Share Transfers In Private Limited Companies

Share transfers are a fundamental aspect of corporate governance in India, allowing shareholders to pass on ownership rights in a company. Private limited companies, as defined under Section 2(68) of the Act, inherently restrict the free transferability of shares through their Articles of Association (AoA), distinguishing them from public companies.

A key differentiation arises based on whether the private limited company qualifies as a “small company” under Section 2(85). A small company is a private company (other than a public company, holding company, subsidiary company, Section 8 company, or one governed by a special Act) with a paid-up share capital not exceeding ₹10 crore and an annual turnover (based on the previous financial year) not exceeding ₹100 crore.

Non-small private limited companies face additional requirements, particularly mandatory dematerialization (demat) of securities under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014. This mandate streamlines processes but requires an additional layer of compliance.

Key Legal Framework

Before delving into the procedures, it’s essential to understand the foundational elements:

• Section 56 of the Companies Act, 2013: Mandates that transfers be executed via a proper instrument, duly stamped and delivered to the company within 60 days of execution. The company must register the transfer and issue new certificates within one month of receipt.
• Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014: Prescribes Form SH-4 as the standard instrument for share transfers.
• Articles of Association (AoA) and Shareholders’ Agreement: These documents often impose restrictions, such as a Right of First Refusal (ROFR) for existing shareholders, pre-emptive rights, or board approval requirements.
• Dematerialization Requirement: Applicable only to non-small private limited companies, requiring shares to be held in electronic form through a depository like NSDL or CDSL.
• Other Compliances: Include updating the Register of Members under Section 88, filing with the Registrar of Companies (RoC) if necessary, and adhering to Foreign Exchange Management Act (FEMA) norms for cross-border transfers and payment of Stamp Duty as per the applicable rates.

Process for Share Transfer in Small Private Limited Companies

Small companies retain the flexibility to hold and transfer shares in physical form, making the process more traditional and paper-based. The following steps provide a comprehensive guide:

1. Review Governing Documents: Begin by examining the AoA and any shareholders’ agreement to identify restrictions. For instance, the AoA may require shares to be offered first to existing shareholders via Right of First Refusal (RoFR). If no such clause exists, transfers can proceed directly, but board consent is typically mandatory.

2. Notify Intent and Obtain Approvals: The transferor (seller) must notify the company and other shareholders of the intent to transfer. If RoFR applies, offer the shares to existing members at the proposed price or fair value (determined by a valuer if needed). Secure written waivers or no-objection certificates (NOCs) from non-interested shareholders. In cases involving foreign parties, obtain RBI approval under FEMA.

3. Execute the Transfer Instrument: Prepare and execute Form SH-4, the prescribed share transfer deed. This form must include details such as the names and addresses of the transferor and transferee, share folio numbers, distinctive numbers, consideration amount, and signatures of both parties in the presence of witnesses. Affix share transfer stamps equivalent to the stamp duty (calculated on the higher of consideration or market value).

4. Submit Documents to the Company: Deliver the duly executed Form SH-4, original share certificates, and any supporting documents (e.g., NOCs, valuation reports) to the company within 60 days of execution. Failure to meet this timeline invalidates the transfer.

5. Board Meeting and Approval: Convene a board meeting to review the transfer request. The board verifies compliance with the AoA, checks for any liens or disputes on the shares, and passes a resolution approving the transfer. If refused, the company must notify the parties within 30 days, providing reasons (as per Section 58).

6. Registration and Certification: Update the Register of Members to reflect the new ownership. Cancel the old share certificates and issue new ones to the transferee within one month of receiving the transfer instrument. Inform the RoC if the transfer alters shareholding patterns significantly (e.g., via Form PAS-3 for allotments, though not directly for transfers).

7. Post-Transfer Compliances: File any necessary intimations with tax authorities for capital gains implications. Update the company’s records, including the annual return (Form MGT-7).

Additional Procedure for Share Transfer in Non-Small Private Limited Companies

Non-small private limited companies must comply with mandatory dematerialization, shifting the process to an electronic framework, which enhances efficiency but requires engagement with depositories and depository participants (DPs).

1. Review Governing Documents and Ensure Demat Compliance: As with small companies, check the AoA and shareholders’ agreement for restrictions. Additionally, confirm that all shares are dematerialized. If not, convert physical certificates to demat form before transfer (involving surrender to the company and issuance of demat credits).

2. Notify Intent and Obtain Approvals: Similar to small companies, notify shareholders and secure RoFR waivers or NOCs. For foreign transfers, FEMA/RBI approvals are required. The demat requirement adds a layer: Ensure both transferor and transferee have demat accounts.

3. Execute Transfer via Delivery Instruction Slip (DIS): Instead of Form SH-4, use a Delivery Instruction Slip (DIS) provided by the DP. The transferor instructs their DP to debit the shares from their demat account and credit them to the transferee’s account. No physical stamping is needed, as stamp duty is collected electronically or separately.

4. Submit to the Company and Depository: The transferor submits the DIS to their DP, who processes it through the depository system. The company receives an electronic intimation and verifies the transfer against AoA restrictions. Delivery to the company (for approval) must occur within 60 days, though the process is faster in demat mode.

5. Board Meeting and Approval: Hold a board meeting to approve the transfer, similar to small companies. The board confirms no disputes and updates internal records.

6. Registration and Confirmation: The depository updates the beneficial ownership electronically. The company updates its Register of Members and issues a confirmation (no physical certificates are issued in demat form). This must be completed within one month.

7. Post-Transfer Compliances: Handle tax filings for capital gains. For non-small companies, additional reporting under Rule 9B may apply, such as annual confirmations of demat holdings. Update Form MGT-7 accordingly.