In a Private Limited Company, the shareholders help determine the ownership of the company. Over the course of business, if you want to introduce new investors or transfer the ownership, then you need to transfer the shares. Today, we will be focusing on the share transfer procedure in a private limited company.
Like any asset or property, you can transfer the rights of share from one shareholder to another. Provided that the Articles of Association don’t impose any restrictions on the said transfer.
Share Transfer and the Articles of Association
A private limited company is an association of people registered under the Companies Act, 2013. Therefore, the rules specified in the Articles of Association or AoA apply to all actions in the company. Hence, before initiating the share transfer procedure, you must check the AoA for any restrictions pertaining to the transfer.
Typically, the AoA has two kinds of restrictions on share transfer:
- Right of preemption – Let’s say that a shareholder of the company wants to sell his shares. According to the Right of preemption, the company must offer the existing shareholders of the company an opportunity to buy them. Further, the Director and/or auditor can determine the price. In some cases, the AoA specifies a formula for calculating the share value. In such cases, you must use that formula. Also, you must offer the shares to an outsider only if none of the existing shareholders want to buy the shares.
- The Directors’ Power to Refuse – The AoA can specify conditions under which the directors can refuse to register the transfer of shares. You need to check the AoA for such clauses too.
It is important to note that any restrictions in the AoA are legally binding. If the shareholders enter into a separate agreement disregarding the restrictions, then it will not bind the company or the shareholders. Further, the only way to restrict a share transfer is via the AoA. Also, you cannot completely ban the transfer of shares in a private limited company.
Share Transfer Procedure – Initial Steps
You must follow these steps to start the share transfer procedure:
- Review the AoA as explained above and address restrictions if any.
- Give written notice to the Director/s of the company regarding your intention to transfer the shares.
- Determine the price of the shares (refer to the section above).
- Give notice to the exiting shareholders about shares being available for purchase. Specify the price and the last date of purchase clearly in the notice.
Remember, you must give preference to existing shareholders before offering the shares to outsiders.
Share Transfer Procedure – All steps
- Obtain the share transfer deed in Form SH-4. Some exceptions are:
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- A director or nominee transfers shares on behalf of another body corporate [Sectin 187 of the Companies Act, 2013].
- A director or nominee transfers shares on behalf of a corporation that the Central or State Government owns or controls.
- Transfer of shares as security for repayment of a loan with the SBI, any scheduled bank, financial institution, any other banking company, State/Central Government, any corporation that the State/Central government holds, and trustees.
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- Ensure that you stamp the transfer deed as per your state’s stamp duty notification.
- Ensure that you have a witness that signs the transfer deed with his/her address details.
- Attach the allotment letter or the share certificate along with the transfer deed and send it to the company.
- The company processes the documents and issues a new share certificate if it approves the application.
Additional points:
- In cases where the transferor makes an application for transfer for partly-paid shares, the company must notify the amount due to the transferee. The transferee must send a no-objection letter within two weeks from the date of receipt of the notice.
- In case of a lost transfer deed, you can affix a stamp of the same value on a written application and send it to the company. The board may choose to register the transfer on a case-to-case basis.
Summing Up
The share transfer procedure is complete only when the company registers the transfer. On registration, the company must send the share certificate to the transferee within one month. We hope that this article helped you understand the share transfer procedure in detail. For any assistance, please feel free to write to us.
