Legal Aspects Governing Transfer of Shares in a Private Company & its Procedure

One of the most significant facets of the Company is that its shares or debentures are transferable. Section 44 of the Companies Act, 2013 explicitly outlines that shares or debentures or any other interest of any member shall be a movable property and they can be transferred in the manner as provided by Articles of Association of the Company. Whenever any member of the Company is in requirement of capital then he can resort to sale of shares by mechanism of transfer of shares.

In this article, we will discuss statutory provisions governing transfer of physical shares and its procedure in case of a Private Company.

Introduction

One of the most significant facets of the Company is that its shares or debentures are transferable. Section 44 of the Companies Act, 2013 explicitly outlines that shares or debentures or any other interest of any member shall be a movable property and they can be transferred in the manner as provided by Articles of Association of the Company. Whenever any member of the Company is in requirement of capital then he can resort to sale of shares by mechanism of transfer of shares.

In this article, we will discuss statutory provisions governing transfer of physical shares and its procedure in case of a Private Company.

Definitions

Private Company: As per Section 2(68) of the Companies Act, 2013, Private Company means a company having a minimum paid-up share capital as may be prescribed, and which by its articles:

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that:

a) persons who are in the employment of the Company; and

b) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the Company.

Share: As per Section 2(84) of the Companies Act, 2013 share means a share in the share capital of the Company and includes stock

Share Transfer: It means voluntary transfer of title or ownership in shares from one person to another. Therefore, for commencing transfer of shares in a Private Company, Articles of Association must be reviewed on a priority basis.

Parties to the Share Transfer

> Company, whose shares are to be sold or transferred.

> Transferor/Seller

> Transferee/Buyer/Purchaser

> Subscribers to the memorandum

> Lead or Major Investors as defined in articles of association, if any.

Transferability of Shares in Private Company

Pursuant to Section 2(68) of the Companies Act, 2013, a Private Company is required to restrict the right to transfer its shares by its articles. For effecting a proper legal transfer, provisions or restrictions contained in the Articles of Association must be duly complied by the transferor, transferee, and the Company whose shares are to be transferred. The rationale behind placing this restriction in Private Company is to maintain or preserve the composition of shareholding.

However, just to preserve the composition of shareholding, there should not be an absolute ban on right to transfer shares. Therefore, Table F of Schedule I which is generally adopted by Private Companies as their Articles of Association, places certain reasonable conditions which needs to be complied for effecting a proper transfer.

Circumstances under which limitations upon transfer of shares in Private Companies are not applicable:

Certain scenarios in which restrictions upon transfer of shares in Private Companies are not applicable:

> Transfer of shares by a member to his/her representative(s);

> In the event of death of a shareholder, legal representatives of deceased shareholder apply for registering shares in the names of heirs; and
> When shares are offered to be issued on rights basis then existing members have the right the renounce these in favor of an outsider or third person. After renunciation from existing members, these shares will be allotted to renouncee for the first time and therefore no transfer of shares will take place.

Methods for placing Restriction on Right to Transfer Shares

(A) Pre-Emption or Right of Pre-Emption: Whenever a member wants to sell his shares then he/she/it has to first make an offer to other existing members of the Company for purchase of such shares. If none of the member is willing to purchase shares so offered to them at a price determined by the board of directors or auditor of the Company or using formula set out in articles of association, then such shares can be transferred by the transferor to the proposed transferee or an outsider or third person.

It is pertinent to note here that Pre-Emption clause which find its place in articles of association, generally comes from shareholders agreement so executed between Company, Promoters, Lead or Major Investors and other existing investors, whenever Company goes for fund raise in its early seed stage of incorporation.

(B) Powers of directors to refuse registration of transfer of shares: Power of directors to refuse registration of transfer of shares are specified in Clause 20 and 21 of Table F of Schedule I of Companies Act, 2013 which finds its place in articles of association of Private Company. This clause puts an obligation on the directors of the Company to use this power with integrity only.

Statutory Provisions Governing Shares Transfer

(1) Section 56 read with Section 44 of Companies Act, 2013; and

(2) Rule 11 of Companies (Share Capital and Debentures) Rules, 2014

Understanding the provisions related to Share Transfer

Pursuant to Section 56(1) of the Companies Act, 2013 read with Rule 11(1) of Companies (Share Capital and Debentures) Rules, 2014, a Company shall not register transfer of securities unless an instrument of transfer in Form SH-04 is duly executed, stamped, and signed by the transferor, transferee or their authorised representatives and witnesses has been delivered to the Company.

Such share transfer deed can be delivered by either transferor or transferee within 60 (sixty) days of its execution along with the Share Certificates in Form SH-01 so issued after allotment to the Company, which needs to be cancelled and splitted for effecting transfer of shares. Provided that where no Share Certificate is in existence then along with letter of allotment of securities.

Provided further that where instrument of transfer or share transfer deed in Form SH-04 has been lost or not delivered within 60 (sixty) days of its execution, the Company may register the transfer of shares on such terms and conditions as to indemnity as the Board may think fit.

Rate of Stamp Duty to be paid on Share Transfer Deeds and Duties by whom Payable

Stamp duty on Share Transfer Deeds in Form SH-04 needs to be paid at the rate of 0.015% as given in Article 56A of Schedule 1 of Indian Stamp Act, 1899.

It is pertinent to note here that in the absence of agreement to the contrary, expense towards stamp duty on Share Transfer Deed shall be borne by transferor or seller of such securities as stipulated in Section 29(1)(k) of Indian Stamp Act, 1899.

However, practically it is observed that generally transferee or buyer of securities borne expenses towards payment of stamp duty while negotiating Share Purchase Agreement.

Time Limit for Issue of Certificates

Pursuant to Section 56(4)(c) of the Companies Act, 2013, every Company, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the splitted certificates of all securities transferred within a period of 1 (one) month from the date of receipt by the Company of the instrument of transfer or share transfer deed.

Penalties for not complying with provisions of Section 56

Where any default is made in complying with the provisions of sub-sections (1) to (5), the Company and every officer of the Company who is in default shall be liable to a penalty of Rs. 50,000/- (Rupees Fifty Thousand only).

Procedure for Share Transfer in Private Company

Step No.	Procedure	Timeline, if any
(1)	Notice/Request Letter from Transferor for transfer of shares: Transferor must give notice/request letter to the directors of the Company of his/her/its intention to transfer shares. Request letter for transfer of shares shall have following contents: > Name of the transferor; > Details of shareholding as on date; > Number and type of shares to be transferred; > Total consideration at which transfer is proposed to be made like face value and premium, if any; > Request to the directors of the Company for making first offer of purchase to existing members of the Company; > In case existing members refuse to buy such shares then a request for allowing transferor to sell shares to an outsider or third party who will be a transferee.
(2)	Request letter for split of share certificate: Transferor shall give notice/request letter to the directors of the Company for splitting his/her/its original share certificate so issued at the time of allotment for effecting smooth transfer. Further, along with request letter for split, transferor shall also send a copy of original share certificate for cancellation to the Company. Request letter for split of share certificate shall incorporate following contents: > Name of the transferor; > Description of those shares which will be transferred, like type of shares, number of shares etc. > Share certificate number which will be splitted specifying new distinctive numbers, new share certificate numbers which will be created post split.
(3)	Reviewing Articles of Association of Company: After receipt of the Requests letter for transfer of shares and split of share certificate, Board of Directors of the Company shall assess the feasibility for transfer. If transfer of shares is not allowed by articles, then Company needs to amend its Articles of Association of the Company by placing reasonable restrictions as per industry standards or general business practice.
(4)	Calling of Board Meeting for approving request for split of shares and transfer of shares: > Issue Notice for holding Board Meeting to all the Directors of Company at their addresses registered with the Company. [Section 173 of Companies Act, 2013 and SS-1 to be adhered] Provided that if Board Meeting is called at a shorter notice, then shorter notice consent letters shall be signed by all the Board of Directors of the Company. > Attach agenda, notes to agenda and draft resolution with the notice of Board Meeting. > Hold the meeting of Board of Directors of the Company on the day, date, time & venue stipulated in the notice and pass the necessary Board Resolution in respect of the following: a) To approve the split of share certificates; b) To approve offer letter for transfer of shares; c) To approve draft of Share Purchase Agreement and execution thereof > Draft minutes of the board meeting shall be circulated to all the directors within 15 days from the date of conclusion of the meeting by hand delivery or by registered post or by speed post or by courier or by email or by any other recognised electronic means. [Section 118(1) of the Companies Act, 2013 read with Clause 7.4 of Secretarial Standard on Board Meeting-1 promulgated by the Institute of Company Secretaries of India].	Notice needs to be given at least 7 clear days before the date of Board Meeting
(5)	Issuance of Offer Letters to all the existing members of the Company: An offer letter shall be circulated to all the existing members of the Company and offer of shares to be sold shall be made in proportion to their percentage of shareholding in the Company.
(6)	Receipt of Acceptance and Renunciation Letters: Existing members shall either accept or renounce shares so offered to them through Acceptance and Renouncement Letter. It is pertinent to note here that members who are renouncing shares, can renounce shares so offered to them in name of some other member or an outsider.
(7)	Intimation letter to Seller/Transferor by Company: On receipt of Acceptance and Renunciation letter from existing members of the Company, Company shall issue an Intimation Letter to transferor/seller intimating them about acceptance and renunciation of there offer for sale of shares to them. Intimation letter shall have following contents: > Details of members who have accepted offer of sale shares; > Details of members who have renounced sale shares in favor of other member or an outsider > Requesting the transferor to execute Share Transfer Deed in Form SH-04 with transferee or purchaser. Further, transferor will send original share certificate for its cancellation and issuance of new split share certificates.
(8)	Execution of Share Purchase Agreement: If the transferor, transferee(s) and Company want to enter into an agreement before the purchase of shares then they can execute the share purchase agreement. It shall contain following clauses including but not limited to: > Sale Consideration; > Conditions Precedent; > Waivers, if any; > Closing Obligations > Representations and Warranties; > Termination rights; > Confidentiality; > Dispute Resolution; > Arbitration Clause; and > Miscellaneous.
(9)	Execution of Share Transfer Deed in Form SH-04: Share Transfer Deed should be duly executed both by the transferor and transferee. It should be duly stamped and dated. Information to be available at hand while filling SH-04 deeds: > Folio number of Transferor; > Name, address and occupation of Transferee; > Father’s, mother’s or spouse’s name, if any, of Transferee; > Contact details and email address of transferee; > PAN of Transferee; > Name and address of witness signing the SH-04 deed
(3)	Calling of Board Meeting for taking on record transfer of shares: After receipt of executed copies of Share Transfer Deeds in Form SH-04 and original share certificate so issued to the transferor at the time of allotment, Company shall: > Issue Notice for holding Board Meeting to all the Directors of Company at their addresses registered with the Company. [Section 173 of Companies Act, 2013 and SS-1 to be adhered] Provided that if Board Meeting is called at a shorter notice, then shorter notice consent letters shall be signed by all the Board of Directors of the Company. > Attach agenda, notes to agenda and draft resolution with the notice of Board Meeting. > Hold the meeting of Board of Directors of the Company on the day, date, time & venue stipulated in the notice and pass the necessary Board Resolution in respect of the following: a) To approve transfer of shares > Draft minutes of the board meeting shall be circulated to all the directors within 15 days from the date of conclusion of the meeting by hand delivery or by registered post or by speed post or by courier or by email or by any other recognised electronic means. [Section 118(1) of the Companies Act, 2013 read with Clause 7.4 of Secretarial Standard on Board Meeting-1 promulgated by the Institute of Company Secretaries of India]. It is pertinent to note here that: a) Date of transfer will be date of board meeting in which transfer has been taken on record; and b) Once share transfer deed is received and board meeting is convened by Company, it is necessary to fill “For Office Use” given in Form SH-04. Many a times Company’s miss to fill “For Office Use’ and this finding comes when due diligence of Company is being done.	Notice needs to be given at least 7 clear days before the date of Board Meeting
(11)	Updating Register of Members in Form MGT-01: Company shall update its Register of Members in Form MGT-01	Within 7 days from the date of board meeting in which transfer is approved
(12)	Issuance of Share Certificates: Company shall issue split share certificate to transferee in Form SH-01. It is pertinent to note here that there is no requirement of paying stamp duty on split share certificates so issued to transferee or purchaser.	Within 1 (one) month from the date of receipt of share transfer deed or instrument of transfer

******

The author can also be reached out at harsh@sarvaankassociates.com or can be contacted at +91-8171445822.