A Private Limited Company, as defined under Section 2(68) of the Companies Act, 2013, must include specific restrictions on the transferability of shares within its Articles of Association (AOA), filed in Form INC-34. These restrictions are primarily designed to regulate the movement of shares and protect existing shareholders’ interests. The most common mechanism is the Right of First Refusal (ROFR), which mandates that any shareholder wishing to transfer shares must first offer them to existing shareholders on identical terms before approaching external parties.
Additionally, most private companies require the approval of the Board of Directors for any share transfer to be finalized, even if the existing shareholders decline to acquire the offered shares. This two-tiered safeguard ensures both shareholder consent and board oversight in the transfer process, preserving the company’s control and integrity.
Dematerialization of Shares and Its Applicability
Recent regulations under Rule 9B of the Companies Act, 2013 have introduced mandatory dematerialization (DEMAT) of shares for certain private companies. This rule applies to all private companies except small companies that meet either of the following thresholds:
- Paid-up capital of ₹4 crores or more, or
- Annual turnover of ₹40 crores or more.
Section 8 companies, as well as holding and subsidiary companies, are also required to comply. For these entities, all shares must be maintained in electronic (DEMAT) form. Share transfers must be conducted through a depository participant (DP) in accordance with dematerialization norms. Importantly, before initiating any share transfer in DEMAT form, existing physical shares must be converted into DEMAT accounts.
Share Transfer Process in Small Private Limited Companies
The transfer of shares in small private limited companies follows a more traditional approach, governed by Section 56 of the Companies Act, 2013. Compared to public companies, private firms impose greater restrictions on share transfers, primarily to safeguard shareholder composition and control. Transfers can occur either between existing shareholders or to outsiders, but only after complying with conditions stipulated in the AOA and the Companies Act.
This article outlines the share transfer procedure, the critical role of Form SH-4, and related stamp duty implications as prescribed by law.
Section 56: Transfer and Transmission of Securities
Section 56 mandates the procedural requirements for both transfer and transmission of shares and other securities. While it applies to all companies, private companies enjoy flexibility through their Articles of Association to impose transfer restrictions.
Key procedural points include:
- Execution of Transfer Instrument: Transfer must be executed using Form SH-4, which acts as the legal deed of transfer. This instrument must be properly stamped, dated, and signed by both the transferor and transferee.
- Timely Submission: The completed and stamped Form SH-4 must be delivered to the company within 60 days of execution.
- Certificate Issuance: Upon successful registration of transfer, share certificates must be issued within one month for physical shares and within two months for fresh allotments.
- Demat Transfer for Listed Companies: Transfers for listed entities or companies with shares in dematerialized form must be processed through the depository system. This requirement typically does not extend to most private companies unless covered under Rule 9B.
- Penalties: Non-compliance with Section 56 provisions may attract penalties up to ₹50,000 on the company and responsible officers.
Modes of Share Transfer: DEMAT vs. Physical
Dematerialized Transfer:
For private companies under Rule 9B, physical transfer through SH-4 and stamp duty payments are replaced by electronic transfers via Depository Participants (DPs). Both transferor and transferee must have active DEMAT accounts, and the transfer is executed through Delivery Instruction Slips (DIS).
Physical Transfer:
For companies not covered by Rule 9B, physical share transfers remain valid. It is crucial to submit a duly executed and stamped Form SH-4 to the company within the prescribed timeline to avoid invalidation. Non-payment or delay in stamp duty may render the transfer legally ineffective.
Transmission vs. Transfer:
Transmission, triggered by events like death or inheritance, differs from transfer as it does not require Form SH-4 or stamp duty but follows separate procedural guidelines under Section 56.
Detailed Share Transfer Procedure in Private Companies
The Companies Act and Share Capital Rules, 2014 (Rule 11), specify the formalities for transferring shares in a private limited company. The Articles of Association often include clauses that restrict share transferability, mandating a preemptive offer to existing shareholders.
When a shareholder intends to transfer shares, the process begins with the execution of the Share Transfer Deed (Form SH-4). This legal instrument must be signed by the transferor, transferee, and witnessed. It includes essential details such as the number of shares, consideration amount, folio number, and distinctive share numbers.
Stamp Duty on Share Transfer
The Indian Stamp Act, 1899, along with various state amendments, governs the stamp duty applicable to share transfers. The prevailing rate is 0.015% of the total consideration or market value of shares, whichever is higher. This includes any premium on shares.
Stamp duty must be paid either via adhesive stamps affixed to the SH-4 form or through electronic stamping. Adhesive stamps must be cancelled by marking across all edges to prevent reuse.
For example, if shares are transferred for ₹1,00,000, the stamp duty payable would be ₹15 (0.015% of ₹1,00,000). Without proper stamp duty payment, the transfer deed is considered invalid, and the company may refuse to register the transfer.
Time Limits and Step-by-Step Procedure for Share Transfer in a Private Limited Company
Under the Companies Act, 2013, the transfer of shares in a private limited company is governed by strict timelines and a clearly defined procedure to ensure transparency and regulatory compliance.
Execution and Submission of Share Transfer Deed (Form SH-4)
The share transfer process begins with the execution of the Share Transfer Deed (Form SH-4), which must be duly signed by both the transferor (seller) and transferee (buyer). The date of execution is considered as the date on which both parties affix their signatures on the SH-4 form.
Once executed, the transfer deed along with the original share certificates must be submitted to the company within 60 days from the date of execution. Upon receipt, the company verifies the documents against its Articles of Association (AOA) to ensure that the transfer complies with the company’s internal share transfer restrictions.
Company Verification and Board Approval
After document verification, the company’s Board of Directors convenes to approve or reject the share transfer request. This approval is essential as private companies have discretionary powers to restrict share transfers as per the AOA.
If approved, the company updates its Register of Members by recording the transferee’s name and issues a fresh share certificate to the transferee. The share certificate must be issued within one month from the date of registration of the transfer.
If the Board rejects the transfer, the company must communicate the decision to both the transferor and transferee within 30 days of receiving the transfer documents.
Detailed Step-by-Step Share Transfer Process:
- Review the Articles of Association (AOA):
Verify any restrictions or procedures for share transfer outlined in the company’s governing documents. - Notify the Company and Existing Shareholders:
Inform the company and current shareholders of the intention to sell shares, offering the right of first refusal if applicable. - Execute the Share Transfer Deed (Form SH-4):
Both transferor and transferee must sign the form. - Payment of Stamp Duty:
Affix the applicable stamp duty on the SH-4 form in accordance with state laws. - Submit SH-4 and Original Share Certificate:
Deliver the duly signed and stamped SH-4 along with the original share certificate(s) to the company. This includes any requirements for share splitting if applicable. - Board Meeting for Approval:
The Board reviews and approves or rejects the transfer in the next board meeting. - Update Company Registers:
Upon approval, the company updates the Register of Members (Form MGT-1) and the register of share transfers.
Role of the Board of Directors in Share Transfer
The Board of Directors holds the authority to approve or reject share transfers in a private limited company, even if the transfer deed and documents are complete. Their decision must align with provisions in the Articles of Association.
- If approved, the transfer is registered, and share certificates are reissued accordingly.
- If rejected, the company must notify the concerned parties within 30 days, providing reasons for the refusal.
This process safeguards the company’s control over its ownership structure.
Conclusion
The transfer of shares in a private limited company is a critical process governed by both the Companies Act, 2013 and the company’s Articles of Association (AOA). It ensures proper control over ownership changes while maintaining legal compliance and protecting the interests of all shareholders. Adhering to the prescribed procedure—including executing the Form SH-4, timely payment of stamp duty, submission to the company, and obtaining Board approval—is essential to effect a valid and legally binding transfer.
Moreover, with the increasing shift towards digitization, companies falling under dematerialisation norms must ensure transfers happen via demat accounts through authorized depository participants. Whether dealing with physical share certificates or demat shares, following the statutory timelines and company-specific rules prevents disputes, penalties, and delays.
For business owners, company secretaries, and compliance professionals, understanding and implementing these procedures accurately is vital for smooth ownership transitions and maintaining regulatory compliance. Keeping detailed records and transparent communication between transferors, transferees, and the company’s board will further streamline the share transfer process.
Frequently Asked Questions (FAQs)
Q1: What is the time limit to submit Form SH-4 to the company after executing a share transfer deed?
Ans: The executed share transfer deed (Form SH-4) along with the original share certificate must be submitted to the company within 60 days of execution. Failure to do so may invalidate the transfer.
Q2: Is Board approval mandatory for share transfers in a private limited company?
Ans: Yes, the Board of Directors must approve share transfers as per the company’s Articles of Association. The Board has the discretion to accept or reject the transfer request within 30 days.
Q3: What happens if the company rejects the share transfer?
Ans: The company must communicate the rejection and the reasons to both transferor and transferee within 30 days. The transfer cannot proceed without Board approval.
Q4: How is stamp duty on share transfers calculated?
Ans: Stamp duty is typically charged at 0.015% of the consideration amount or the market value of the shares, whichever is higher. It must be paid via adhesive or e-stamps on the Form SH-4.
Q5: Are share transfers in private companies required to be in dematerialised form?
Ans: If the company falls under Rule 9B of the Companies Act, 2013 (typically those with paid-up capital above Rs.4 crore or turnover above Rs.40 crore), share transfers must be done through dematerialised (demat) accounts via authorized depository participants.
Q6: What is the difference between transfer and transmission of shares?
Ans: Transfer of shares is a voluntary act between transferor and transferee, requiring execution of Form SH-4 and stamp duty payment. Transmission occurs due to inheritance, death, or legal succession and does not require Form SH-4 or stamp duty.
