In India, transfer of shares in a company is governed by the Companies Act, 2013. Section 56 of Companies Act, 2013 and Rule 11 of Companies (Share Capital & Debentures) Rules 2014 provides for a transfer of shares/securities in a private limited company.
The share transfer in a Private Limited Company can be restricted by the Articles of Association (AOA). Hence, the Articles of Association of the Company must be reviewed prior to beginning the share transfer procedure.
The following steps must be followed before initiating the share transfer procedure :
If any of the present shareholders come forward for the purchase of shares, such shares must be allotted to them. In case no present shareholder is interested or excess shares are available, the same can be transferred to the outsider.
Procedure of share transfer
Step 1: Obtain the Form SH-4, duly executed by the transferor and transferee.
Step 2: In compliance with the Indian Stamp Act and the Stamp Duty Notice as per the respective state, the transfer certificate shall bear stamps. The official share transfer rate is 25 Paise, for every 100 rupees of the share value or part thereof or 25% of the value of shares. The share stamps shall be cancelled issued at or before the transfer deed was signed.
Step 3: A person who gives his or her signature, name, and address must bear witness to the signatures of the transferor and the transferor of a share transfer deed.
Step 4: A share transfer deed must be deposited with the company along with share certificates, by or on behalf of the transferor and by or on behalf of the transferee, within sixty (60) days of the date of execution, and in or on behalf of the customer.
Step 5: The Board shall consider the same after receiving the share transfer deed and documents then pass a resolution for acceptance of the same in the Board Meeting of the Company. After passing of Board resolution enter the name of transferee in the register of members as the shareholder. If the documentation for transfer of share is in order, the board shall register the transfer by passing a resolution.
Step 6: The Company shall within one month of the passing of the Board Resolution issue a share certificate in the favour of the transferee as per section 56(4)(c) of Companies Act. 2013.
Intimation to Authority
A company is not required to intimate any change in shareholding (except for the companies listed on stock exchange) to Registrar of Companies or other authority. The transfer is considered as an internal matter of the company, the compliances remain among the company, transferor and transferee.
Foreign Exchange Management Act, (1999) (FEMA)
Regulations applicable for transfer of shares from a non-resident to a non-resident
As per Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 read along with Regulation 8(B)(I)(a) of the Master Circular on FDI in India (2015-2016), a general permission has been granted for the transfer of shares or bonds or debenture of an Indian company by one Non-Resident Individual to another Non Resident individual.
Rule 9(1) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 reads as follows-
“a person resident outside India, not being a non-resident Indian or an overseas citizen of India or an erstwhile overseas corporate body may transfer by way of sale or gift the equity instruments of an Indian company or units held by him to any person resident outside India; Provided that, prior government approval shall be obtained for any transfer in case the company is engaged in a sector which requires government approval.”
Rule 8 (BI)(a) of Master Circular on FDI reads as follows:
“Transfer of shares by a Person resident outside India
1. Non Resident to Non-Resident (Sale / Gift): A person resident outside India (other than NRI and OCB) may transfer by way of sale or gift, shares or convertible debentures to any person resident outside India (including NRIs but excluding OCBs).”
There is no prescribed requirement that has been made by the RBI for reporting in this regard under this act.
As per Rule 20 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, the reporting requirements are for any investment in India by a person resident in India.
Filing of Form FC-TRS:
As per Rule 4(3) of Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, Form FC-TRS shall be filed for transfer of equity instruments in accordance with the rules, between:
1. a person resident outside India holding equity instruments in an Indian company on a repatriable basis and person resident outside India holding equity instruments on a non-repatriable basis; and
2. a person resident outside India holding equity instruments in an Indian company on a repatriable basis and a person resident in India,
The onus of reporting shall be on the resident transferor/transferee or the person resident outside India holding equity instruments on a non-repatriable basis, as the case may be.
Some provisions of the Companies Act require the valuation to be done by the registered valuer. However, there is no valuation compliance required by the Companies Act for the purpose of transfer of shares of the Company. Further, under FEMA, the pricing guidelines shall be followed in case the transfer is between the resident and a non-resident.