The ownership of a private limited company is determined by the shareholding of the Company. To induct new investors or transfer ownership of the Company, the share of the private limited company would have to be transferred.
A private limited company is considered to be a "closed corporation" of members, similar to a Partnership Firm. Therefore, the share transfer in a Private Limited Company can be restricted by the Articles of Association (AOA). Hence, the Articles of Association of the Company must be reviewed prior to beginning the share transfer procedure.
Restrictions on right of the shareholders to transfer shares are usually in two forms:
1. Rights of pre-emption: If a shareholder wishes to sell some or all of his shares, such shares must first be offered to other existing members of the private limited company at a price determined by the Directors or the Auditor of the Company. The value of the shares can be determined based on the formula / method prescribed in the Articles of Association. In no existing shareholder is interested, then shares of the Company can be freely transferred to an outsider.
2. Powers of Directors to refuse: The Director may have the powers to refuse registration of transfer of shares under certain circumstances - prescribed in the Articles of Association.
Only restriction contained the Articles of Association are considered legally binding. Any private agreement between the shareholders are not binding either on the company or on the shareholders. Further, share transfer can only be restricted by the Articles of Association. The right to transfer shares of a private limited company cannot be an total prohibition or ban on share transferability.
To initiate the share transfer procedure, the following steps must be followed:
Step 1: Review the AOA: Articles of Association of the Private Limited Company must be reviewed and restrictions, if any must be addressed.
Step 2: Shareholder must give notice in writing to the Director of the Company about intention to transfer share of the company.
Step 3: Determine the price as per Articles of Association at which the shares of the Company will first be offered to present shareholders of the Company. (Usually this price is determined by the Directors of the Company or an Auditor of the Company.)
Step 4: The company must then give notice to the other shareholders about the availability of share, the last date to purchase the shares and the price at which the share are available.
If any of the present shareholders come forward for the purchase of shares, such shares must be allotted to them. In case no present shareholder is interested or excess shares are available, the same can be transferred to the outsider.
To effect the share transfer, the following steps must be followed:
Step 1: Obtain share transfer deed in the prescribed format.
Step 2: Execute the share transfer deed duly signed by the Transferor and Transferee.
Step 3: Stamp the share transfer deed as per the Indian Stamp Act and Stamp Duty Notification in force in the State.
Step 4: Have a witness sign the share transfer deed with his/her signature, name and address.
Step 5: Attach the share certificate or allotment letter with the transfer deed and deliver the same to the Company.
Step 6: The company must process the documents and if approved, issue new share certificate in the name of the transferee.
The ownership of shares can be transferred by delivery of possession, but there is a contractual relationship between the members and the company. When shares are transferred the contractual relationship is assigned to the transferee which needs an instrument of transfer. Transferring a share involves a series of steps, first an agreement to sell (Share Transfer Deed), then execution of a deed of transfer and finally registration of the transfer.
Share transfer deed is an instrument of transfer that must be executed by both transferor and transferee. Share transfer deed must be duly stamped and delivered to the company along with certificate relating to shares transferred. Any instrument of transfer which is not in conformity with these provisions cannot be accepted by the company. Share transfer in physical mode is executed with the help of Form "SH-4".
Some companies send a notice or acknowledgement of the instrument to the transferor who has lodged a transfer with the company before the documents are scrutinized. The notice of acknowledgement is usually in the form of a letter which holds a checklist for scrutiny of the transfer documents. Some companies follow a practice of issuing transfer receipt. If the transfer application is made by the transferor alone and he has partly paid for the shares; the company must not register the transfer unless the company acknowledges the transferee, and he does not have any objection in transferring the shares within 2 weeks from the receipt of the notice. There is no statutory obligation on the company to give notice to the transferor when the transfer documents are lodged by the transferee.
On receipt of all the transfer documents, a scrutiny should be done to ensure that all the documents are in place. The scrutiny should be done within 3 to 5 days from the receipt of the transfer documents. In case the documents are not acceptable, the same should be returned to the transferee. In case the signature of the transferor in the transfer instrument differs from the specimen signature on the company's record, then the documents will be returned.
Every transfer of shares must be placed before the Board of Directors or committee for its approval. The registration takes place after approval. If everything is accepted after scrutiny, it should be approved by the right authority. Transfer of shares must be approved by the board. If articles of the company empower the board to delegate its power of approval of share transfer, then it may delegate it to a committee who might not be the company's directors.
Registration of share transfer is a requirement for the transferee obtaining the status of a member of the company. A transfer is incomplete without registration of share transfer. A share transfer form is a document through which the transferee agrees to accept the shares. This becomes a legal contract with the company. Once the company approves and registers the transfer, this leads to the entry of the transferee's name in the registry of the member and it qualifies his status as a member. The maintenance of the register of transfer is not a statutory requirement.
Transfer becomes effective only on registration of such shares by the company. The company shall deliver the share certificate within 1 month from the receipt by the company's instrument related to transfer. The instrument of transfer must be endorsed with the respective name of the transferee.