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Transfer of Shares: Mechanisms, Regulations, and Restrictions Explained

The transfer of shares is a fundamental characteristic of company shares, allowing shareholders to freely trade their ownership in the company. However, this flexibility is balanced by certain mechanisms, regulations, and restrictions, especially within private companies. This article delves into these aspects, focusing on the provisions of the Companies Act 2013 and the practical implications for shareholders.

Mechanisms and Regulations for Transfer of Shares

Under Section 44 of the Companies Act 2013, shares are considered movable property and are transferable according to the Articles of Association (AOA) of the company. This is a fundamental aspect of both public and private companies, allowing transfer of shares freely. However, private companies can impose conditions to maintain control over their ownership structure. Shares and debentures, being movable property, can be transferred as outlined in the company’s articles, with public company shares generally being more freely transferable.

The transfer of shares is facilitated through any contract or arrangement between two or more persons, as governed by the provisions of the Companies Act. These provisions cover both the transfer and transmission of securities. Transmission refers to the loss of title due to events such as death, succession, inheritance, or bankruptcy, distinguishing it from voluntary transfer.

Transfer of shares involves the voluntary transfer of a company member’s rights and duties, represented by a share, from a shareholder who no longer wishes to be a member to a person who wants to join the company. Thus, in the absence of explicit restrictions in the AOA, shares in a company are transferable like any other movable property.

Key Participants in Transfer of Share Process

 The process involves several key parties, including:

  • Subscribers to the Memorandum: The original shareholders of the company.
  • Legal Representatives: In the event of a shareholder’s death, their legal representatives take over.
  • Transferor: The current shareholder wishing to do transfer of shares.
  • Transferee: The recipient of the shares.
  • The Company: Whether publicly traded or privately held, the company facilitates and records the transfer of shares.

Procedure for Transfer of Share Under the Companies Act, 2013

  1. Obtain the Transfer Deed: The transfer deed must be in Form SH-4 and endorsed by the prescribed authority.
  2. Signatures and Stamping: Both the transferor (seller) and the transferee (buyer) must sign the deed. Stamp duty must be paid according to the Indian Stamp Act.
  3. Witness Verification: A witness must verify the signatures.
  4. Submission to the Company: Attach the share certificate or allotment letter to the transfer deed and submit these to the company.
  5. Board Resolution: The company’s board must pass a resolution approving the transfer of shares.
  6. Issuance of New Share Certificate: After verification, the company issues a new share certificate to the transferee.

Time Limits and Penalties:

  • Time Limits: The company must register the transfer of shares within 60 days of the execution date. Certificates for subscribers to the memorandum must be delivered within two months of incorporation.
  • Penalties: For non-compliance, penalties range from Rs. 25,000 to Rs. 5,00,000 for the company and Rs. 10,000 to Rs. 1,00,000 for officers in default.

Restrictions on Share Transferability

While shares in public companies are generally freely transferable, private companies often impose restrictions to control their ownership structure and protect the interests of existing shareholders. These restrictions are primarily governed by the AOA.

Clause Restricting Transfer of Shares

Consider a scenario where the AOA of a private company includes a clause allowing shares of a particular shareholder to be transferred to another person upon passing a special resolution. If a shareholder has agreed to the terms in the AOA upon subscribing to the company’s shares, they are bound by these terms. This means the shareholder must comply with the transfer of shares mandate as specified in the special resolution, making such clauses legally binding and enforceable.

Transfer of Share and the Sale of Goods Act, 1930

Under the Sale of Goods Act, 1930, shares are considered goods, and the principle of ‘Nemo dat quad non habet’ (no one can transfer what they do not possess) applies. Only the shareholder, who has ownership of the shares, can transfer them. However, an exception to this rule is outlined in Section 27 of the Act, which states that the original owner’s consent to the transfer of shares, either explicitly or through their conduct, validates the transfer of shares by another party. Since the shareholder consents to the terms of the AOA, including the transfer of shares provisions, the company can enforce these clauses without contravening mercantile laws.

Reasonableness and Minority Protection

While private companies can restrict transfer of shares, such restrictions must be reasonable and not oppressive to minority shareholders. There are landmark legal precedents which established that the majority’s decisions are binding on the minority, provided they are not ultra vires (beyond the powers of) the AOA or oppressive. Therefore, any special resolution to do transfer of shares must be justifiable and provide an opportunity for the affected shareholder to be heard. This ensures that the restriction is fair and legally sound.

Practical Challenges and Procedural Considerations

A practical challenge arises under the Depositories Act, 1996, which requires a delivery instruction slip to register a share transfer. If a shareholder does not voluntarily transfer their shares, the company can appoint an authorized person to sign the slip on their behalf. This is supported by the judgment in Madhava Ramachandra Kamath v. Canara Banking Corp. Ltd (1941), which upheld that such provisions in the AOA constitute a binding contract between the company and its shareholders.

Frequently Asked Questions

  1. What is a resolution of transfer of shares?

A resolution of transfer of shares is a formal decision made by the board of directors or shareholders of a company authorizing the transfer of shares from one shareholder to another. This resolution typically includes details of the transfer of shares, such as the number of shares, the names of the transferor and transferee, and the effective date of the transfer.

2. What is the difference between transfer of share and transmission of shares?

  • Transfer of Share: This is a voluntary process where ownership of shares is transferred between two living, eligible entities. It involves an agreement between the current shareholder (transferor) and the new shareholder (transferee).
  • Transimission of Share: This occurs automatically upon the death of a shareholder. Ownership of the shares is vested in the legal heirs or nominees according to inheritance laws, succession rights, or a legally registered will.

3. How do I transfer shares of a company to another person?

To do transfer of shares:

  • Obtain approval from the board of directors and all other shareholders in the company.
  • Fill out the share transfer form (typically Form SH-4).
  • Submit the form along with the original share certificate to the company.
  • The company will then issue a new share certificate to the transferee (the person receiving the shares).

4. Can a board reject the transfer of shares?

Yes, the board of directors can refuse to register a transfer of shares. However, they must pass a formal resolution to this effect. Simply failing to approve a resolution due to a deadlock does not constitute an active exercise of the right to decline. If the board does not actively reject the transfer by passing a resolution, the applicant (transferee) will be allowed to be registered as a member of the company.

Conclusion

While the transferability of shares is a hallmark of corporate ownership, private companies have the leeway to impose reasonable restrictions through their AOAs. These restrictions must balance the interests of majority and minority shareholders, ensuring fairness and compliance with both corporate and mercantile laws. By following the prescribed procedures and maintaining transparency, companies can manage transfer of shares effectively while upholding shareholder rights. InstaFiling simplifies the transfer of share process by providing expert guidance on drafting or amending Articles of Association (AOA), ensuring compliance with legal standards, and facilitating necessary approvals and documentation. We offer step-by-step support, maintain transparent communication, and protect shareholder rights, ensuring a smooth and compliant transfer of shares process.

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