There are various reasons for an investor to transfer his share ownership to someone else. However, most of the stockholders do not understand the legal implications of the share transfer procedure. Any individual investor gets to have the ownership in a private limited company (PLC) through shareholding. The shares or the ownership of the company can be transferred to new investors or promoters to transfer the administrative rights of the firm. A private company is generally known as a closed organisation of shareholders. The rules and the regulations associated with the share transfer of a private limited company are quite different from the public limited firm. In the following sections, we will understand the procedure to transfer shares of a private limited company.
Right of Shareholders to Move Shares
In organisations like these, the article of association or AoA may limit the transfer of shares proceedings. Thus, before initiating transfer of share procedure for a private limited company, the AoA must be checked to ensure that it doesn’t inhibit the said procedure of share transfer. If it does so, then the AoA needs to be changed by getting approval from the Board of directors. Let us understand how the shareholders’ right to move shares are limited in two forms:
Directors’ Right to Deny
The administrator or the director possess the right to deny transfer of shares registration as given in the Article of Association of the company. As only the restrictions mentioned in the AoA are binding for the stockholders, any private arrangement doen between the shareholders is of no significance. Thus, if the transfer of share agreement is not as per the AoA, then it can be prohibited.
If a stockholder wants to sell any or all of his holdings, then he must sell the securities to the registered private limited partnership members on a price approved by either the partnership auditor or the director. The share value can also be determined using the formula/method stated in the AoA. If no current shareholder is available, then the company’s stocks can be transferred to an outside group or third party.
Initiating Share Transfer Procedure
The following are the steps to initiate the share transfer procedure:
- The Company’s AoA must be checked and revised accordingly to remove any limitations o the share transfer procedure.
- The shareholder will submit a written notice of intent to the director of the company stating his motive to move the company’s share.
- The shareholder can determine the share price as per the AoA. This is the price at which the shares will be sold to the company’s existing shareholders through a shareholder transfer form. This price is usually set and approved by the Company Directors or Auditor.)
- Post this, the company informs other shareholders regarding share availability and the last date to purchase the stock.
Note: If any of the existing shareholders wants to purchase shares, he must be allowed to do so. If no existing shareholder shows interest in the shares, or the available shares are more than what the existing shareholders wish to buy, the shares could be transferred or sold to an external partner.
- The SH-4 or Share transfer act should be duly executed by both the share transferor and buyer.
- In compliance with the Indian Stamp Act, a Stamp Duty should be paid and the stamps with appropriate value should be pasted on the transfer certificate. The stamps that were issued at the time or before the signing of the transfer deed must be cancelled.
- A person must give witness to the signatures of the transferor and the buyer in the share transfer deed by giving his/her signature, name, and address.
- The corresponding share certificate must be changed as per the share transfer deed and forwarded to the company. A share transfer deed should be deposited to the company on behalf of the customer under sixty days from the date of execution.
- Step 9: The Board should register the transfer by resolution if the share transfer documentation is in order.
Time Limits for Transfer Procedure
- The Company should not register any transfer of shares of the company or any ownership interest in them within 60 days of the execution of share transfer execution.
- The transfer should not be registered until the company notifies the share transferor and buyer within two weeks of receiving the transfer notice.
In the following scenarios, the company should issue certificates concerning the securities allocated/transferred within the following time limit:
- Allocation of debenture: Within 6 months from the allocation date.
- For memorandum subscribers: Within 2 months from the company incorporation date.
The Share Transfer process in a private limited company is a complex one. Shareholders willing to transfer their ownership can consult a financial advisory firm to understand the legalities of the process. These firms can also help in the creation of share transfer deeds and execution of the transfer procedure. Taking the assistance of such firms helps the shareholders in saving valuable time and effort. They can focus on other ventures while the consultancy will take care of the necessary proceedings of the share transfer procedure.