Section 56 of the “”New Act” [Companies Act 2013], substitutes of old provisions pertaining to transfer and transmission of shares of a company. It is pertinent to note that Section 56 not only provides provisions for transfer of shares but also for the transfer of Interest in a Company which does not have a share capital.
Though Section 44 of the Companies Act 2013, categorically placed “shares” as movable properties and are feely transferred, procedure involved in transfer and transmission of shares will not end in mere delivery of share certificates / instruments of transfer to the transferee.
Transfer of shares unlike transfer other movable properties involve the third party (Company) approval other than the transferor and the transferee. Also the definition section of Private Limited Company[1], places restrictions upon the transfer of shares held in a Private Limited Company.
Transfer of Shares – Law:
Section 56 of the Companies Act 2013, provides for the manner in which transfer of shares of a company be effected. Accordingly the procedure involved in transfer of shares of a company includes the following:
Production of Instrument of Transfer, in prescribed form (SH 4) either by the transferor or transferee. The instrument shall contain the name and particulars of the transferor and the transferee, along with the particulars of the share transferred
Such instrument has to be duly executed and stamped as based on the value of shares that are transferred.
Share certificates / Letter of allotment of shares has to be delivered along with the instrument. In event of loss of instrument / the same has not been delivered within the prescribed period, the transfer may be effected on such terms as to indemnity as the Board may deem fit.
Transfer of Partly paid up shares:
In the words of Section 56(3), a transfer of partly paid up shares of a company shall be registered only upon issuance of notice to the Transferee and a no objection has to be obtained from him within two weeks from the issuance of the notice.
Delivery of share certificates:
Certificates of securities transferred or transmitted shall be delivered to the transferee within one month from the date of receipt of the instrument of transfer/transmission[2]. In case of securities dealt in a depository, then the details of such transfer shall be intimated to the depository immediately.
Refusal of Registration:
Shares of a public limited company are freely transferable. However, restrictions on transfer of shares shall be placed upon a Private Limited Company. In addition to the statutory provisions, transfer of securities of a private Limited Company are governed by the procedure prescribed in the Articles of Association of the Company.
The Board of Directors of a Company are vested with power to refuse the registration of transfer of shares of a Private Limited Company.[3]
Section 58 of the New Act provides the procedure on refusal of registration of shares. Accordingly, a Private Limited Company can refuse to register transfer/ transmission of shares by intimating the same within 30 days from the date of receipt of the instrument of transfer of intimation of the transmission. On refusal of registration of transfer, the Board is bound to provide reasons for such refusal.
Appeal by the Aggrieved Member:
Section 58(3) provides the mechanism for a member aggrieved by the act of the Company in refusing registration to redress the grievance. The transferor aggrieved by the refusal of transfer of shares or transmission as the case may be can file an appeal to the Tribunal within 30 days from the date of receipt of intimation refusing registration of transfer of shares. In case of no reply from the Board, then the member has a right to Appeal to the Tribunal within a period of 60 days from the date on which the instrument of transfer / transmission was delivered to the Company.
In case of transfer of shares of a public company, a member can appeal against the refusal of registration of shares within a period of 60 days from the date of receipt of refusal of transfer / transmission as the case may be. In case if there is no reply, then such appeal can be made within a period of 90 days from the date on which the instrument of transfer / transmission was delivered to the Company.
Court’s power to intervene:
The Tribunal after hearing both sides may either dismiss the Appeal or pass the following Order:
- Direct the Company to register the transfer / transmission. Upon such Order the registration has to be made within 10 days from the date of the Order.
- Direct rectification of Register.
- Award damages to the aggrieved member, if any.
Any person contravening the Order of the Tribunal shall be punishable with an imprisonment of not less than 1 year but up to 3 years and a fine of not less than 1 lakh rupees but up to 5 lakhs rupees.
In Bajaj Auto Limited vs Company Law Board[4], the Supreme Court held that, if the power of the Board of Directors to refuse registration is not found in the interest of the Company, then the Court can interfere in the registration. The Board of Directors have a duty to act bonafide and in the interest of the Company and shareholders.
Judicial intervention is warranted when the refusal for transfer is based on irrelevant consideration. Refusal on frivolous ground was held void.[5]
Stamp Duty on Transfer of shares:
Stamp Duty for Shares are calculated on basis of consideration received on such transfer. A stamp duty of Rs 0.25 for every Rs 100 is chargeable as Stamp duty. In case of shares transferred without proper consideration ( Gift of shares), then the market value of shares are required to be considered for calculation of Stamp duty.
It is pertinent to note that Section 8A of the Indian Stamp Act exempts payment of Stamp Duty for securities issued in electronic form provided the consolidated stamp duty is already paid. Also shares transferred between a Depository and the beneficial owner will not attract Stamp duty.
Liability to Pay Stamp duty:
According to the provisions of Section 29 of the Stamp Act, unless there is an agreement to the contrary,the expenses relating to the Stamp Duty are to be borne by the person executing the document. In the case of transfer of shares of a company it is the seller who is responsible for payment of stamp duty. [6]
The transferee is not liable for stamp duty on a mere fact that instrument for transfer of shares is required to be executed both by the transferor and transferee.[7] Section 17 of the Stamp Act makes it clear that any instrument chargeable with duty, should be stamped before the instrument is signed. However in practice this may also be borne by the transferee.
[1] Section 2 (68) of the Companies Act 2013
[2] Section 56(4)(c)
[3] Section 58(2) of the Companies Act 2013.
[4] AIR 1999 SC 345
[5] Techno electric & Engg company Limited Vs Payal Singh, (1992) 1 Comp. L.J 334 (Cal)
[6] Union of India vs. Kulu Valley Transport Ltd. (1958) 28 Comp. cas. 29
[7] Mrs. G.R. Parry vs. Union of India (1962) Comp. cas. 145
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