Companies Act Section 56: Transfer And Transmission Of Shares
Transferring shares in a company is an important legal procedure that must be carried out with utmost precision. Whether you’re a business owner, shareholder, or investor, understanding the share transfer process is crucial for ensuring smooth transitions and compliance with regulations.
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OVERVIEW
Transfer of Shares
The transfer of shares is the process of moving existing shares from one person to another, either through sale or as a gift. Share transfers are governed by the relevant provisions in the Companies Act 2013 and the company’s Articles of Association (AoA). It is essential to review the Articles of Association before initiating a share transfer to ensure compliance.
A share transfer results in a change of ownership, impacting the company’s shareholder structure. In a private limited company, share transfers are typically restricted by the Articles of Association, which may outline specific conditions or approvals required.
Process
How to Transfer Shares in a Private Limited Company?
Transferring shares in a private limited company can seem complex, but understanding the process can make it much easier. Whether you're selling shares to a new investor, transferring ownership to a family member, or restructuring your business, it’s crucial to follow the correct legal steps to ensure a smooth and lawful share transfer.
What is a Share Transfer in a Private Limited Company?
A share transfer in a private limited company involves the transfer of ownership of shares from one shareholder to another. Unlike public companies, where shares are traded on stock exchanges, private limited companies have specific procedures for transferring shares, often requiring board approval and adherence to the company’s internal policies.
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Check the Company’s Articles of Association
Before proceeding with the share transfer, it’s important to review the company’s Articles of Association. These documents may contain specific provisions related to the transfer of shares, such as pre-emption rights or approval requirements.
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Execute the Agreement Between the Transferor and the Transferee
The first step in transferring shares is for the Transferor and transferee to agree on the terms of the transfer. This includes the number of shares, consideration amount, transfer price, and any special conditions of the sale. It’s also essential to clarify whether the transferee is an existing shareholder or a new investor.
Complete the Share Transfer Form
The transferor must fill out a share transfer form (Form SH-4), which includes important details such as the name of the transferee, the number of shares being transferred, and the agreed price. Both the transferor and the transferee need to sign this document. The witness is also required to sign this document.
Board Approval
The completed share transfer form must be submitted to the company’s board of directors for approval. According to the Companies Act, directors have the right to approve or reject the transfer of shares based on the company’s internal regulations or if the transfer is in the company’s best interest.
Payment of Stamp Duty
In India, a share transfer is subject to stamp duty, which varies based on the value of the shares being transferred. The stamp duty must be paid before the transfer can be finalized, and the share transfer form must be duly stamped as proof of payment.
Update the Company’s Share Register
Once the transfer is approved, and stamp duty is paid, the company must update its share register. This involves noting the details of the new shareholder and the number of shares they now hold.
Issue Share Certificates
Finally, new share certificates are issued to the transferee to officially document their ownership of the transferred shares. The original certificates held by the transferor are canceled.
Legal Requirements
Legal Requirements for Share Transfer in Private Limited Companies
Transferring shares in a private limited company is governed by specific legal procedures to ensure proper documentation, transparency, and compliance with applicable laws. The Companies Act, 2013 outlines the legal requirements that must be followed when transferring shares in a private limited company.
Key Legal Requirements for Share Transfer in Private Limited Companies
1. Review the Company’s Articles of Association (AoA)
The first step in the share transfer process is to check the Articles of Association (AoA) of the company. These internal regulations may impose certain restrictions on share transfers, such as:
✅ Pre-emption rights: Existing shareholders may have the right of first refusal to purchase shares before they are sold to outsiders.
✅ Board Approval: Many private limited companies require the approval of the board of directors before shares can be transferred.
2. Share Transfer Agreement
A share transfer agreement must be executed between the transferor and the transferee. This legally binding document will outline:
✅ The number of shares being transferred.
✅ The agreed price for the shares.
✅ Any special conditions or terms related to the transfer. The share transfer agreement helps protect both parties involved and ensures clarity on the terms of the transaction.
3. Execution of Share Transfer Form (SH-4)
The share transfer form (Form SH-4) must be completed to formalize the share transfer. The form includes:
✅ Names and addresses of both the transferor and transferee.
✅ The number of shares being transferred.
✅ The date of the transfer. The form must be signed by both parties to validate the transfer.
4. Board of Directors’ Approval
According to the Companies Act, 2013, the transfer of shares in a private limited company cannot be completed without the approval of the board of directors. The board will review the share transfer form and ensure the transfer is in compliance with the company’s Articles of Association and any shareholders' agreements.
6. Updating the Share Register
Once the transfer is approved and the stamp duty is paid, the company must update its share register to reflect the new ownership. The share register is a legal document that must accurately record the details of the shareholders and their respective shareholdings.
7. Issuance of New Share Certificates
Following the update to the share register, the company must issue new share certificates to the buyer, confirming their ownership of the transferred shares. The old share certificates held by the seller should be canceled.
Additional Legal Considerations
✅ Valuation of Shares
If shares in a private company do not have a market value, the price for the shares may need to be determined by an independent valuation to ensure fairness in the transfer process.
✅ Tax Implications
The transfer of shares may have tax implications, including capital gains tax, depending on the jurisdiction and the nature of the transfer.
✅ Transfer Restrictions
Certain shareholders' agreements or restrictions may limit the transfer of shares to outside parties. Always check for any restrictions before proceeding.
Sections 56
Key Provisions of Section 56: Transfer of Shares
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| In the case of shares held in a depository (NSDL/CDSL), the transferor and the transferee must both be registered as beneficial owners for the purpose of electronic tracing. The Form SH-4 needs to be executed properly, stamped at 0.015% of market value, dated, signed by both parties, and delivered within 60 days of execution with complete transferee details (name, address, occupation, PAN for listed companies). The share certificate or letter of allotment should be submitted to ascertain ownership and details about the shares. | Unlike transfer, which is a consensual act, transmission happens once and for all by law, so no permission is not necessary and no documentation is required like a transfer deed. Such events where transmission takes place include, among others, the death of a shareholder, the solvency or bankruptcy of a shareholder, a court order, succession events, or any other legal event that transfers the rights to a successor. | Partly paid shares, which have only part of their nominal value paid up, need extra protection measures during transfer. When the transferor is the only one to start the transfer, the company has to send a notice in Form SH-5 to the transferee about the transfer application and then wait for the transferee's reply. The transferee, who got the notice, can either object or consent by giving no objection within two weeks of receiving the notice. |
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It is mandatory for every company to deliver share certificates for all allotted, transferred or transmitted securities unless prohibited by law. For practical application, if a properly executed Form SH-4 is submitted on January 1, the company has to deliver the new share certificate by February 1, and missing this deadline puts the company at risk of incurring penalties. In case of depository transfers where the shares are kept with NSDL or CDSL, the company has to instantly inform the depository about the allotment, transfer or transmission details to ensure that the electronic records are updated. |
The transfer by legal heir or representative of a deceased shareholder will be considered valid and enforceable, notwithstanding the fact that the legal heir was not, at the time, a registered shareholder. This provision thus becomes an important exception to the general rule applied to transfer documents that only registered shareholders can execute. |
Complying with Section 56 does not come without a cost; non-compliance with any provision of this section will bring serious consequences, which include a fixed, non-negotiable corporate penalty of ₹50,000 and ₹50,000 for each individual officer responsible for the non-compliance. These penalties can be imposed on cases like failure to register a valid transfer or transmission, due delivery of documents not within the set time frames, registering transfers that do not meet Section 56 requirements, or any company officers' involvement in non-compliance. |
Penalties
Penalties and Legal Consequences for Non-Compliance
Non-compliance with Section 56 triggers serious consequences:
Company and Officer Penalties (Section 56(6))
- Flat penalty: ₹50,000 for each violation
- Scope: Covers the company and every negligent officer
- Types of violations: Neglecting to register valid transfers, not delivering certificates on time, and registering invalid transfers.
Civil and Equitable Remedies
- Shareholder can sue: In the event of the wrongful refusal of registration of a valid transfer by the company, the shareholder has the option of filing a civil lawsuit for damages and claiming.
- Specific performance: The judge may compel the company to accept and facilitate the transfer of shares by referring to the registration.
- Appeal to NCLT: Disqualified for transfer under Section 58, the shareholder can challenge the decision within 60 days in the National Company Law Tribunal.
Tax Implications
- Capital Gains Tax: The transferor is responsible for the payment of capital gains tax on the profit resulting from the sale.
- Tax on Higher Consideration: As per Section 56(2)(viib) of the Income Tax Act, inward share premium over fair market value may attract tax for closely held companies (although this rule will cease to be operative in April 2025).
- Gift Tax Complications: In case of shares being transferred as a gift, stamp duty will be charged at fair market value, and the donee might be subject to tax consequences.
Regulatory Consequences
- Stock Market Delisting (applicable to public companies): Exchange warnings or even delisting can be the result of ongoing non-compliance.
- SEBI Action: If the transfers are found to be fraudulent, it could lead to SEBI imposing penalties or the offender being prosecuted for civil or criminal offences under the Securities Laws.
- Depository Action: If the depository participant is found to be involved in supporting invalid transfers, they may incur penalties under the Depositories Act, 1996.
Why Choose JustStart?
Why Choose JustStart for Share Transfer Services?
✅ Our Proven Work Strategies
From meticulous planning to seamless execution, we follow industry-leading benchmarks to ensure every step of your share transfer process is not only carefully crafted but successfully implemented.
✅ Our Ideology Defines Us
At JustStart, we cater to individuals and businesses with the determination to achieve their goals. With a foundation built on trust, commitment, and expertise, we aim to deliver a smooth and hassle-free experience for every client.
✅ Timely Completion of Tasks
Time is crucial in the business world. Delays can lead to missed opportunities. That’s why we implement stringent measures to ensure your share transfer processes are completed within the set timelines.
✅ Quality That Guarantees Satisfaction
We believe in delivering excellence. Every phase of our work is systemized to minimize errors, ensuring your project is thoroughly reviewed and delivered with precision.
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FAQs
LET'S CLEAR ALL THE DOUBTS!
A transfer of shares refers to the process of transferring ownership of shares from one person to another.
No, a share transfer without consideration is void and legally invalid.
Form SH-4 is required for the transfer of shares. It must be duly stamped with the appropriate stamp duty, dated, and executed by or on behalf of both the transferor and the transferee.
Stamp duty is payable by the person receiving or acquiring the shares.
No, shares of a private company are not freely transferable.
A person who transfers their shares in exchange for consideration is known as the transferor.
A person who receives the shares and provides consideration is known as the transferee.
A share transfer deed is a document that contains the details of the transfer of ownership of shares from a seller to a buyer.
No, a share certificate is mandatory for the transfer of shares.
The share certificate is an important document in the share transfer process. It is required for verification and for making entries in the share register.
If you don’t have a share certificate, our experts can assist you with this process.
Yes, a digital signature is not required for the transfer of shares.
