Share Transfer

Share Transfer Process

The shareholders of a Private Limited Company make decisions about who owns the company. If you want to change ownership over the course of your business or bring in new investors, you must transfer the shares. Our team of experts at Lawgical Adda is ready to assist Private Limited Companies with the Share Transfer process. We make sure that every step is carried out in accordance with current legal standards and regulatory requirements, which ensures a smooth transition and compliance integrity.

Comprehending Share Transfer in Private Limited Enterprises

In the context of a private limited company, "share transfer" refers to the voluntary transfer of ownership rights by a shareholder to any other individual with the approval of the remaining shareholders. Stated differently, a private limited company's ability to transfer shares is limited and requires the approval of other shareholders; this idea is referred to as the "Right of Preemption" or the “Right of First Refusal.”

In other words, whomever wants to sell or transfer his stock must first make an offer to the current shareholders. The current shareholders are free to accept the offer and buy the shares, or they can decline the share transfer plan. The shares may be offered to any member of the public if these shareholders decline to buy the shares that are being offered.

What distinguishes issuing shares from transferring shares?

A private limited corporation must choose how many shares to issue at formation. Following that, the shareholders receive these in accordance with the agreement. Share transfers between shareholders are permitted at any moment, but it's crucial to understand that they have no effect on the quantity of shares that are already in circulation. New shares are created by issuing them. A partnership agreement describes in detail how shares are distributed.

Important Rules for Private Company Share Transfers

To ensure adherence to corporate governance guidelines and preserve the business's private status, share transfers inside a private corporation are subject to strict legal regulations. The foundation for these transfers is established by Sections 56(1) & (3) of the Companies Act, 2013 and Rule 11(1) (2) (3) of the Companies (Share Capital and Debentures) Rules, 2014.

Many important parties are involved in the process, including

1. First recipients of the company's memorandum.
2. In the event of the death of a shareholder, a legal representative.
3. The existing shareholder who wants to transfer shares is the transferor.
4. The person who receives the shares is the transferee.
5. The business that is being transferred, whether it is privately held or listed on a public exchange.

Procedure for Transferring Shares in a Private Company

The following is a description of the steps needed to start the share transfer process in a private company:

Step 1: Examine the company's articles of association (AOA).

The AOA and any current shareholders agreement must be carefully read through before starting the share transfer process. Certain clauses concerning the transfer of shares, such as pre-emption rights or permission requirements, might be included in these documents.

Step 2: Make shares available to current investors (with the option to decline).

A shareholder offers to sell or transfer his shares when he wants to stop being associated with the company. In this instance, he is principally required by contract to notify the company's current owners under the "Right Of First Refusal." It makes sure that the current shareholders are given the first chance to approve or reject the offer to buy shares. The shares may be made available to any outsider or entity interested in purchasing them if no current shareholders express interest in purchasing them.

Step 3: Put Share Transfer Agreement into Action

A Share Transfer Agreement is created once all necessary clearances are secured. The terms and circumstances of the share transfer are outlined in the agreement, together with the number of shares, compensation, any guarantees or representations, etc.

Step 4: Fill out the Share Transfer Form

Both the transferor and the transferee must complete a Share Transfer Form—the SH-4 Form required by Section 56 of the Companies Act 2013—after the Share Transfer Agreement is executed. Additionally, a few more pertinent paperwork and formalities need to be completed, like share certificates and board resolutions approving the share transfer.

Step 5: Payment of Stamp Duty

According to the applicable state legislation, share transfers in India are subject to stamp duty; the amount of stamp duty varies depending on the state in which the company is registered and the value of the shares being transferred. For the share transfer agreement to be deemed legally binding, it must bear the stamp of the relevant duty.

Step 6: Board of Directors approval

Transferring shares may occasionally need board of directors approval. Depending on the internal policies of the business and its governing papers, other approvals, such as shareholder approval or compliance with regulatory standards, can also be necessary.

Step 7: New Share Certificate Issuance

The Board of Directors of the company confirms the transfer and makes the necessary modifications to its records upon receipt of the Share Transfer form and any other pertinent documentation. The transferee receives a new share certificate from the company confirming their ownership of the transferred shares upon successful verification.

Can a spouse or kid inherit shares in a private company?

It is possible to transfer shares of a private firm to a spouse or children. 

The shareholders may need to approve this by passing a special resolution, and the company's articles of organization may need to be altered to make this possible.

Any dividends they receive from the company will be subject to income tax, and the total amount of tax due will depend on their other income.

Is consent from shareholders required before issuing shares of a private company?

Usually, a firm cannot issue or transfer shares until it has received approval from its shareholders. Typically, this takes place during a general meeting where all shareholders can cast votes on the proposal.

Under the Companies Act, shareholders typically get "pre-emption" rights. This suggests that, based on their current stake, they should receive first dibs on any additional private firm shares. In cases when there is a share transfer, preemption rights might also be applicable. 

If the transfer is not registered by the corporation, the share transfer procedure will not be completed. Within a month after the transferee's registration, the corporation must send the share certificate. While shares in a private limited company can only be transferred in compliance with the guidelines outlined in the AOA, shareholders of a public limited company can transfer their shares freely and readily.

The knowledgeable staff at Lawgical Adda is prepared to offer thorough support throughout the share transfer procedure. Any private limited company's share transfers can be completed smoothly and legally thanks to our extensive knowledge and experience navigating the complexities of corporate regulations. Our experts can help you at every stage, from examining the articles of association to making sure share transfer deeds are properly executed and stamped.