Share Capital: Transfer and Transmission

Transfer of shares refers to the intentional transfer of title (rights as well as duties) to shares by one person to another. There are two parties to transfer of shares, i.e. transferor and transferee.

The shares of the public company are freely transferable unless there is an express restriction provided in the articles of association. However, the company can refuse the transfer of shares, if it has a valid reason for the same. In the case of a private company, there is a restriction on the transfer of shares subject to certain exceptions.

Transfer of shares: Procedure and Scope

“When joint stock companies are established, the great object was that the shares should be capable of being easily transferred.”

One of the most important features of a Company is that its shares are transferable. Rights of a shareholder to transfer his share are always subject to provisions in Articles of Association. Upon incorporation a company acquires its own independent legal personality and distinct entity, and its shareholders acquire the right to hold and transfer shares. A Company limited by guarantee and having no share capital, no transfer of share is involved as there are no shares to transfer. A member of such a company may transfer his ‘interest’ as per section 82 that allows for transfer of shares or ‘other interest.’

1.1 Need for an instrument of transfer

Shares are moveable goods. The ownership of moveable goods may be transferred by delivery of possession, but as per section 36 there is a contractual relationship between the members and the company. When shares are transferred the contractual relationship is assigned to the transferee which requires an instrument of transfer. Transferring a share involves a series of steps, first an agreement to sell, then execution of a deed of transfer and finally registration of the transfer. Section 108 lays down the procedure for transfer.

1.2Procedure for transfer of Shares

1) Instrument of transfer must be executed by both transferor and transferee.

2) It must be duly stamped

3) It must be delivered to the company along with certificate relating to shares transferred

4) Must be in the prescribed form and presented to prescribed authority.

Section 108 requires the transfer to be in a proper instrument of transfer known as ‘Share Transfer Form’ which is required to be presented to the Registrar of Companies before it is signed and filled up by the transferor. Any instrument of transfer which is not in conformity with these provisions shall not be accepted by the company. In cases of hardship the Central Government may extend the period of time. The transferee becomes a member of a company only when the transfer is registered by the company.

In Prafulla Kumar Rout v. Orient Engg. Works (P.) Ltd it was observed that all that section 108 requires is that before delivery, the stamps should be affixed. However, in Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd., the Kerala High Court observed that instrument is unstamped if the it is not properly executed. Cancellation of the stamps by the staff of the company does not make the transfer instrument duly stamped. Provisions of Section 108 are inapplicable to transfer where transferee or transferor are entitled as beneficial owners in the records of depository.

1.3 Demat Shares

In the case of fresh issue (IPO), the investor would indicate his choice in the application form, if he opts to hold the security in the depository mode, commonly known as ‘demat’ mode. An investor, who opts for a depository mode may at any time, opt to choose out of it and claim share certificate from the company by substituting his name as the registered owner in the place of the depository. Ownership changes in the depository system will be made automatically on the basis of delivery vs. payment. The provisions of section 108 are inapplicable to transfer where transferee and transferor are entered as beneficial owners in records of depository.

Under the depository system securities may be dematerialized that may be transferred by recording entries in a depository. SEBI (Disclosure and Investor Protection) Guidelines, 2000 stipulates that no company shall make public or offer sale of securities unless it enters into an agreement with the depository or gives an option to its shareholders to hold securities in dematerialized form no stamp duty is charged.

Where there is an immediate and unconditional transfer of shares with stipulation for determination of consideration for transfer to be mutually agreed on in future, it cannot not be said that agreement for transfer of shares was conditional on determination of price of shares. Forgery does not confer any title because it is not merely an absence of free consent but there is no consent at all.

1.4 Time Limit

As per section 113, a company is required, within 2 months after the application for transfer, to deliver the share certificates duly transferred. In Re, Reliance Industries Ltd. the company failed to deliver shares within the prescribed time of 2 months. CLB fined the company and share transfer agents. The default under section 113 is a continuing offence and, therefore, shall not be subject to limitation.

1.5 Board of Directors- Power of refusal

Where the AoA of a Company give power to the Board to refuse registration of a transfer of shares, such power must be exercised by a resolution of the Board. The Board may refuse to register the transfer as long as they are acting in the interests of the Company, but if they exercise their discretion to refuse malafide, i.e. they act oppressively or corruptly, the CLB or the Court will now interfere and order registration.

AoA of a company may be specific and empower the BOD to refuse to register transfers on certain specific grounds. Thus, where AoA of a company contain a provision to the effect that no share shall be transferred to an outsider if any member of the Company was willing to purchase the same at fair price to be determined by the directors, and transfer to an outsider shall be allowed only when the Board of Directors was unable to find a willing member within a stipulated period; the directors having offered to purchase those shares, the question of registering shares in favour of an outsider not arise. The refusal to register transfer of shares on the ground that the transferor had been indulging in acts which were against the interests of the company is not right. As per section 111 if a Company refuses to register the transfer of shares, within 2 months from the date of lodging the instrument of transfer, send notice of refusal to the transferor or transferee giving reasons. CLB on appeal may direct the registration of the transfer.

In Hemanigiri Finance & Leasing (P.) Ltd v. Tamilnad Mercantile Bank Ltd., the CLB/ Tribunal held that there is no blanket authority available to a company to refuse registration of transfer, even if Articles provide absolute discretion. When the Articles do not provide for any powers for refusal, the company cannot refuse.

In case of refusal, on appeal to the CLB/Tribunal, it is always for the party assailing the decision of the BOD to demonstrate that such decision suffers from unsustainable reasons. The Tribunal while dealing with an appeal against refusal may, after hearing the parties, either dismiss the appeal or, by order, direct that the transfer shall be registered by the Company and the company shall comply with such order within 10 days of the receipt of the order.

Certification of an instrument of transfer lodged with the company is a process in which the company certifies on the instrument of transfer that the share certificate as stated in the certification stamp has been lodged with the company for registration of transfer. It is an endorsement made by the company on the instrument of transfer lodged, to the effect that stated above. It is a kind of receipt. This provision has been made to facilitate the sale of smaller number of shares in case the share certificate is for a larger number of shares .

1.6 Rights of transferees

Till the company has registered the transfer, the name of the transferor continues to appear in the register of members and thus he continues to be the lawful owner but transferee is the beneficial owner (cestui que trust). In order to protect the interest of the transferees; section 206A was added by the Amendment Act, 1988 which provides that where any instrument of transfer of shares has been delivered to the company for registration and transfer has not been registered, the right to dividend, rights shares and bonus shares will be kept on hold. This dividend would be kept in an “Unpaid Dividend Account”  unless the company is authorized by the registered holder of such shares in writing to pay dividend to the transferee.

1.7 Blank Transfer

Where a shareholder signs a share transfer form without filling in the name of the transferee and hands it over along with the share certificate to the transferee thereby enabling him to deal with the shares, he is said to have made a transfer ‘in blank’ or a ‘blank transfer’. It is not a negotiable instrument because it may be transferred by mere delivery. Accordingly, the title of the transferee acquiring shares through a blank transfer is subject to the title of the transferor.

A bona fide transferee from a person who has acquired a blank transfer form by fraud does not acquire good title to the shares included in the deed. A transfer in blank, when accompanied by a share certificate, carries to the transferee both the legal and equitable rights to the shares and also the right to call upon the company to register the transfer. This right to get himself registered as a member is available to the transferee even after the death of the transferor. Blank transfer, however, results in loss of stamp duty and income tax. To prevent abuse of blank transfer subsections (1A) and (1B) of section 108 were introduced in 1965.

1.8 Right to Pre-emption

It is a common practice to provide in the articles that any member intending to transfer his shares must offer the shares first to other members of the company. Such restrictions are not invalid. The conditions imposed and the formalities prescribed by the articles are mandatory. The pre-emption clause does not, however, completely bar transfers to outsiders.

1.9 Restrictions on Transfer of Shares

General grounds

Malafide instrument of transfer, inadequacy of reasons, irrelevant considerations and bad delivery of transfer documents, contravention of law, prejudicial to company or public interest and stay order by Court are the reasons when transfer of shares can be restricted.

Transmission of Shares

There are some cases when the transfer of shares occurs due to the operation of law, i.e. when the registered shareholder is no more, or when he is insolvent or lunatic. Transmission of shares also occurs when the shares are held by a company, and it is wound up.

The shares are transferred to the legal representative of the deceased and the official assignee of the insolvent. The transmission is recorded by the company when the transferee gives the proof of entitlement of shares.

A company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer, in such form, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities:

The significant differences between transfer and transmission of shares are provided below:

1. When the shares are transferred by one party to another party, voluntarily, it is known as transfer of shares. When the transfer of shares happens due to the operation of law, it is referred to as transmission of shares.
2. Transfer of shares is done intentionally whereas death, bankruptcy and lunacy are the reasons for transmission of shares.
3. The transfer of shares is initiated by the parties to transfer, i.e. transferor and transferee. Unlike transmission of shares which is initiated by the legal representative of the concerned member.
4. Transferee pays an adequate consideration to the transferor for the transfer of shares. In the case of transmission of shares, no consideration shall be paid.
5. Execution of valid transfer deed is necessary when there is the transfer of shares, but not in the transmission of shares.
6. When the transfer is completed, the liability of the transferor is over. On the other hand, the original liability of shares exists.
7. Stamp duty is payable on the market value of shares in case of transfer while in the transmission of shares no stamp duty is to be paid.

Comparison