Transfer and Transmission of Shares

Transfer of Shares

Transfer of shares refers to the process by which ownership of shares in a company is transferred from one person or entity to another. This typically involves a formal procedure including the completion of a share transfer form, which must be signed by both the transferor (current owner) and the transferee (new owner). The transfer is then recorded in the company’s share register. Depending on the company’s regulations and the type of shares, the process may require approval from the company’s board of directors or compliance with specific legal and regulatory requirements. The transfer of shares changes the legal ownership and entitlements associated with those shares.

Meaning of Transfer of Shares

Transfer of shares refers to the voluntary transfer of ownership of shares by one person to another through a legal process. It involves an act of the shareholder, usually for consideration such as sale or gift. Transfer results in a change of ownership while the company continues its existence. It is governed by the Companies Act, 2013 and the Articles of Association of the company.

Characteristics of Transfer of Shares

• Formal Documentation

The transfer of shares typically requires formal documentation, including a share transfer form, which must be completed and signed by both the transferor (the current owner) and the transferee (the new owner). This form details the number of shares being transferred and the consideration paid.

• Approval and Registration

The transfer often needs to be approved by the company’s board of directors or other governing body, depending on the company’s articles of association. Once approved, the transfer is recorded in the company’s share register, updating the ownership records.

• Consideration

The transfer of shares generally involves consideration, which is the payment or value exchanged for the shares. This consideration is agreed upon by both the transferor and the transferee and is documented in the share transfer form.

• Share Certificate

In many cases, the physical share certificate representing the shares must be surrendered by the transferor and endorsed to the transferee. The company then issues a new share certificate in the name of the transferee, reflecting the updated ownership.

• Legal and Regulatory Compliance

The transfer must comply with legal and regulatory requirements, including securities laws and regulations. This ensures that the transfer is valid and legally binding.

• Restrictions

Some companies have restrictions on the transfer of shares, such as pre-emption rights, where existing shareholders have the first right to buy shares before they can be sold to an outside party. These restrictions are often outlined in the company’s articles of association or shareholders’ agreements.

• Tax Implications

The transfer of shares may have tax implications for both the transferor and transferee, including capital gains tax or stamp duty, depending on jurisdiction. It’s important for both parties to understand these implications and comply with relevant tax regulations.

• Change of Rights and Obligations

Once the transfer is completed, the transferee assumes all rights and obligations associated with the shares, including voting rights, dividend entitlements, and any potential liabilities. The transferor’s rights are extinguished, and the transferee becomes the new shareholder of record.

Procedure for Transfer of Shares

Step 1. Authority under Articles of Association

The first requirement for transfer of shares is that the Articles of Association (AOA) of the company must permit such transfer. In case of private companies, the Articles may impose restrictions such as prior approval of the Board or right of pre-emption. Any transfer made in violation of the Articles is invalid. Therefore, compliance with the Articles is essential before initiating the transfer process.

Step 2. Agreement between Transferor and Transferee

Transfer of shares is a voluntary act and begins with an agreement between the transferor (existing shareholder) and the transferee (buyer or recipient). This agreement may be for consideration such as sale, gift, or exchange. The intention to transfer ownership must be clear and lawful. Without a valid agreement, the transfer cannot take place.

Step 3. Execution of Instrument of Transfer (Form SH-4)

The transfer must be effected through a proper instrument of transfer, known as Form SH-4, as prescribed under the Companies Act, 2013. The form must be duly filled, dated, and signed by both the transferor and the transferee. It should mention details such as the name of the company, number of shares, distinctive numbers, and consideration involved.

Step 4. Payment of Stamp Duty

Stamp duty must be duly paid on the instrument of transfer as per the applicable Stamp Act. The rate of stamp duty is generally based on the consideration or market value of shares. Non-payment or insufficient payment of stamp duty renders the transfer deed invalid. Payment of stamp duty ensures legal validity of the transfer.

Step 5. Attachment of Share Certificate

The original share certificate relating to the shares being transferred must be attached to Form SH-4. In case the certificate is lost, a duplicate certificate must be obtained before submission. Attachment of the share certificate acts as proof of ownership and is necessary for verification by the company.

Step 6. Submission of Transfer Documents to the Company

The duly executed transfer deed along with the share certificate must be submitted to the company within the prescribed time. As per the Companies Act, the instrument of transfer should be delivered to the company within 60 days from the date of execution. Late submission may lead to rejection of the transfer.

Step 7. Scrutiny and Approval by Board of Directors

Upon receipt of the transfer documents, the company places them before the Board of Directors for approval. The Board verifies compliance with the Articles, payment of stamp duty, and authenticity of documents. If satisfied, the Board passes a resolution approving the transfer. In private companies, Board approval is mandatory.

Step 8. Entry in the Register of Members

After approval, the company enters the name of the transferee in the Register of Members and removes the name of the transferor. This entry completes the transfer process. Only after registration does the transferee become a legal shareholder with full rights such as voting, dividend, and transfer rights.

Step 9. Issue of New Share Certificate

The company issues a new share certificate in the name of the transferee within the prescribed time, usually one month from the date of registration. The old share certificate is cancelled. Issuance of the new certificate serves as legal evidence of ownership.

Step 10. Intimation to the Parties

After completion of transfer, the company intimates both the transferor and transferee about the registration of transfer. This ensures transparency and avoids disputes. Proper communication strengthens investor confidence and ensures compliance with good corporate governance practices.

Transmission of Shares

Transmission of Shares refers to the process by which ownership of shares is transferred due to events such as the death, bankruptcy, or incapacity of the shareholder. Unlike a voluntary transfer, transmission is typically automatic and involves the legal heir or representative of the deceased or incapacitated shareholder. The process requires the submission of necessary legal documents, such as a death certificate, probate, or court order, to the company’s registrar. Once verified, the shares are transferred to the rightful heirs or representatives, who then become the new shareholders. This process ensures the continuity of ownership despite changes in the shareholder’s status.

Meaning of Transmission of Shares

Transmission of shares refers to the automatic transfer of shares by operation of law, without any voluntary act by the shareholder. It occurs due to events such as death, insolvency, lunacy, or succession. Unlike transfer, transmission does not require a contract or consideration and arises due to legal necessity.

Characteristics of Transmission of Shares

• Automatic Process

Unlike voluntary transfers, transmission of shares occurs automatically due to specific triggering events, such as the death of a shareholder. It does not require a formal transfer agreement between parties but rather follows legal protocols for changing ownership.

• Legal Documentation

To effectuate the transmission, relevant legal documents must be provided. For example, in the case of death, a death certificate, probate, or letters of administration may be required. These documents verify the legal authority of the heir or representative to claim ownership of the shares.

• Heir or Representative

Transmission usually involves the legal heir(s) or representative(s) of the deceased or incapacitated shareholder. The new owner is recognized based on legal claims or court orders, rather than through a purchase or sale agreement.

• Company’s Share Register

The company’s share register is updated to reflect the new owner following the transmission. This process ensures that the company’s records accurately represent the current shareholders and their respective holdings.

• Board Approval

Depending on the company’s articles of association, the transmission of shares may require the approval of the board of directors. This step ensures that the transmission adheres to the company’s internal regulations and governance standards.

• Transfer of Rights and Obligations

Upon successful transmission, the new shareholder assumes all rights and obligations associated with the shares. This includes voting rights, dividend entitlements, and any responsibilities or liabilities related to the shares.

• No Consideration

Unlike voluntary share transfers that typically involve consideration (payment or value exchanged), transmission of shares does not involve a financial transaction. The transfer occurs due to the shareholder’s status change rather than a sale or purchase.

• Compliance with Regulations

The transmission of shares must comply with relevant legal and regulatory requirements, including company law and securities regulations. This ensures the process is legally valid and appropriately documented.

Key differences between Transfer of Shares and Transmission of Shares

Key Similarities between Transfer of Shares and Transmission of Shares

• Ownership Change

Both processes result in a change of ownership of shares. Whether through a transfer or transmission, the shares are reallocated from one party to another, updating the company’s records.

• Share Register Update

In both cases, the company’s share register must be updated to reflect the new owner. This ensures that the official records accurately represent the current shareholders.

• Formal Procedures

Both processes involve formal procedures to ensure proper documentation and compliance. Although the specifics differ, each process requires adherence to legal and company regulations to validate the change in ownership.

• Legal Documentation

Both the transfer and transmission require specific legal documents. For transfers, this might include a share transfer form, while for transmissions, legal documents such as a death certificate or probate are needed.

• Rights and Obligations

In both scenarios, the new shareholder assumes all rights and obligations associated with the shares. This includes voting rights, dividend entitlements, and any responsibilities related to the shares.

• Compliance with Regulations

Both processes must comply with legal and regulatory requirements, including company laws and securities regulations. This ensures that the ownership change is legally valid and properly documented.

• Potential Board Approval

In some cases, both processes may require approval from the company’s board of directors, depending on the company’s articles of association and internal policies.

• Recording

Both transfer and transmission involve recording the change in ownership in the company’s share register, ensuring that the records reflect the current shareholders.