Summary: The transfer of shares in a company is generally understood as a straightforward process involving execution of the prescribed transfer documents, approval by the Board of Directors and subsequent recording of the transfer in the statutory records of the company. The supplied content addresses the timing of payment of consideration by the transferee to the transferor, particularly where valuation of shares is undertaken. It refers to Form SH-4, which requires disclosure of the “Total Consideration Received”, and states that the consideration should ideally be remitted by the transferee to the transferor before execution of Form SH-4. The suggested sequence is to agree on the intention to transfer, undertake valuation wherever applicable or considered necessary, mutually agree the transfer price, remit the consideration, execute Form SH-4, submit the share certificate and prescribed documents, obtain Board approval and record the transfer in the Register of Members. The content concludes that, although the Companies Act, 2013 does not expressly prescribe that consideration must be paid before execution of Form SH-4, the wording of the prescribed transfer instrument supports that view.
Share Transfer Procedure and Payment of Consideration
The transfer of shares in a company is generally understood as a straightforward process involving execution of the prescribed transfer documents, approval by the Board of Directors and subsequent recording of the transfer in the statutory records of the company.
The usual documentation and procedural steps include:
1. Execution of Form SH-4 (Securities Transfer Form) duly signed by the transferor, transferee and itnesses.
2. Submission of the share certificate and other relevant documents to the company.
3. Approval of the share transfer by the Board of Directors through a Board Resolution.
4. Recording of the transfer in the Register of Members of the company.
However, an important practical question often arises in relation to the timing of payment of consideration by the transferee to the transferor.
When Should the Share Transfer Consideration Be Paid?
The Companies Act, 2013 does not prescribe a specific timeline stating when the consideration for transfer of shares is required to be paid between the transferor and transferee. Further, unlike certain other corporate transactions, there is no separate requirement for filing an intimation of every share transfer with the Registrar of Companies.
This often leads to uncertainty regarding the appropriate sequence of events, particularly in transactions where the parties intend to undertake a valuation of the shares.
In this regard, attention may be drawn to the language used in Form SH-4, which requires disclosure of the “Total Consideration Received”.
The expression “consideration received” indicates that the consideration is contemplated as having already been received at the time of execution of the transfer instrument. Accordingly, from a procedural perspective, the consideration should ideally be remitted by the transferee to the transferor before execution of Form SH-4.
Suggested Sequence of Share Transfer
Where valuation is undertaken as part of the transaction, the procedural sequence may therefore be structured as follows:
1. Intention to transfer shares is agreed between the proposed transferor and transferee.
2. Valuation of shares is undertaken and the valuation report is prepared, wherever applicable or considered necessary.
3. Transfer price is mutually agreed between the transferor and transferee based on the valuation and other commercial considerations.
4. Share transfer consideration is remitted by the transferee to the transferor.
5. Form SH-4 is executed by the transferor, transferee and witnesses.
6. Share certificate and prescribed documents are submitted to the company within the applicable timeline.
7. Board approval is obtained for registration of the transfer, subject to the provisions of the Companies Act, 2013 and the Articles of Association of the company.
8. Transfer is recorded in the Register of Members and the necessary corporate records are updated.
Conclusion
Although the Companies Act, 2013 does not expressly prescribe that the consideration must be paid before execution of Form SH-4, the wording of the prescribed transfer instrument, particularly the reference to “Total Consideration Received”, supports the view that consideration should be paid before execution of the transfer deed.
Accordingly, where valuation is undertaken, it would be prudent to complete the valuation and arrive at the mutually agreed transfer price before execution of SH-4 and completion of the subsequent corporate formalities.
This approach provides a clear procedural sequence and helps ensure that the documentation and financial aspects of the share transfer remain properly aligned.
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Disclaimer: This article is intended for general informational purposes and should not be construed as legal or professional advice. The specific facts of a transaction, the Articles of Association of the company and applicable provisions of law should be examined before undertaking a share transfer.
