In a Private Limited Company, the ownership is decided by the shareholding of the Company. For inducting new investors or transferring the ownership of the company, the shares of the company need to be transferred. The company’s interest could be sold to attract new investors or to pass the control of the company.
Similar to a partnership firm, a Private Limited Company is considered to be a closed corporation of the members. The transfer of shares in a Private Limited Company can be thus restricted by the Articles of Association (AOA). It is very necessary to review the Articles of Association before beginning with the procedure of share transfer. The restrictions on the right of the shareholders to transfer the shares is of two forms.
Rights of pre-emption: Incase the shareholder wishes to sell some or all of the shares he has, then such shares must be offered to the existing members of the private limited company at a price that is determined by the Directors or the auditor of the Company. The formula method that is prescribed in the Articles of Association determines the value of shares. The company shares can be transferred to an outsider if no existing share holders is interested.
Power of the Director to refuse: The Directors may have the powers to refuse the registration of share transfer under certain circumstances that are prescribed in the Articles of Association.
The restrictions that are mentioned in the AOA are considered to be legally binding. A private agreement between the shareholders is not binding either on the company or on the shareholders. Further, the transfer of shares can only be restricted by the Articles of Association. The right to transfer the shares of a private limited company, cannot be totally prohibited or banned.
To initiate the process of the share, transfer the following steps are to be taken:
*If any current shareholders are coming forward to purchase the shares, then they should be allocated the shares. In case if no existing shareholders are interested and excess shares are available the same could be transferred to the external partner.
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Share transfer from one person to another person or one person to many or many to one person.
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Share transfer from one party to another, wherein transferor or transferee is a corporate entity.
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Share transfer from one party to another, wherein transferor or transferee is a foreign national or foreign entity.
The following steps should be carried out the transfer the shares of the Private Limited Company
The ownership of the shares can be transferred by the delivery of possession but here is a contractual relationship between the members and the company. When the transfer of shares happens an instrument of transfer is needed. Transferring the shares is a long procedure which starts with an agreement to sell, then the execution of the deed of transfer and finally the registration of the transfer.
Both the transferor and the transferee need to execute the share transfer deed as it as an instrument. This share transfer deed must be duly signed and delivered to the company along with the certificate relating to the shares that are transferred. The company will not accept any instrument of transfer which is not in conformity with these provisions. In the physical mode the transfer of shares should be executed in the form SH-4.
At times some companies send a notice or an acknowledgement of the instrument to the transferor who has lodged a transfer with the company prior to scrutinizing the documents. This acknowledgment notice comes in the form of a letter which has a checklist for scrutiny of the transfer documents. Some companies issue transfer receipts. In case the transfer application is made by the transferor and he has partly paid for the shares then the company should not register the transfer unless the company acknowledges the transferee. Also, he should not have any objection in transferring the shares within 2 weeks from the receipt of the notice is issued. The company is not statutory obliged to give the notice to the transferor when the transfer documents are lodged by the transferee.
A scrutiny should be done on the receipts of all the transfer documents to ensure that all the documents are in place. This scrutiny should be done within 3 to 5 days from the receipts of the transfer documents. If the transfer documents are not acceptable then they should be returned to the transferee. Also, if the signature if the transferor is different in the transfer instrument and the signature in the company’s record then the documents will be returned.
The board of directors or the committee must approve each and every transfer of shares. The registration happens only after the approval. The right authority should approve it, if everything is accepted after the scrutiny and the transfer of shares must be allowed by the board. In case the AOA of the company empowers the board to delegate the power of approval of share transfer then it may also delegate it to another committee which does not include the company’s directors.
Any share transfer is incomplete without the registration of the share transfer. A share transfer form is basically a document through which the transferee agrees to accept the shares. This happens to become the legal contract with the company. After the company approves and also registers then the transferee’s name is entered in the registry and it qualifies him as the member of the company. Maintenance of the register of the transfer is not a statutory requirement.
The transfer is effective only on the registration of such shares by the company. The company should deliver the share certificate within 1 month from the receipt by the company’s instrument relevant to transfer. The instrument of transfer should be endorsed with the respective name of the transferee.
Businesses with share capital: The company should not (Within 60 days of its execution) not register any share transfer or ownership interest in it other than beneficial owners that have proper instruments.
Application by the transferor: The transfer should not be registered until the company has notified the transferor within 2 weeks of the notice of the receipt.
No opposition certificate: In the following events the following timelines should be followed:
Last updated: June 05, 2021