company registration online.
The directors’ power to refuse authorization of the share transfer process and rights of pre-emption are the two major restrictions in this regard.
It is prudent to note here that the restrictions as implied in the AOA would be considered legally binding only. Moreover, the AOA can only restrict the share transfer process alone and not beyond that.
Documents Required for Transfer of Shares
The documents required in this regard are listed hereunder:
- Transferor’s notice to the company
- Documentation of the company board’s resolution to examine the notice from the transferor
- The company’s offer letter to the current shareholder
- A no-objection certificate (NOC) from the present shareholders
- A share transfer agreement in SH-4 form along with stamp duty returned share certificates
Steps Involved in Share Transfer Initiation
We now enumerate the steps involved in initiating a share transfer in a private limited company:
- Examination of the AOAs
- Receipt of a notice by the directors from the shareholders stating the objective of the transfer of shares to proceed further
- Company notice confirming the availability of shares for transfer addressed to the stakeholders. Further, the company notice should clearly specify (a) the last date to acquire the available shares and (b) also the fixed pricing at which the shares are available.
Share Transfer Procedure for Pvt Ltd Company
The Companies Act 2013 has included a detailed procedure to be followed while transferring the shares of a private limited company:
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- As approved by the designated authority, a transfer deed, to begin with, has to be obtained in the prescribed form, that is, Form SH-4. Transfer of shares may not be necessarily carried out using Form SH-4 only in the following cases:
- Where a manager or candidate transfers shares on account of business maintained or controlled either by the state or central government
- Wherein shares of a company are surrendered as a security deposit toward payment of a loan or any advance with:
- State Bank of India
- Any registered bank
- Any additional banking corporation
- Financial system
- Central government
- State government
- As approved by the designated authority, a transfer deed, to begin with, has to be obtained in the prescribed form, that is, Form SH-4. Transfer of shares may not be necessarily carried out using Form SH-4 only in the following cases:
- For transferring debentures of a private limited company, a regular format can be utilized as the means of transfer.
- Under the mandatory provisions included in the Companies Act, 2013, it is essential to obtain the AOA in case of transfer deed filed either by the transferee or the transferor and trust agreement in the state of debentures as well as dividends as applicable.
- The share transfer agreement should hold stamps as stipulated under the Indian Stamp Act. In this regard, the current stamp duty rate for share transfer is fixed at 25 paise for every ₹100 of the use of the share or part thereof. Consequently, this implies that for shares charged at ₹1050, the corresponding stamp charge will be ₹2.75.
- A person who has provided his/her name, signature, and location as permission for share transfer must also ensure in person that the transferee and transferor have signed the debentures/share deed.
- Suppose that debentures are transferred. Then, the relevant debenture document or the appropriate allotment letter along with the transfer agreement must be provided to the company.
- If a transferor provides a statement only for partially given shares, then the company has to address the same properly by duly notifying the result due on debentures to the transferee as a notice. Further, the transferee within 2 weeks of receipt of such notice has to submit his/her NOC to the company.
- In the unfortunate event of the registered transfer deed being misplaced, one has to attach the same price stamp on a signed form. The board may, however, disclose the transfer on particular terms of payment as it deems fit in such a case.
- The appropriate share transfer certificate has to be handed over by a company to an eligible transferee within 30 days from the date of registration. The company should not default on this protocol; if so, then this would seriously undermine the whole transfer process as it may lead to legal complications between the transferee and the company.
Regrettably, a company cannot demand any fee for the filing of share transfer as well as security in case its shares are already listed in a known stock exchange. Hence, a private limited company cannot charge fees if its stocks are already listed on the stock exchange.
Benefits of Share Transfer
One may reap the following benefits once the transfer of shares by a private limited company is completed:
- Capital appreciation, the entitlement of pay, limited responsibility, right shares, liquidity, bonus shares, and demand over profits and assets
- A private limited company that transfers its shares can reduce its tax bill.
- Furthermore, a transferee will become the proprietor of a rapidly expanding company.
- By virtue of a successful share transfer, a transferee, more often than not, has the privilege to work with a new private equity investor of his/her choice.
Based on our discussion so far, it is worth remembering that only when the share transfer is registered by a company that the share transfer procedure will be completed.
Penalties
- For the company – The minimum is Rs. 25,000, and the maximum is Rs. 5,00,000.
- For an officer In default – The minimum is Rs. 10,000, and the maximum is Rs. 1,00,000.
Conclusion
To conclude, share transfer paves the way for the accumulation of shares either for an individual or a new company. Investing in shares, for which share transfer is an absolute must, therefore can prove to be a great source of long-term wealth generation for any individual investor or a new company.
