Home Company law Section 56 of Companies Act, 2013

Section 56 of Companies Act, 2013

April 22, 2024

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This article is written by Moiz Akhtar. This article provides an in-depth analysis of the transfer of shares and transmission of shares under section 56 of the Companies Act, 2013. This article also covers all aspects of the procedures required for the registration of both the transfer and transmission of shares in a company.

This article has been published by Shashwat Kaushik.

Table of Contents

Introduction

In today’s 21st century, as India is moving towards a greater economy, its business dynamics are also evolving. India has come a long way from the 1991 economic crisis to building up one of the largest foreign exchange reserves. In the last 30 years starting from the LPG reforms (liberalisation, privatisation, globalisation) initiated by then Prime Minister Narsimha Rao’s government which opened up the Indian market for private players and foreign investments to the change of economy from a protectionist to a more liberal one. The changes that happened in the economic sectors of India created a level playing field for all the players in the economy.

An evolving economy brings entrepreneurs and investors together to work cooperatively by cultivating a healthy relationship among them. Trading exchanges like BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are crucial for the daily flow of investment and economy in the Indian market. BSE is the oldest stock exchange in Asia and was set up in 1875. NSE was established in 1992 and, in 1993, it was recognised by SEBI. Both BSE and NSE are stock exchanges that deal with the sale and purchase of thousands of shares daily. Hence, an optimal level of transparency in the functioning of companies that are registered in these two exchanges is required so that investors have an ample amount of trust while buying shares of these companies. Transparency in day to day business of trading shares in lieu of the Companies Act, 2013 is very important for the companies themselves as well as for the investors.

What are stocks and shares

Section 2(84) of the Companies Act, 2013 defines a share as a share in the share capital of a company and includes stock. A stock is a security held by individuals and is issued by a corporation or a company. Stock represents the ownership or the extent of ownership of the individual in the company. The more stocks a person owns, the more the percentage of ownership he or she has in the company from which he or she purchased the stocks. Stocks are categorised into single units and every single unit is called a share as a share of the holding shares in a company makes the individual a proportional owner of the company and the ownership is directly proportional to the number of shares the individual holds. Why are shares issued by the companies?

Shares are vital for the aggregation of capital for the company to carry on its business. To run day-to-day activities and business, companies need capital. Investors buy shares of the companies of their choice and the companies utilise the investor’s money for its production activities, manufacturing, buying raw materials, paying debt, and many other commercial activities. Accordingly, the profits earned by the company are equally distributed to all its shareholders in proportion to the number of shares they hold. For example, if there are 100 shares of a company and the company earns a profit, then the profit will be equally distributed among these 100 shares. The distribution of profit should be transparent and also by following the laws concerned. Likewise, if a company suffers a loss, then it has no liability to return the money to its investors; hence, the loss is incurred by the investors.

Share prices are influenced by the company’s performance. When the company’s business is growing and the company is making profits, then the prices of each share of the company will rise, resulting in a profit for its investors. Also, if for any reason business of the company is performing poorly or the sale of services or products depreciates, then the value or price of each share depreciates resulting in a loss to the investors. An investor’s ownership percentage depends upon the total shares issued by the company. For example, if an investor owns 10% of the share in a company, we cannot necessarily say that he is the 10% owner of the company because it depends on how much the company values the shares it has issued. For example, if a company’s total value is 100 Rupees, but it has issued shares valued at 50 Rupees each, then we could say that the company still holds 50% of the asset. Here, the company has issued shares worth 50% of its net asset value, and investors will buy from these 50% of the shares which are issued by the company. Therefore, if someone owns 10% of the total shares issued by the company, it means he or she is the owner of 10% of the total shares issued, which would be 5 Rupees. Because the total share issued is 50 Rupees and 10% of 50 Rupees is 5 rupees. This calculation is based on the total value of the issued shares.

Whenever an investor wants to sell their shares he or she could sell their shares to any person who is interested in buying those shares at the market price of the share. The Market price of the share varies every day and even throughout the day. Hence, there is no fixed price at which the investor could sell their share. Hence, the sale and purchase of shares happen every day.

Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) was established as a regulatory body for stocks and securities in India in 1988. At first, SEBI was set up as a non-statutory body to regulate securities. However, on 30th January 1992, SEBI became an autonomous body and gained statutory powers under the Securities and Exchange Board of India Act, 1992 passed by the parliament of India.

The stock exchanges are legally bound to follow the rules and business guidelines set up by SEBI for managing securities. Noncompliance with the said guidelines by the exchanges will attract heavy penalties and various legal obligations, as SEBI has the power to investigate and scrutinise the financial accounts and business activities of any of the exchanges in India. Consequently, the stock market, as well as the sale and purchase of shares on exchanges, is highly regulated by SEBI, which increases the trust and confidence of investors. SEBI’s regulation also helps prevent illegal activities like stock manipulation and insider trading.

Section 56 Companies Act, 2013

Provisions under Section 56 of the Companies Act, 2013 are mentioned below-

Subsection 1 of Section 56 of the Companies Act, 2013 specifies that a company is not empowered to register a transfer of securities or transfer of shares unless both the parties i.e., the names of the transferor and the transferee are mentioned in the depository. Furthermore, the act mandates that for a proper transfer to take place, an instrument of transfer is necessary.

The instrument must be stamped, and the stamp duty of the deed must be duly paid. It also should be properly dated as well as executed by both the transferor and the transferee. The execution of the deed can also be done on behalf of the transferor and the transferee by their legal representatives. In the instrument of transfer, the name, address, and occupation of both the transferor and the transferee should be properly mentioned. The instrument of transfer should be sent and delivered to the company office either by the transferor or the transferee or by their legal representatives within 60 days from the date of execution of the instrument.

The share certificate of the shares to be transferred should be attached to the instrument of transfer and, if the share certificate is not delivered by the company, then the letter of allotment of shares should be attached to the instrument of transfer. The Companies Act further states that, if the instrument of transfer is lost due to any reason, the company may still register the transfer after consulting the board members of the company. But, in this case, the transferor and the transferee have to agree to the indemnity clause that if any third party claims the said transferred shares in the future, then all loss, damages and legal expenses arising from it will be borne by both parties.

Subsection 2 of Section 56 of the Company Act, 2013 grants companies the authority to register the transmission of securities for a person who is the legal heir of the deceased shareholder in the company. The transmission of security will take place only by operation of law.

Subsection 3 mentions that for the transfer of partly paid-up shares, the company will only register the transfer after sending a notice to the transferee about the balance amount of the partly paid-up shares, which should be paid by the transferee in the future. Furthermore, the transferee, after receiving the notice from the company, should send an NOC to the company regarding the transfer of partly paid-up shares within 14 days.

Subsection 4 describes the timeframe within which the company must deliver the certificates for the allotted shares to the respective shareholders. The timelines are mentioned below:-

For the members of the company, the company will deliver the share certificates within 60 days of the incorporation of the company.
If the company is allotting shares to anyone, then the company should deliver the share certificate within 60 days from the date of allotment of shares.
In both the case of transfer of shares as well as transmission of shares, the company will deliver the share certificate within 30 days. For the transfer of shares, 30 days are calculated from the date of receipt of the instrument of transfer by the company, and in the case of transmission of shares, 30 days are calculated from the date of receipt of intimation for transmission of shares by the company.
In case of debentures, the company will provide the share certificate within 180 days from the date of allotment of debentures.
In case the securities or shares of any company are registered under any depository, then the company shall provide the details of the allotment of shares to the depository.

Subsection 5 states that any transfer made by the competent legal heir or representative of the deceased shareholder is considered valid. Even if the legal heir is not a shareholder of the company before, they can still execute the transfer of shares.

In case of any default or noncompliance with the provisions mentioned in Subsection 1 and Subsection 5 of Section 56 of the Companies Act, 2013, the company and every officer of the company involved in the noncompliance shall be liable to a penalty of Rupees 50,000/-.

If any depository or any participant of any depository with ill intentions defrauds a person or illegally transfers shares, then the defaulter shall be liable under Section 447. This section states that the person committing fraud is liable to a punishment of imprisonment of a minimum of six months and it could be extended to a period of ten years. The person who is guilty is also liable to a fine and the minimum fine amount is the amount involved in the fraud. The fine amount also could be extended to a sum three times the amount involved in the fraud.

Transfer of shares in private companies

Shares issued in private limited companies are not marketable because of the restriction on the right to transfer. Hence, shares issued by private limited companies are not freely tradable in the open market. The main reason behind the restriction on the right to transfer shares in a private company is to preserve the composition of the shareholding.

–Section 2(68) of the Companies Act 2013, restricts the transfer of shares in a private company but it does not prohibit the right to transfer shares. For the transfer of shares in a private company, provisions and restrictions contained in (AOA) Articles of Association should be duly complied with by the transferor and the transferee.

-As per provisions mentioned in Section 44 of the Companies Act 2013, shares or debentures or other interests are movable property, transferable in a manner provided by the Articles of Association of the company. Hence, there is no absolute prohibition on the right to transfer shares. The right to transfer is subjected to restrictions contained in articles and there cannot be total prohibition or ban on the transferability of the shares. However, the company could incorporate only permissible restrictions on transferability.

However, restrictions on the transfer of shares in private companies are not applicable in the following cases-:

The company cannot restrict the transfer of shares if the shares are to be transferred to the representative(s) of shareholders.
In case the legal representative may proceed for the registration of shares in the name of its heirs, on whom the shares have been devolved.
In respect of shares which are proposed to be issued on the basis of articles of association, existing members have a right to renounce shares likely to be allotted to them. If the existing shareholder renounces their shares for any reason, then these shares will be allotted to the renounces for the first time and therefore no transfer of shares would take place.

Restriction on the right to transfer is generally placed by using the following method

Right of preemption

If a member of the company wishes to sell some or all of his shares, such shares shall first be offered to other existing members of the company. The price of each share shall be determined by the director or auditor of the company. The price of each share could also be determined by using the formula mentioned in the article of association. If no existing member agrees to buy those shares, then the transferor can transfer the shares to the transferee of his choice. A member of a private company is not bound to sell his shares to other members of the same company under the pre-emption clause unless any other member agrees to purchase all the shares proposed to be sold. The pre-emption clause cannot place a complete ban on the right to transfer, it cannot completely prohibit the transfer.

Valuation of shares under the pre-emption clause

Article of Association of a private company provides that the shares are to be sold under the pre-emption clause at a fair price determined by the directors or the auditor of the company. It may also be provided that the fair price would be certified by the auditor of the company. If the preemption clause requires that the shares are required to be offered to other members at a price certified by the directors or the auditors then the court also cannot inquire about the correctness of the valuation, unless there is evidence that the valuation was not correctly made. If the person who made the valuation has acted in negligence and failed to take into account all necessary data and factors for determining the value of the share, in such case the transferor may sue for damages to the person who made the valuation. The damages should be claimed for the difference of amount between the value of the share determined by the valuer and the real value of the shares.

Powers of director to refuse registration of transfer of shares

These powers are specified in the Articles of Association(AOA) of the company. This power should be exercised by the board of directors in good faith.

Transfer of shares in a public company

According to Section 58 of the Companies Act 2013, the securities or the interest of any member in a public company shall be freely transferable. The board of directors of the public company or depository has no power to refuse or withhold the transfer of any securities. Unlike in the case of a private company, there is no preemption clause in the case of a public company. But Section 58(2) of the Companies Act 2013, states that any contract or agreement between 2 or more persons in respect of transfer of securities shall be enforceable as a contract. The concerned parties could also add the terms of the agreement such as right of first refusal, right of first offer, call option, tag along, put option etc. These terms would be binding on the investors.

What is the transfer of shares

The transfer of shares refers to when any shareholder or owner of shares in a company voluntarily transfers the ownership rights of his/her shares or interest to any other person. The act of transfer should be completely voluntary and the transfer should be duly registered by the company. The person who transfers his/her shares is called a “transferer” and the person who purchases the said shares is called a “transferee”. Hence, both the seller and purchaser, i.e., the transferor and transferee, should agree to the transfer of shares. The transfer of shares must take place for a consideration, which is determined by the market. Without consideration, the transfer of shares would be held invalid.

Process of transfer of shares

Subsection 1 of Section 56 of Companies Act 2013 states that a company shall not register a transfer of securities of the company, or the interest of a member in the company in case of a company having no share capital, other than the transfer between persons both of whose name are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer, in such form as may be prescribed, duly stamped, dated, and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with certificate relating to securities, or if no such certificate is in existence, along with the letter of allotment of securities. For a proper transfer to take place, Section 56 of the Companies Act 2013 has mentioned the procedures. The transferor, transferee, and the company must all follow the procedure established under Section 56 of the Companies Act, 2013. To transfer shares from the transferor to the transferee, both parties are required to give the instrument of transfer to the company. Without an instrument of transfer, a company shall not register the transfer of shares. Moreover, a company by itself cannot transfer the shares of a person to any other person. Hence, proper legal documentation and instruments of transfer are prerequisites for a proper transfer to take place.

Sending intimation to Board of Directors

First of all, the person who wants to transfer shares to another person or any other shareholder of the company should send the intimation to the board of directors of the company. The transferor’s request to the company should be in a written form, mentioning that the transferor wants to sell his/her shares or any part of them. The intimation sent to the board of directors of the company should be simple and precise. For example, if the transferor has 100 shares in the company and they wish to sell all of them, they should mention in the intimation that they want to sell all 100 shares. And if they want to sell only 50 shares out of 100 shares then they should specify the split and transfer of shares in the intimation to the board of directors. Both total transfer of shares and as well as split along with transfer of shares can be easily done, usually, the board of directors has no objection to it. Shares issued by a private company are not marketable securities because of the restrictions on the right of transfer. Hence shares issued by a private company are not freely tradable in the open market. The main reason behind the right of restriction on the transfer of shares in a private limited company is to preserve the composition of the shareholding.

Meeting of the Board of Directors

After receiving the intimation from the transferor/transferee/, a notice will be sent to all the members and shareholders of the company on behalf of the company as per Section 173 The company would mention that a certain number of shares are available for sale, and interested buyers should report their desire to the company to buy the shares available for sale. If it is mentioned in the Article of Association (AOA) of the company, that any shareholder wishing to sell his/her shares must first offer them to existing shareholders, the company would ask, notify and propose it to its members and existing shareholders. If none of the shareholders and members of the company show a willingness to buy those available shares, the company will allow an outsider to purchase those shares which the seller wants to sell. As soon as a competent buyer is found, an agreement must be reached between the transferor and the transferee.

Filing the Form No. SH4

Both the transferor and the transferee shall fill out Form No. SH4. The form generally consists of two pages. On the first page, at the top right corner, the date of execution of the transfer deed is mentioned, which needs to be filled out by either of the parties. Then, the company’s Corporate Identification Number (hereinafter mentioned as “CIN”) should be filled in. CIN is issued by the registrar of the companies for all the companies registered in India. The name of the company should also be filled in, and if the company is listed on any of the securities or stock exchanges, the name of the stock exchange should be filled in below the CIN.

In the description of the securities section, the kind and class of securities held by the shareholder should be filled in. Generally, there are four kinds of securities, namely debt securities, derivative securities, equity securities, and hybrid securities. Let’s say the kind and class of securities the transferor holds is equity securities (shares), then it should be mentioned under that kind/class of securities in the form. Furthermore, the description of securities is divided into four boxes. Contents of the boxes are mentioned below-:

Kind and class of securities

In the first box, the kind and class of securities are mentioned. There are four kinds of securities, namely debt securities, derivative securities, equity securities, and hybrid securities.

Nominal value

In the second box, the nominal value of each unit of share should be filled in. The nominal value of a share is the price of each security at which the company first issued its shares. The nominal value of a share is very important because it is used to calculate the profits and dividends each shareholder receives.

Called up amount

The third box consists of the amount called up for each unit of security. This is the price of each share decided by the company. The amount called up is the minimum price at which the seller could sell his/her shares. The company decides this price by the article mentioned in the Articles of Association of the company.

Amount paid up for shares

The amount paid is the price of the share at which the transferor is selling his/her share to the transferee. The amount called up per unit of share is decided by the company, whereas the amount paid up depends upon the negotiations between the seller and purchaser.

Below the description of the securities box, there is a section for securities transferred along with consideration received. The number of securities should be filled in both numbers and words. Next to the number of securities, the consideration received from the transferee should be filled in. Again, the consideration amount should be duly filled in both words and figures. For example, if the number of securities or shares to be transferred is 10 and the amount paid up for each unit of security is 5 rupees, then 10 should be filled in the number of securities box, and 50 rupees should be filled in the consideration box (as 10 shares at 5 rupees each equals 50).

After filling out the above details, distinctive numbers of shares should be filled in. Each company assigns a serial number to its issued shares, and this serial number is known as the distinctive number.

For example, If a company has issued 100 shares and a shareholder buys 10 shares, then the company would mention the assigned serial number of those 10 shares. If the company has allotted shares having serial numbers from 70 to 80, then it means that share numbers 70 to 80 belong to the shareholder. Below the distinctive number, the corresponding certificate number is to be filled in. While allotting the shares to the investors, the company provides the investors with corresponding certificates of the allotted shares. It is a unique identification number and is different for every shareholder. The corresponding certificate is signed by the company and it also serves as the legal proof of ownership of shares allotted to the shareholder. Folio number is also mentioned in the form. Folio number is kind of a roll number of the shareholder assigned to them by the company. It could also be said that the folio number is the unique number identifying the shareholder’s account with the company. There are many details linked to the folio number like how much money the shareholder has invested in the company, how many shares he/she holds, share trading history, as well as contact details of the shareholder. Folio numbers are very useful for the company to keep a record of their investors and their transactions within the company. Folio number helps companies in times of emergency like frauds and manipulations.

In the transferor’s particulars, the transferor’s details like full name, residential address, and signature should be filled in. One witness is also mandatory for the execution of the transfer deed. The name of the witness and residential address are also to be filled in. The witness will put his signature clarifying that the request for share transfer is genuine. The witness should also agree to the fact that the transferor and the transferee both signed the form in front of him and he witnessed the signature.

Coming to the transferee’s particular which is a very detailed part of the form. The name of the transferee, his/her father’s name, mother’s name, and also spouse’s name to be filled in if any. Then, the address of the transferee is to be filled in along with his/her mobile number and email ID. The transferee’s occupation is to be duly filled along with the transferee’s folio number if the company has given any folio number to him/her. Permanent Account Number (PAN) of the transferee is to be filled in so that the income tax department is well-informed about the transaction of the transferee. Lastly, the transferee should put his signature on the form.

Stamp duty on transfer of shares

For a transfer to occur, the stamp duty should be paid. Since shares are moveable as well as tradable property, under the Indian Stamp Act, 1899, the Central Government levies stamp duty on the exchange of instruments, securities, and shares. Furthermore, Section 44 of the Companies Act, 2013 allows shares to be transferred in accordance to the Articles of Association of the company. Articles of Association are nothing but the internal guidelines, rules, and bylaws governing the company. All the internal business of the company is carried out according to the articles mentioned in its Articles of Association.

The Central Government, empowered by the Union list of Schedule 7 of the Indian Constitution, collects duty on transfer forms for the transfer of shares. Also, it is expressed in section 17 on the Indian Stamp Act 1899, that all instruments chargeable with duty and executed shall be stamped before, or at the time of execution. After the amendment to the Indian Stamp Act, 1899 in July 2020, the rates of stamp duty on the transfer of shares were revised. Earlier the rate of stamp duty for the transfer of shares used to be 0.25% of the total consideration value but after the amendment it was reduced to 0.015% of the consideration value mentioned in the share transfer form or the transfer execution deed. Since the Indian Stamp Act, 1899, governs all the aspects of stamp duty across India, the rate of stamp duty payable on the transfer of shares is uniform throughout the country, currently set at 0.015% of the consideration value.

Documents required to be attached to the transfer deed

Share Certificate

The most essential document for a share transfer deed is the share certificate of the transferor. The share certificate should be attached to the share transfer form or share transfer deed. A share certificate is issued by the company to its shareholder, serving as proof of the shareholder’s legal ownership of the company’s shares. A share certificate is mandatory for the transfer of shares if shares are delivered to the transferor.

Letter of allotment of shares

In case the transferor has recently purchased the shares and the company has not yet issued a share certificate to the shareholder, then a letter of allotment of shares should be attached to the instrument of transfer. A letter of allotment of shares is provided whenever a new set of shares is purchased by an individual or investor. It serves as validation given by the company to its shareholders that they have purchased the specified number of shares and that the delivery of those shares will take place shortly. Hence, either a share certificate or a letter of allotment of shares should be attached to the share transfer form or share transfer instrument.

PAN Card

In case the company is listed in any of the stock or security exchanges, a photocopy of the PAN card should also be attached to the instrument of transfer.

Deposition of transfer deed to the company

After all the particulars and details are filled in the form SH4, along with the necessary documents attached, the instrument of transfer should be deposited at the company office within 60 days from the date of execution of the transfer deed, either by the transferor or by the transferee. If, for any reason, the parties are unable to submit the transfer deed or the transfer deed is lost or misplaced during transit, then the company will still register the transfer subject to the indemnity clause. Under the indemnity clause, a contract is signed by the transferor or both the transferor and the transferee that they will compensate the company for the cost and expenses arising from third-party claims. If any third party claims the transferred shares, then the indemnifying party i.e., the transferor and the transferee, will bear the expenses and legal costs suffered by the company. Here the transferor and transferee are the indemnifying party while the company is the indemnified party. However, it is completely dependent upon the board members whether they will register the share transfer without the instrument of transfer or not.

Transfer in case of partly paid-up shares

If the shares are partly paid up, meaning the transferor has not made full payment for the shares to the company and enters into a transfer deed with a transferee, the company will still allow the transfer. However, the company will send a notice to the transferee, requesting the transferee to make the payment for the remaining balance of the partly paid-up shares. In this case, the transferee should send a No Objection Certificate (NOC) to the company within 2 weeks (14 days) from the date of receiving the notice.

Effects of transfer of shares

Once the transfer form has been executed and the stamp duty paid, the transfer is complete between the transferor and the transferee. Then the transferee acquires to have his name entered in the registered members. Once the transfer is executed, the liability upon the transferor ceases to exist and is transferred to the transferee.

Priority among transferee

If a transferor fraudulently sold his shares to two transferees then the priority will be given to the first transfer or the first purchase of shares.

What is transmission of shares

Transmission of shares means the transfer of ownership or title of shares by operation of law. This typically only happens when the shareholder or owner of shares dies or becomes insolvent. In general, the transmission of shares takes place due to the death of the shareholder. In such cases, the shares will be transmitted to the competent legal heir of the shareholder as determined by the court under the Indian Succession Act, 1925. If the shareholder has a will, then the court may direct the execution of the said will and the title of shares would be transmitted by the company to the competent legal heir.

Under Section 56 of the Companies Act, 2013, a company can register a transmission of shares if the competent legal heir of the deceased shareholder sends an intimation to the company, requesting the transfer of shares from the shareholder to its legal heir. Unlike the transfer of shares, which requires the execution of the transfer deed and filing of form no. SH4, the transmission of shares does not require these procedures. A notice or application to the company by the competent legal heir of the shareholder, along with the necessary documents, is sufficient for the transmission of shares to occur.

Documents required for the transmission of shares

A photocopy of the death certificate

A death certificate can be easily issued by a medical practitioner who states when a person has died, or one could apply for the death certificate online. Death certificates usually contain the date and location of the deceased, along with the age.

Succession certificate

A succession certificate is a certificate that is issued by the court stating the rightful and competent legal heir of the deceased person. It is valid only when it is issued by the court. In the succession certificate, the court mentions the names of competent legal heirs of the deceased according to personal succession laws.

Probate

If the deceased shareholder of the company has a will that is not registered, the competent legal heir should register the will in the court of competent jurisdiction. They will then examine the will and affix its seal, thus registering it. The certified copy of the registered will is known as probate. In case the legal heir of the deceased shareholder has probate, then, a succession certificate by the court is not necessary, as the transmission of shares will take place by the registered will. But in case the deceased shareholder has appointed a nominee, then the said nominee would be entitled to the shares of the deceased.

Signature of the competent successor

The signature of the competent legal heir is required for the transmission of shares to take place.

By attaching the above-mentioned documents along with the application for the transmission of shares, the legal heir should send the application to the company. After receiving the application, the company will transmit the title of shares from the deceased shareholder to its competent legal heir. In the case of transmission of shares, only a change of title takes place, and there is no sale or purchase of shares. Hence, unlike in the transfer of shares where the parties are required to pay the stamp duty, in the transmission of shares no stamp duty is to be paid to the government. This is because it is simply a transmission of title from the deceased shareholder to its legal heir, thus, no stamp duty or executed deed is necessary.

Difference between transfer and transmission of shares

The major differences between the transfer and transmission of shares are given below.

Basis of differentiation	Transfer of shares	Transmission of shares
Definition	Transfer of shares means any shareholder or owner of the shares in a company transfers the ownership rights of his/her shares or interest to any other person voluntarily.	Transmission of shares means the transfer of ownership or title of shares by operation of law.
Parties involved	For the transfer of shares to take place, both the transferor and the transferee are needed.	For the transmission of shares to take place, only the competent legal heir of the shareholder is needed.
Voluntariness	The act of transferring the shares is completely voluntary and dependent upon the transferor and transferee.	The act of transmission of shares is not voluntary and is governed by the operation of law.
Instrument of transfer	A proper instrument of transfer is needed to be executed by both the transferor and the transferee for the transfer of shares.	No instrument of transfer is needed in case of transmission of shares.
Form no. SH 4	Both the transferor and the transferee should fill out form no. SH4 and attach the share certificate	Only an application or a letter of intimation is required for the transmission along with legal heir proof; there is no need to fill the form no. SH4.
Stamp duty	Stamp duty is payable in case of transfer of shares.	No stamp duty is payable in case of transmission of shares.
Liability	The liability of the transferor ceases to exist after the shares are transferred to the transferee.	In case of transmission of shares, the original liability continues to exist and the legal heir or receiver of the shareholder will be liable for the shares.

Statutory remedy against refusal

Section 58 of the Companies Act 2013, contained the provision to be followed when a company refuse to register the transfer of securities-:

If a private company limited by shares refuses for any reason to register the transfer of shares or transmission of shares of a member in a company, then the company shall send notice to the transferor or transferee or the legal representative of both the transferor and transferee. In the notice, the company shall mention the cause and reason for the denial of registration of transfer. The company shall send the notice of refusal within thirty days from the date of receipt of the instrument of transfer or intimation of transmission.
The transferee or the transferor in case of refusal from the company may appeal to the tribunal against the refusal within a period of thirty days from the date of the receipt of the refusal notice. If no notice has been sent by the company and the transfer also didn’t take place then the transferor or the transferee or the legal representative of both should appeal to the tribunal within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission was delivered to the company.
If a public company without sufficient and valid causes refuse to register the transfer of securities within a period of thirty days from the date of receipt of the instrument of the transfer or the intimation of the transmission, the transferee may, within a period of sixty days from the date of receipt of refusal notice can appeal to the tribunal against the refusal by the company. In case no refusal notice has been sent to the transferor or transferee then the transferee should appeal to the tribunal within ninety days from the date of delivery of the instrument of transfer to the company.
A tribunal while dealing with the appeal after hearing the parties may either dismiss the appeal or-

Direct the company to register the said transfer or transmission and the company shall register the transfer or transmission within ten days of the receipt of the order from the tribunal.
The tribunal could also direct rectification of the register and also direct the company to pay for the damages if any, sustained by either the transferor or transferee or both.

Death of transferor or transferee before registration of transfer

In cases where the transferor has died before the registration of the transfer and the company has not received any notice regarding the transferor’s death then the company would register the transfer. If the company has notice of the transferor’s death then the company would not register the transfer until the legal representative of the transferor has been referred to.

In the case where the transferee dies and the company has notice of his death, then the company shall not register the transfer of shares in the name of the deceased transferee. The registration of transfer could only take place with the consent of the transferor and the legal representative of the transferee. In case of a dispute regarding the registration of the transfer, then an order of the court will be needed.

Lost transfer deed

Many times the transfer deed sent to the company by the parties was lost during the transit. In this case, Section 56(1) of the Companies Act 2013, provides that if the instrument of transfer is lost or the instrument of transfer is not delivered to the company within sixty days from the date of the execution of the deed, then the company may register the transfer subject to indemnity as the board of directors may think fit.

The company may ask for proof of the instrument of transfer. The proof may be in the form of an affidavit either by the transferor or by the transferee. The sale or purchase note of the broker and the registration receipt issued by the postal authorities should be duly provided to the company.

Forged transfer

A forged transfer is said to take place when a forged transfer deed is presented to the company for registration. Upon suspicion, the company generally sends a notice to the transferor about the lodgement of the transfer instrument so that he can object to the transfer if he wishes. The company allows the transferor a time period within which he can object to the transfer. If no objection is raised by the transferor then the company would register the transfer.

The consequences of a forged transfer are mentioned below-:

A forged transfer deed, however genuine it may seem, is a nullity. It can never transfer the title title from one person to another. Hence a forged transfer doesn’t make any changes to the shares and it rightly belongs to the transferor. If a company registers a forged transfer then the real owner of the shares can apply to the company regarding the transfer and his name will be restored. ( People Insurance Co. Ltd. vs. Wood & Co. Ltd.)
In case if a company has issued a share certificate in a forged transfer to the transferee and the transferee sells the share further to any innocent purchaser, then the company is liable to compensate such an innocent purchaser. The company cannot deny the innocent purchaser to register his name as a member. ( Balkis Consolidated Co. vs. Tomkinson)
The company has all rights to recover the loss from the person who lodged the forged transfer.

Even if the transferee has paid the stamp duty and was a bona fide purchaser for the shares, it did not make any difference and the transferee is bound to return the scripts to the person to whom the same rightly belongs.

Provisions under the Companies (Share Capital and Debentures) Rules, 2014

In Chapter 4, under Rule 11 of the Companies (Share Capital and Debenture) Rules, 2014, it is mentioned that a proper instrument of transfer is necessary for the execution of the transfer. The following are the provisions mentioned under Rule 11:-

1. For the transfer of physical shares to take place, the instrument of transfer should be made under form no. SH4. Furthermore, it is mentioned that this instrument of transfer, which is form no. SH4 should be submitted to the company within 60 days from the date of execution of the instrument.

2. In case the company does not have any share capital and has not issued any shares, but the members of the company receive dividends or interest from the company, in proportion to the money they have invested, even in such cases, an instrument of transfer under form no. SH4 is mandatory.

3. If the transfer is taking place for partly paid-up shares, the company will issue a notice to the transferee using form no. SH5, informing them of their obligation to pay the remaining balance amount of the partly paid-up shares in the future. After receiving the notice from the company, the transferee should respond to the company, with an NOC that he has no objection regarding the transfer of partly paid-up shares. The transferee should provide their response to the company, stating any objections or lack thereof, within 14 days from the date of receipt of notice from the company.

Penalty

Section 56 of the Companies Act, 2013 clearly mentions the penalty for non-compliance of the guidelines while carrying out the processes of both the transfer of shares and transmission of shares. If any non-compliance occurs, the company and every officer of the company involved in the noncompliance shall be liable to a penalty of Rupees 50,000/-.

Conclusion

The stock and share market in India is growing at a much faster pace. People are investing in equities more often. For many, investing in equities is a more lucrative and better investment decision than investing in real estate and other sectors of the economy. As people aspire for better returns on their investments, they trust their money with the companies they invest in. It is crucial for the companies to follow the mentioned guidelines of the Companies Act and apply the rules strictly while managing shares of the investors. Also, for the investors, it is very important to know the intricacies of the rules and regulations according to which their shares are being managed by the companies. The process of transfer and transmission of shares and how to execute both the transfer and transmission are intrinsic to the knowledge of the investors as well as legal professionals.

Frequently Asked Questions (FAQs)

What is form no. SH4?

Form no. SH4 is the form in which both the transferor and the transferee should mention the details of the transfer of the shares and this form itself will be treated as the instrument of transfer.

What is a share certificate?

A share certificate is issued by the company to its shareholders, which serves as proof of legal ownership of the shareholder on the company’s share. Every share certificate is unique to its owner and it is duly signed and stamped by the company. Each share certificate has a distinctive number as well as a certificate number, which is unique to every shareholder of the company.

What is a folio number?

The folio number is the unique number identifying the shareholder’s account with the company. There are many details linked to the folio number, such as how much money the shareholder has invested in the company, how many shares he/she holds, share trading history of the investor, as well as contact details of the shareholder. Folio numbers are very useful for the company to keep a record of their investors and their transactions within the company. One could say that the folio number is a roll number assigned to the investor by the companies.

What is the Article of Association (AOA)?

Articles of Association (AOA) of a company is a document which contains the regulations according to which the company should operate. It also contains the kind of work the company will be doing, the kinds of services the company will be providing and the bylaws of the company for its internal governance.

What is the instrument of transfer?

The instrument of transfer is a transfer deed for the transfer of shares from the transferor to the transferee. An instrument of transfer is very necessary for the transfer of shares to take place. The instrument of transfer serves as the legal evidence of the fact that both the transferor and the transferee agree to the transfer of shares and its execution.

What is a CIN (Corporate Identification Number)?

CIN is a unique number assigned to the company when it is registered with the Registrar of Companies of India. CIN is very important for the company because it serves as the identification for the company with the Government of India. It is a 21-digit alphanumeric code and should be mentioned in all the reports submitted to the Ministry of Corporate Affairs by the companies. CIN is used by the government to track the business and transactions of the company and to maintain the records.

What is transposition?

In the case of a joint shareholding, one or more of the shareholders may intimate the company to alter or rearrange the serial orders of their names in the register of members of the company. In this process, the serial orders of names mentioned in the share certificate also change. In transposition, no interest of any shareholder is transferred and hence stamp duty is not payable. The company will issue new share certificates with altered serial orders of name to respective shareholders.