COMPANY SHARE TRANSFER IN INDIA 2022
The ownership hierarchy of a private limited company in india is decided by the shareholding of the Company. If a company wants to induct new investors or transfer the ownership of the Company, the share of the private limited company has to be transferred.
RESTRICTIONS FOR SHARE TRANSFER IN AOA 2022
A private limited company is deemed as a “closed corporation” of members, very similar to a partnership firm. Thus, the share transfer in 2022 a private limited company can be restricted by the Articles of Association (AOA). The Articles of Association of a company/organization has to be checked before the commencement of the share transfer procedure. The restrictions imposed on the right of the shareholders to transfer shares are as mentioned below:
- RIGHTS OF PRE-EMPTION: If a shareholder wants to sell some/all of his/her shares, then these shares must be offered first to the other members of the private limited company at a price which is decided by the directors or the auditor of the Company. The value of the shares can be arrived at basis the formula or method prescribed in the Articles of Association. If no existing shareholder is interested in buying these shares, then these shares can be sold/transferred to an outsider.
- POWERS OF DIRECTORS TO REFUSE: A director in a private limited company may have powers to refuse registration of transfer of shares under certain circumstances as prescribed in the Articles of Association.
- The restrictions contained the Articles of Association of a private limited company are deemed as legally binding. Any private agreement between the shareholders is not considered binding either on the company or on the shareholders.
- The share transfer can only be restricted by the Articles of Association. However, the right to transfer shares of a private limited company cannot be considered a ban on share transferability in totality.
SHARE TRANSFER PROCESS INITIATION
- The Articles of Association of the Private Limited Company have to be reviewed and if there are any restrictions they must be addressed
- A shareholder must give a notice in writing to the director of the said company about his/her intention to transfer the shares of the said company
- A price has to be determined as per the Articles of Association at which the shares of the Company will first be offered to present shareholders of the Company. This price is normally decided by the directors of the said company or the auditor
- The said company has to issue a notice to the other shareholders about the availability of these shares, the last date to purchase these shares and the price at which these shares are being sold for.
- If any of the present shareholders come forward for the purchase of shares, such shares have to be transferred to them. In case no present shareholder shows interest or excess shares are available, then these shares can be transferred to an outsider.
PROCESS TO TRANSFER SHARES OF A PRIVATE LIMITED COMPANY
- The share transfer deed has to obtained in the prescribed format.
- The share transfer deed has to be executed and signed by the transferor and transferee.
- The share transfer deed must be stamped as per the Indian Stamp Act and stamp duty notification in force in the state where the company is located.
- A witness must sign the share transfer deed with his or her signature, name and residential address.
- The share certificate or allotment letter must be attached with the transfer deed and delivered the to the company.
- The company must process the documents and if these documents are approved, issue a new share certificate in the name of the said transferee.
PROCEDURES FOR SHARE TRANSFER THROUGH THE PHYSICAL MODE
The ownership of a company’s shares can be transferred by delivery of possession, but this involves a contractual relationship between the members and the company. When the shares of a company are transferred the contractual relationship is assigned to the transferee, this needs something called the instrument of transfer. The transfer of shares involves a series of steps as follows:
- An agreement to sell, which is called the share transfer deed
- The execution of a deed of transfer
- The final step is the registration of the transfer
1) TRANSFER DEED
A share transfer deed is an instrument of transfer that has to be executed by both transferor and transferee. A share transfer deed has to be stamped and delivered to the company along with the transfer certificate for these shares. An instrument of transfer which does not comply these regulations will not be accepted by the company. A share transfer in physical format is done and executed with the help of Form “SH-4”.
Some companies may send a notice or acknowledgement for the instrument to the transferor who has filed a transfer with the company before the documents have been scrutinized. The notice of acknowledgement is usually a letter which holds a checklist to check the transfer documents. Some companies may follow a practice of issuing what is called a transfer receipt. If the transfer application has been made by the transferor alone, and he or she has partly paid for the shares then. The company will not register the transfer unless the company acknowledges the transferee. He or she does not have any objections to transfer the shares within 2 weeks from the receipt of such a notice. There is no mandatory obligation on the said company to give notice to the transferor when the transfer documents are lodged by the transferee.
On receiving all the transfer documents, a scrutiny must be done to ensure that all the
documents are in place. The scrutiny must be done within 3 to 5 days from the time the transfer documents have been received. If these documents are not acceptable, the same have to be returned to the transferee. In case the signature of the transferor in the transfer instrument is different from the specimen signature in the company’s record, then the documents shall be returned.
Any transfer of shares has to be placed before the board of directors or committee for its approval. The registration always takes place after such an approval. If everything is deemed okay after scrutiny, it must be approved by the right authority. The transfer of shares have to be approved by the board. If the articles of the company empower the board to delegate its power of approval of share transfer, then it may decide to delegate it to a committee who may not be the company’s directors.
Aregistration of share transfer is a requirement for the transferee to obtain the status of a member of the company. A transfer is deemed incomplete without the registration of share transfer. A share transfer form is the only document through which the transferee agrees to accept the shares. This document then becomes a legal contract with the company. Once the company approves and registers the transfer, an entry of the transferee’s name in the registry of the member is made which qualifies his or her status as a member. The maintenance of the register of transfer is not a statutory or mandatory requirement.
6) DELIVERY OF SHARE CERTIFICATE
The transfer becomes effective only when the registration of such shares is done by the company. The company must deliver the share certificate within 1 month from the receipt by the company’s instrument which is related to the transfer. This instrument of transfer has to be endorsed with the respective name of the transferee.
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