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:
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 a total prohibition or ban on share transferability.
To initiate the share transfer procedure, the following steps must be followed:
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.
For transfer of shares, the following steps must be followed:
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.