Meaning and Nature of Transfer of Shares

A share, in the eyes of company law, is a bundle of rights and obligations that a member holds in a company, and one of its defining features is that it can, ordinarily, change hands. Transfer of shares is the voluntary act by which a shareholder — called the transferor — passes his shares, along with the rights and liabilities attached to them, to another person — the transferee — in the manner recognised by law and by the company's own articles. For a Gujarat board Std 12 Secretarial Practice student, the first thing to fix firmly in mind is that transfer is always an act of the shareholder's own choice; nobody transfers shares against his will, and nobody's shares are transferred to him without his consent to take them.

Section 44 of the Companies Act, 2013 states that the shares, debentures or other interest of any member in a company are movable property, transferable in the manner provided by the articles of the company. Section 2(84) similarly recognises a "share" as a share in the share capital of a company, and treats it as movable property. Because shares are property, and because Indian law generally allows the free alienation of property, the Companies Act, 2013 — through Section 58(2) — specifically protects this freedom for a public company: the securities of members in a public company are ordinarily freely transferable, and any contract or arrangement between two or more persons restricting such transfer is not enforceable as between the parties or against the company, except as otherwise expressly permitted by the Act (for instance, a contract of pre-emption among the shareholders of a public company is permissible if made by the shareholders themselves and enforced only between them).

A private company, in sharp contrast, is defined partly by the very fact that it restricts the right of its members to transfer shares (Section 2(68)). Its articles almost always carry a pre-emption clause — a rule requiring a member who wishes to sell his shares to first offer them to the existing members at a fair price, before he may sell them to an outsider — along with a general power allowing the directors to refuse to register a transfer. This is one of the sharpest practical differences in how transfer of shares works for a public company (largely open) as against a private company (closely controlled), and it is worth learning alongside every other rule in this chapter on transfer and transmission of shares.

Transfer of shares is a bilateral, consideration-based transaction — the transferor usually receives a price for the shares he gives up, and the process, once completed, substitutes the transferee's name for the transferor's name in the company's register of members. Until the company actually registers the transfer, however, the transferee does not become a member for purposes such as voting or receiving dividends; registration by the company is what completes the legal transfer, not merely the private agreement between the two parties.