Step by step process of share transfer in a Pvt Company

The process of share transfer in a private limited company involves exchange of ownership between the shareholders. Shares are generally transferred to realign ownership, facilitate exit of an investor, plan succession or to raise capital.

The process of share transfer in a Private Limited Company seems to be straightforward and simple but private companies usually impose restrictions through their Articles of Association before a share transfer can be registered. The Companies Act, 2013 needs to be followed in true spirit before initiating the process of share transfer.

The recent amendment where MCA introduced Rule 9B of Companies (Prospectus and allotment of securities) Rules, 2014 on 27^th October 2023 mandating the conversion of physical shares into demat shares for non-small private companies resulted into a significant compliance shift where traditional paper transfers using SH 4 have started disappearing slowly.

Further, the compliance related to stamp duty where uniform 0.015 percent stamp duty (effective nationwide after July 2020) is imposed on off market transfers needs to be taken care of during the process of share transfer in a Private Limited Company.

In this blog, we shall walk you through the process of share transfer in a Private Limited Company (two paths), covering prerequisites, legal framework, documentation and stamp duty requirements.

Table of Contents

Prerequisites for process of share transfer in a private limited company

There are certain areas which needs to be checked before initiating the process of share transfer in a private limited company to avoid any possible delays: –

Check the Article of Association and Share Purchase Agreement: – The Articles of Association and Share Purchase Agreement must be read and examined carefully to identify the potential restrictions such as lock-in period, right of First Refusal or mandatory Board consent. The clear identification of such restriction helps you avoid future disputes and legal consequences.

Check the applicability of Rule 9B of Companies (Prospectus and allotment of securities) Rules, 2014: – This rule was introduced to mandatethe conversion of physical shares into demat shares for non-small private companies. Check whether the Rule 9B has been triggered for your private limited company and if the answer is No, you can follow the traditional method of share transfer using SH-4.

Readiness of KYC documents and share certificates: – The shareholders involved in share transfer, i.e., transferor and transferee shall possess updated KYC documents and original share certificates at the time of share transfer. The transferor shall request in advance for split of share certificates before the process of share transfer.

Compliance of FEMA Rules in case of non-resident transfers: – Cross border transfers require the compliance with FEMA rules under which Form FC-TRS shall be filed on the FIRMS portal within 60 days. The share transfer shall not be valid even approved by management if FEMA rules are not complied with in case of cross border transfers.

Legal Framework governing process of share transfer in a private limited company

Legal Framework	Description
Section 44 of the Companies Act, 2013	Section 44 treats shares as movable property and they are freely transferable subject to restrictions imposed in AOA. If AOA contains certain restrictions, those restrictions should be complied with.
Section 56 and Rule 11 of the Share Capital and Debentures Rules	These provisions lay down the process of physical share transfer on duly stamped and signed SH-4 form which needs to be submitted to the company. Further, the company records the share transfer and issue new share certificates.
Section 58 of the Companies Act, 2013	This section lays down the provisions related to refusal of accepting the share transfer by the company subject to prompt communication. The shareholder may appeal to NCLT within 30 days of receiving the refusal, or within 60 days of receiving SH-4. if the company doesn’t process the request for new share certificates.
Rule 9B of Companies (Prospectus and allotment of securities) Rules, 2014	This rule mandates the conversion of physical shares into demat shares for non-small private companies within 18 months from the end of that financial year and after that all further share issues and transfers must be in dematerialised form only
Uniform 0.015 percent stamp duty (effective nationwide after July 2020)	The share transfer was subject to stamp duty as per respective state of the India where share transfer took place but now it is effective nationwide after July 2020 that uniform 0.015 percent stamp duty shall be levied on share transfer.

Step by step process of share transfer in a Private Limited Company

Physical Share transfer- Cases where Rule 9B of Companies (Prospectus and Allotment of securities) Rules, 2014 doesn’t apply

Request for Split of share certificate: – The transferor shall request the company to split his/her share certificate.
Execution of Transfer Deed (Form SH-4): Transferor and transferee execute the share transfer deed in the prescribed Form SH-4.
Stamp Duty Payment: Appropriate stamp duty is affixed on the transfer deed as per applicable rates.
Submission to the Company: The transferee submits the duly executed SH-4 form along with the original physical share certificate to the company.
Verification by the Company: The company verifies the signature, documents, and compliance requirements.
Board Approval: The Board of Directors approves the transfer in a board meeting.
Entry in Register of Members: The company records the transfer in the Register of Members.
Issuance of New Share Certificate: A new physical share certificate is issued to the transferee within the prescribed time limit.

Demat Share Transfer: – Cases where Rule 9B of Companies (Prospectus and Allotment of securities) Rules, 2014 apply

Opening of Demat Account: Transferor and transferee must have a Demat account with a Depository Participant (DP).
Holding of Shares in Demat Form: Shares must first be dematerialised with a depository such as National Securities Depository Limited or Central Depository Services Limited.
Delivery Instruction: The transferor submits a Delivery Instruction Slip (DIS) or online instruction to the DP to transfer shares.
Electronic Transfer: The DP processes the request and transfers the securities electronically to the transferee’s demat account through the depository system.
Confirmation of Transfer: The transferee receives credit of shares in their demat account.
Automatic Record Update: The Register of Beneficial Owners maintained by the depository is updated, which serves as the record of ownership.

Documents Required under process of share transfer in a Private Limited Company

Cases	Documents Required
For both physical and demat transfers	Self-Attested PAN Card of transferor and transfereeAddress proofShare Purchase Agreement (if available)Board Resolution in case transferor or transferee is a companyAny other document as may be requested by the company as per their MOA.
For Demat transfer (additional documents)	Delivery Instruction Slip (DIS) submitted to the DPClient Master Report (CMR) if the company needs verificationDP-generated confirmation of the off-market transfer
For Physical Transfer	Duly signed and stamped SH-4Original copy of share certificatesShare transfer revenue tickets as per 0.015% stamp dutyID proof of witness (voluntary document)

Conclusion

The process of share transfer in a private limited company requires diligence, proper documents and clarity of compliances involved. Each share transfer process is different that depends upon the small company status, transferor and transferee(s) involved. The prerequisites mention in this article needs to duly be checked and complied with before initiating the process of share transfer in a private limited company. Each step has its place, and little attention may prevent the future delays and disputes.

How can My Legal Business LLP help you?

My Legal Business LLP is a reputed firm that provide end to end compliance solutions for the companies. If you need help in drafting or reviewing your share purchase agreement or expert guidance for share transfer in your private limited company, contact us today for smooth and compliant process that let you focus on your business and rest assured for proper compliance.