In this blog post, Sucharita Ghosh, a student of Surendranath Law College, University of Calcutta, Kolkata, and currently pursuing a  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata describes the procedure for transfer of shares of a public company. 

 

Introduction

Transferability is one of the most important features of securities of the company. Section 44 of the Cmpanies Act, 2013 states that the shares or debentures or other interest of any member in a company are movable property, and these are transferable in the manner provided by the articles of the company.

As per the provision of company law, the securities or other interest of any member of a public company shall be freely transferable.

The concept of free transferability of shares in a public and private company is very succinctly discussed in the case of WESTERN MAHARASHTRA DEVELOPMENT CORPORATION LTD. Vs. BAJAJ AUTO LTD 2010 154 com cases 593 Bom. In the case, it was held that the Company Act makes a clear distinction regarding the transferability of shares relating to private and public companies. By its definition, a ‘private company’ is a company, which restricts the right to transfer its shares. In the case of a public company, the Act provides that the shares or debentures and any interest of the company are freely transferable.

The provision contained in the law for the free transferability of shares in a public company is founded on the principle that members of the public company must have the freedom to purchase and every shareholder the freedom to transfer.

Earlier the share of companies was transferred only through physical mode, but, now after the advent of a depository system, the securities are transferred in dematerialized form, to a large extent.

 

Legal Provisions

Section 56-59 of the Companies Act, 2013 discussed the detailed provisions regarding the transfer of a share of a company.

Some important rules and procedures for transfer of shares of a public company are discussed below-

Instrument for Transfer to be presented to the company: As per the provision of section 56(1) of the Companies Act 2013, a company shall not register or transfer securities of the company unless and until a proper instrument of transfer duly stamped, dated and executed by or on behalf of the transferor and the transferee has been delivered to the company along with the certificate relating to the securities. If there is no such existing certificate, then the related letter of allotment of securities must be presented.

• Rule 11 of Companies (Share Capital & Debentures) Rules 2014: According to Rule 11 of Companies Rules 2014, an instrument of transfer of securities held in physical form shall be in Form No. SH.4 and every instrument of transfer with the date of its execution specified thereon shall be delivered to the company.
• The period for deposition of Instrument for Transfer: A specific time limit must be followed for deposition of the instrument of transfer. The instrument of transfer of shares i.e. Form No. SH.4 with the date of its execution specified thereon shall be delivered to the company within sixty days from the date of such execution by or on behalf of the transferor and by or on behalf of the transferee.

Stamp duty on share transfer: The transfer of shares of a public company attracts stamp duty under Indian Stamp Act, 1899.A Company cannot register transfer of shares unless the instrument of transfer is duly stamped and is delivered to the company. According to section 56(1) of Companies Act 2013 which is correspondence to section 108(1) of the Companies Act 1956, it is mandatory that the company shall not register the transfer of shares unless properly executed an instrument of shares duly stamped has been delivered to the company. [Case reference: SHRI PARVEEN SHARDA V. CHOPSANI ICE AERATED WATER AND OILS MILLS LTD., APPEAL NO.1 OF 1982 decided on 10.1.1983 (CLB)]

• Affixation and cancellation of stamps: In VARDHMAN PUBLISHERS LTD. V. MATHRUBHUMI PRINTING & PUBLISHING CO. LTD 1990, the KERALA HIGH COURT held that affixing stamps on a separate sheet of paper and attaching it to the transfer application or cancellation of stamps by drawing a line across the stamp was not improper and would not invalidate the said application.
• The value of share transfer stamps to be affixed on the transfer deed: The Stamp duty for transfer of shares is 25 paisa for every Rs. 100 or part thereof of the value of shares.

Time limit for issue of certificate of transfer: According to Section 56(4), Every company, unless prohibited by any provision of law or of any order of any Court, Tribunal or other authority, must within One month deliver, the certificates of all shares transferred after the application for the registration of the transfer of any such shares, debentures or debenture stock received.

Power to refuse registration and appeal against refusal: According to the section 58(4) of CA13, a public company may on sufficient cause, refuse, to register the transfer of securities.

In the case, RANGPUR TEA ASSOCIATION LTD. V. MAKKAN LAL SAMADDER (1979) 43 Com Cases 58 it was held that The mere attempts of a person to wind up a company more than once cannot be a ground for refusing to register transfer by the directors. In such a case the public company may send an intimation of the refusal.

• Time Limit for Refusal of Registration of Transfer: As stated in Section 58 of Companies Act 2013, the Power of refusal of registration of transfer of shares is to be exercised by the company within thirty days from the date on which the instrument of transfer or the intimation of transfer, as the case may be is delivered to the company.
• Time Limit for Appeal against refusal to register Transfer by Public Company: As per section 58(4) of the said Act, a transferee of shares may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.

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The Penalty for Non-compliance: As per to the provision of section 56 (6) of companies Ac t 2013, Where any default is made in complying with the provisions related to the transfer of shares, the company shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/- and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 10,000/- but which may extend to Rs. 1,00,000/-.

Transfer of securities by legal representatives: Section 56(5) of the Companies Act 2013, states that, the transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.

Transfer to shares by depository with intent to defraud: As per section 56(7), without prejudice to any liability under the Depository Act, 1996, where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable under section 447 for fraud which is a severe punishment.

 

 

Basic Procedure for Transfer of Share in a Public Company  

A company to give effect to the transfer of shares must follow the following steps:

• The deed of Share transfer in form SH-4 must be duly executed both by the transferor and the transferee.
• The share transfer deed must bear stamps according to the Indian Stamp Act, and Stamp Duty must be given in the State concerned.
• A person giving his signature, name, and address must witness the signatures of the transferor and the transferee in the deed of transfer.
• The relevant share certificate or allotment letter should be attached to the share transfer deed and deliver the same to the company.
• The deed of share transfer must be deposited with the company within sixty days from the date of such execution by or on behalf of the transferor and transferee.
• After receiving of share transfer deed, the board shall consider the same. And if the documentation for transfer of share is in order, the board shall, by passing a resolution register the transfer.

 

Legal Validity of Restrictions on Transfer of Shares of Public Companies

In accordance with the provision of Sections 2(68) and 2(71) of the Companies Act, 2013, a public company is defined as a company, which inter alia, does not restrict the right to transfer its shares. These provisions of the said act have already been notified and have come into force from the corresponding provisions of the Companies Act, 1956.

Further, as specified under Section 58(2) of the Act of 2013, the shares of a public company are freely transferable. However, it is also stated that in the proviso to Section 58(2) “any contract or arrangement between two or more persons in respect of the transfer of securities shall be enforceable as a contract.”

The above-mentioned provisions of the Company Act 13 appear to be an attempt to codify the principles laid down in an important judgment of the Bombay High Court in the case of MESSERS HOLDING LIMITED V. SHYAM MADANMOHAN RUIA AND OTHERS, [2010]104SCL293 (Bom), in this case, it stated that:

An agreement by a particular shareholder or between two shareholders relating only to their shares is a consensual arrangement entered into by them, in exercise of their right of free transferability and it consequently imposes no restriction on transferability…..The concept of free transferability of shares of a public company is not affected in any manner if the shareholder expresses his willingness to sell the shares held by him to another party with right of first purchase at the prevailing market price at the relevant time. So long as the member agrees to pay such prevailing market price and abides by other stipulations in the Act, Rules, and Articles of Association, there can be no violation. For the sake of free transferability both the seller and purchaser must agree to the terms of sale.

In another case of VODAFONE INTERNATIONAL HOLDING B.V Vs. UNION OF INDIA (2012) 6SCC613, the Court has taken the view that law can restrict freedom of contract only in cases where it is for some good of the community. The Companies Act or other legislations do not explicitly or impliedly forbid shareholders of a company to enter into agreements as to how they should exercise voting rights attached to their shares.

 

Legal Analysis

In light of the revised definitions under Companies Act 2013 and the recent judgments, the legal position with respect to validity of restrictions on transfer of shares of a public company can be summarized as under:

• An agreement between shareholders restricting the transfer of shares in a public company does not violate the legal mandate of free transferability of shares of a public company;
• Restrictions on transfer of shares must not be in violation of the articles of association of the public company or the governing law (i.e. the CA13);
• Such agreement restricting transfer of shares can be enforced as a contract amongst and against the shareholders who are partying thereto;
• However, such contractual restrictions on the transfer of shares of a public company are not enforceable against the company, in case the company is not a party to the agreement containing such restrictions.

 

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References:

• Bare Act: The Companies Act, 2013
• Company law by Avtar Singh
• http://taxguru.in/company-law/procedure-transfer-shares-companies-act-2013.html
• http://www.ilntoday.com/2013/12/legal-validity-of-restrictions-on-transfer-of-shares-of-public-companies/
• http://sntca.in/share-transfer-under-companies-act-2013/
• http://blog.ipleaders.in/how-to-transfer-shares-in-india-under-companies-act-2013/