Shares with a Note on Restrictions
The transfer of shares is a fundamental concept under Company Law, reflecting the free transferability of ownership interests in a company. Shares represent movable property and confer rights such as ownership, dividends, and voting power. The ease with which shares can be transferred enhances liquidity, investor confidence, and market efficiency. However, while the law promotes free transferability, it also recognizes certain restrictions to protect the interests of the company, its members, and the public at large. Therefore, understanding the procedure for transfer of shares along with applicable restrictions is essential for students, professionals, investors, and corporate managers.
Under Indian law, the procedure for transfer of shares is primarily governed by the Companies Act, 2013, along with the Companies (Share Capital and Debentures) Rules, 2014, and, in case of listed companies, SEBI regulations.
Meaning of Transfer of Shares
A transfer of shares refers to the voluntary transfer of ownership of shares by one person (transferor) to another person (transferee) for consideration, such as money. It involves a legal process whereby the transferee becomes a member of the company, subject to compliance with statutory requirements and company regulations.
According to Section 44 of the Companies Act, 2013, shares are movable property and are transferable in the manner provided by the Articles of Association (AoA) of the company.
Legal Framework Governing Transfer of Shares
The procedure for transfer of shares is governed by:
- Companies Act, 2013
- Companies (Share Capital and Debentures) Rules, 2014
- Articles of Association
- SEBI (LODR) Regulations, in case of listed companies
- Indian Stamp Act, 1899 (as amended)
Procedure for Transfer of Shares
1. Execution of Transfer Instrument
The first step in the transfer of shares is the execution of a proper instrument of transfer. As per Section 56 of the Companies Act, 2013, the transfer must be effected through Form SH-4.
The transfer deed must:
- Be duly stamped according to the applicable stamp duty laws
- Be signed by both the transferor and transferee
- Contain details such as name, address, folio number, share certificate number, and distinctive numbers of shares
Stamp duty is mandatory, and an unstamped or inadequately stamped instrument is invalid in law.
2. Delivery of Transfer Deed to the Company
Once executed, the transfer deed along with:
- Original share certificate, or
- Letter of allotment (if share certificate is not issued)
must be delivered to the company within 60 days from the date of execution of the instrument.
Failure to submit the documents within the prescribed time may render the transfer invalid unless condoned by the company.
3. Scrutiny by the Company
Upon receipt of the transfer documents, the company scrutinizes them to ensure:
- Compliance with statutory requirements
- Proper stamping and signatures
- Adherence to Articles of Association
- Absence of any legal restrictions or prohibitions
If the documents are in order, the company proceeds with registration of the transfer.
4. Approval by Board of Directors
The transfer of shares must be approved by the Board of Directors through a resolution passed at a duly convened board meeting. The Board has discretionary power, subject to the Articles of Association, to accept or refuse the transfer.
In case of refusal, the company must communicate the reasons for refusal to the transferee and transferor within 30 days of receipt of the transfer instrument.
5. Entry in the Register of Members
After approval, the company enters the name of the transferee in the Register of Members, thereby recognizing the transferee as the legal owner of shares.
This step is crucial because membership rights arise only upon entry in the register.
6. Issue of New Share Certificate
The company must issue a new share certificate in the name of the transferee within one month from the date of registration of transfer.
The old share certificate is canceled, and the new certificate serves as conclusive evidence of ownership.
Transfer of Shares in Listed Companies
For listed companies, the transfer process is largely electronic and governed by SEBI regulations. Shares are transferred through depositories like NSDL and CDSL via dematerialized accounts, ensuring faster and more transparent transactions.
Restrictions on Transfer of Shares
Although shares are generally transferable, Company Law permits certain reasonable restrictions to safeguard corporate interests.
Restrictions under Articles of Association
The Articles may impose restrictions such as:
- Right of pre-emption, requiring shares to be offered first to existing members
- Requirement of Board approval
- Restrictions on transfer to undesirable persons
Such restrictions are common in private companies, where free transferability is limited.
Statutory Restrictions
The Companies Act, 2013 imposes statutory restrictions in specific situations, such as:
- Transfer of shares by a minor
- Transfer in violation of court orders
- Transfer without proper stamping or execution
Restrictions in Private Companies
As per Section 2(68) of the Companies Act, 2013, a private company must restrict the transfer of its shares. These restrictions are mandatory and form a defining feature of private companies.
SEBI Regulations for Listed Companies
In listed companies, restrictions arise under:
- Insider trading regulations
- Lock-in requirements
- Transfer during sensitive periods
These restrictions aim to protect investors and maintain market integrity.
Refusal by Board of Directors
The Board may refuse transfer if:
- The transfer violates Articles of Association
- The transferee is not a desirable person
- The transfer instrument is defective
However, refusal must be bona fide and not arbitrary.
Mnemonic Sentence to Remember the Procedure
Every Dedicated Share Board Enters Certificates
Breakdown:
- E – Execute transfer deed (Form SH-4)
- D – Deliver deed to company
- S – Scrutiny of documents
- B – Board approval
- E – Entry in Register of Members
- C – Certificate issued to transferee
About Lawgnan
Understanding the procedure for transfer of shares is essential for Company Law students, legal aspirants, corporate professionals, and investors. Clear knowledge of statutory steps, documentation, and permissible restrictions helps avoid invalid transfers and legal disputes. If you want more exam-oriented, humanized, and legally accurate explanations on Company Law, Corporate Governance, SEBI regulations, and practical case-based answers, explore our in-depth resources. Visit the link below to access well-structured notes, mnemonic-based answers, and updated legal content designed for clarity, compliance, and confidence. Stay legally informed and exam-ready with reliable Company Law insights.
