3 STEPS TO FOLLOW WHEN TRANSFERING SHARES IN A PRIVATE LIMITED COMPANY

Private limited companies are closely held companies with less than 200 members. The transfer of share of a private limited company are governed by the provision of the companies act, 2013.

The provisions of the Companies Act, 2013 that deal with Share Transfer are,

• Section 56 of the Companies Act, 2013 – Transfer and Transmission of Securities

• Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014 – Instrument of Transfer

• Table F of Schedule I of the Act – Articles of Association of a Company limited by Shares

How is a Share Transfer done?

Step 1 - Review the Articles of Association of the Company

Review the Articles of Association of the Company to determine whether any procedure or restrictions on transfer of securities have been provided for. It shall be noted that though a model of the Articles is provided in Table F, the Company is free to make its own Articles (provided it doesn’t contradict the Act in any way).

After understanding the Articles of the Company, the Shareholder-1 (henceforth “Transferor”) shall give a notice in writing to the Company informing it of their intention to transfer shares held in their name.

Step 2 - Intimation to other shareholders

The Company, upon receipt of the notice, shall intimate to the other Shareholders about such decision taken by the Transferor informing about the price, volume of shares proposed to be transferred.

The price of the share to be transferred shall be fixed by the Board or the Auditor in accordance with Rule 11UA of Income Tax Rules, 1962.

If the other Shareholders do not express any interest, the Transferor shall be free to transfer the shares to any Third-party (henceforth ‘Transferee”). A Share Transfer Form (SH-4) shall be executed by both Transferor and Transferee along with signatures of witnesses.

Step 3 - Submit Executed SH-4 form and Share certficate to Company

Approach the Company with the executed SH-4 along with the Share certificate corresponding to the share being transferred within 60 days of execution. The Board of Directors shall review the documents and if found to be bona fide in nature, will register the share transfer and record the name of the Transferee in its Register of Members.

We should understand the distinction between a Shareholder and a Member. The Transferee shall only become a Member when their name is entered into the Register of Members (RoM). When the transfer gets effected they shall only be a Shareholder until such time as the Authorized Person enters their name in the RoM.

After entering the name of Transferee in the RoM, the Board may issue new share certificates in lieu of the existing share certificate signed by any 2 Directors authorized for said purpose and the Company Secretary, if any.

Other Relevant Information

The Articles of Association have a very important role in the governance of the Company and act as its by-laws. It may pose various restrictions to transfer of shares, but it shall be noted that it cannot call for complete prohibition.

The Right of existing shareholders to have first priority in case of a proposed transfer is otherwise known as the “Right of Pre-emption”.