Procedure for Transfer of Shares

Once a shareholder has decided to transfer his shares, the Companies Act, 2013 lays down an exact procedure that must be followed before the company can lawfully record the change of ownership in its own books. This is set out chiefly in Section 56 of the Act, read with Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014.

Step 1 — Instrument of transfer (Form SH-4). A transfer of shares cannot be registered by the company unless a proper instrument of transfer, in the form prescribed under Rule 11 — commonly called Form SH-4 — is delivered to the company. This instrument must be duly stamped (a transfer of shares attracts stamp duty under the Indian Stamp Act, 1899, as amended, at the rate notified for transfer of securities), dated, and must specify the name, address and occupation, if any, of the transferee.

Step 2 — Execution by both parties. The instrument of transfer must be executed — that is, signed — by or on behalf of both the transferor and the transferee. Execution shows that both sides genuinely agree to the transfer: the transferor to give up his shares, and the transferee to take them on and accept the obligations of membership.

Step 3 — Delivery to the company within the prescribed time. Section 56(1) requires that the duly executed instrument of transfer, together with the share certificate (or, if no certificate has yet been issued, the letter of allotment), be delivered to the company within sixty days from the date of execution of the transfer instrument. If the instrument of transfer has been lost, or this sixty-day window has genuinely been missed, the company may still register the transfer on such terms of indemnity as the Board thinks fit — usually an indemnity bond protecting the company against any loss arising from a defective or fraudulent transfer.

Step 4 — Consideration by the Board of Directors. The Board (or a committee or officer to whom the Board has delegated the power) examines the instrument of transfer and the accompanying documents to satisfy itself that the transfer is genuine, properly executed and properly stamped, and that it does not conflict with any restriction validly placed by the articles — relevant mainly for a private company. The Board may approve the transfer, or, for good and communicated reasons, may exercise its power to refuse it. …