How to Transfer Shares in a Private Company to the Legal Representative of Deceased Shareholders
September 25, 2019
While used interchangeably by many a layman, “transfer” and “transmission” of shares have very distinct legal implications in Indian law. Specifically, under Section 56, Rule 11, of the Companies Act, 2013, differences between the terms are clearly laid out, and to provide context for this article, are outlined below:
Chief amongst the differences described is the fact that Transfer of Shares is a voluntary act, whereas a Transmission of Shares occurs under normal operation of law. As a result, executing a Transfer of Shares involves a more detailed process, whereas a transmission occurs naturally after insolvency, lunacy, death or as a result of inheritance by the next generation. In both cases, the private company shares of a member can be transferred or transmitted to a legal representative, but under a transfer of shares agreement, the recipient is known simply as a transferee, whereas the member is known as the transferor.
With this backdrop, the procedure for the transfer of shares can now be illustrated. A note must be made at this stage to state that the procedure described below applies only to Private Company shares.
The Transfer Procedure-
As per the Companies Act, 2013, there is an 8-step process to follow to execute a transfer of shares. This is laid out in Figure 1 below, but as an outline, it involves the transferor first intimating the company of his/her intention to transfer shares upon his/her death, followed by a valuation exercise and an offering to existing shareholders for said shares. Should no existing shareholder want to avail this option, the transferor’s shares can then be offered to a legal representative of the owner. Only at this point can the company’s Board of Directors register this claim and pass a resolution to transfer the shares.
Figure 1 – Basic Procedure for Transfer of Shares in a Private Company to 3rd Party/Legal Representative of Deceased Shareholders
Main Provisions related to Transfer of Share-
- An instrument for Transfer of Share is compulsory: Companies are not allowed to register a transfer of its shares from or to any party without first receiving a duly stamped and executed proper transfer deed as per Section 56, Rule 11 of the Companies Act, 2013. This transfer deed is available in Form SH.4. Specifically, this relates to the Companies (Share Capital & Debentures) Rules, 2014, and this must be stamped and executed by or on behalf of both the transferor and the transferee, specifying both their names, addresses, and occupations. This form along with the certificate of shares must be delivered to the company as a first step to the share transfer process. If no share certificate is in existence, a letter of allotment of shares can be used instead.
- The period for deposit of Instrument for Transfer: A fixed period of 60 (sixty) days from the date of execution by or on behalf of both the transferor and the transferee is applicable within which the instrument of transfer of shares must be delivered to the company.
- The value of share transfer stamps to be affixed on the transfer deed: As per Notification No. SO 130(E), dated 28-01-2004 issued by the Ministry of Finance, Department of Revenue, New Delhi, applicable stamp duty for the transfer of shares is 25 paise for every Rs. 100 or part thereof of the value of shares transferred. This amount must also be borne by the transferor.
- Time limit for issue of certificate of transfer (Section-56(4)): As per the Act, it is stipulated that “Every company, unless prohibited by any provision of law or of any order of any Court, Tribunal or other authority, shall, 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.”
- Private company shall restrict right to transfer its shares: Section 2(58)(i) of the Companies Act, 2013 provides that the Articles of a private company shall restrict the right to transfer the company’s shares in some cases, especially if the entire shareholding of a private company may be owned by a family or other private group. However, there are exceptions to this, as described in Point 6 below, which explicitly allows for the transfer to one’s legal representatives.
- Restriction upon transfer of shares is in private company are not applicable in the following cases:
- On the right of a member to transfer his/her shares cannot be applicable in a case where the shares are to be transferred to his/her representative(s).
- In the event of the death of a shareholder, legal representatives may require the registration of share in the names of heirs, on whom the shares have been devolved.
Note that Restriction should not be in the form of Prohibition and Restriction can only be as indicated in the Articles of Association.
- Time Limit for Refusal of Registration of Transfer: The company has a window of 30 days from the date on which the intimation of transfer is enacted, within which it can exercise its power to refuse the registration of transfer of shares. This intimation can be by way of mere intimation or delivery of the instrument of transfer, as the case may be.
- Time Limit for Appeal against refusal to register Transfer by Private Company: If the company refuses a transfer, then as per section 58(3), a transferee of shares has 30 days (from the date of receipt of the notice from the company) within which it may appeal to the Tribunal against the refusal. If no notice has been received, the transferee has a period of 60 days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company to appeal the same.
- Non-compliance Penalties: If any default is made in complying with the provisions related to the transfer of shares, the company shall be punishable with fines of not less than INR 25,000/- but which may extend to INR 5,00,000/- in total. Also, every officer of the company who is in default shall be punishable with fines of not less than INR 10,000/- but which may extend to INR 1,00,000/-.
Provided the above tenets are abided by, a transfer of shares in a Private Company to the legal representative of Deceased Shareholders is allowed under the Companies Act, 2013.