In India, the ownership structure of a Private Limited Company is determined by its share distribution. To bring in new investors or change ownership, shares in the company must be transferred. This allows the company to sell its interests to attract fresh investors or to shift control.
A key feature of these companies is the transferability of shares. Shares and debentures are considered movable property and can be transferred, as outlined in the company's articles, particularly concerning shares held by members of a public company.
What is a share transfer?
Share transfer involves the voluntary transfer of a company member's rights and, potentially, responsibilities. These rights and duties shift from the shareholder who no longer wishes to be a member of the company to someone who desires to become a member.
Consequently, company shares can be transferred like any other movable property, unless specific restrictions are expressed in the Company's Articles.
Adaptability in Ownership: Promoters, shareholders, and investors have the option to purchase and trade company shares through the share transfer process. This method provides increased flexibility for altering the ownership stakes within the company.
Opportunity for Exit: In certain scenarios, shareholders may wish to exit by selling some or all of their shares, or the company's promoters/shareholders may want to sell the entire business as a functioning entity. Share transfer serves as an exit opportunity for current shareholders.
Planning for Succession: Current shareholders can transfer company shares to family members or legal heirs as part of succession planning.
Tax & Process
Transferring shares in a private limited company may lead to capital gains income subject to Income Tax Regulations. In the case of startup private limited companies, investors frequently exit by transferring their equity shares to a new investor. The income generated is then subject to taxation as capital gains for the seller. The applicable tax rate hinges on whether the income is categorized as long-term or short-term capital gains.
Company's Memorandum of Association (MOA) and Articles of Association (AOA)
Current Shareholder Roster or Shareholder Register Copy
Share Certificate from Shareholders Transferring Shares, including their Name, Identity proof, mobile number, email ID, and address proof (Transferor)
Identity proof, mobile number, email ID, and address proof of the purchasing shareholder (Transferee)
Evidence of consideration payment
Any additional documents as necessary
Transferring shares in a private limited company involves several steps:
Step 1: Share Transfer Deed:
Obtain a share transfer deed in the prescribed format.
Ensure it's properly signed by both the transferor and transferee.
Stamp the deed with names, addresses, and signatures.
Step 2: Submission to the Company:
Attach the transfer deed or allocation letter to the share certificate.
Send these documents to the company for processing.
If approved, the transferor receives a new certificate.
Step 3: Notice to Existing Members:
The company informs existing members of the intention to transfer shares.
If no member expresses interest, the transferor can sell to a non-member.
Step 4: Form SH-4:
Initiate the transfer process with Form SH-4.
Provide details such as date, company CIN, name, securities class, value, and more.
Both transferor and transferee information must be included with signatures.
Step 5: Stamping the Document:
Ensure the transfer deed is appropriately stamped as per the Indian Stamp Act.
Step 6: Registration and Share Certificate Delivery:
Submit the documents to the company for registration.
The company registers the transfer and delivers the share certificate to the transferee within a month of document receipt.
Step 7: Timelines:
Companies with a share capital must not register any transfer within 60 days of execution.
If the transferor applies, registration can't occur until they are notified within two weeks of application.
Step 8: Penalties:
Companies face penalties ranging from Rs. 25,000 to Rs. 5,00,000.
Officers in default can be penalized from Rs. 10,000 to Rs. 1,00,000.
Note: Share transfer deeds must conform to specific requirements set by the company and can only be accepted by the company if they meet these standards.
What is a Share transfer in a Company?
Share transfer involves the voluntary transfer of rights and duties of a company member.
What is the difference between a director and a shareholder?
A shareholder or member owns company shares and is listed in the company's register of members. A director, on the other hand, oversees the company's daily operations. It's possible for a director and a shareholder to be the same person, but they can also be different individuals.
What are the penalties for companies in default?
Companies in default may face penalties, with a minimum of Rs. 25,000 and a maximum of Rs. 5,00,000.
Does share transfer occur immediately?
No, there is a prescribed procedure that must be followed for the share transfer process.
Can a minor person become a shareholder of a company?
A minor can become a member/shareholder of a company only through gift and/or inheritance but cannot enter into an agreement to buy shares. Additionally, the minor will hold shares through a guardian, and the guardian will act as a member on behalf of the minor.