The Companies Act regards the share in a company as a movable property and empowers every shareholder to transfer his shares in the manner provided in the Articles.
The basic object of establishing public companies is to make the shares freely transferable. This is not a right conferred by the Articles but is a power cast upon every shareholder by the express provisions of the Companies Act. Therefore, even the Articles cannot take away this power altogether but can impose reasonable restrictions regarding the mode of transfer. In case of private companies, the Articles should prescribe limitations on the right to transfer the shares.
Only a person who has the capacity to transfer can transfer a share. A person who properly becomes a member of the company is entitled to effect a transfer. The capacity to transfer shares is not co-extensive with the capacity to enter into a contract. Even a minor or an infant can become a member. If he properly becomes a member, he acquires a right to transfer his shares.
Sec. 108 deals with transfer of shares in and debentures of a company. The said section stipulates that
“unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company along with the certificate relating to shares or debentures or if no such certificates is in existence along with the letter of allotment of the shares or debentures, a company shall not register a transfer.”
This section is mandatory and unless all the pre-requisites mentioned in the section are complied with, the transfer will be void. The Central Government have prescribed the form for transfer which should be used in the case of all transfers of shares in or debentures of a company including a private company.
The form seeks the particulars prescribed in the section namely, name, address and occupation of the transferee, and provision for signatures of the transferor and the transferee. It also seeks other particulars namely, name of the company to which the shares relate, the distinctive numbers of the shares and the number of shares involved in the transfer and also the stock exchange on which the shares are quoted.
Before the instrument of transfer is lodged with a company, it should be duly stamped. The transfer of shares attracts stamp duty under the Indian Stamp Act (Act II, 1899).
The Government has prescribed a stamp duty of Re.0.50 for every Rs.100 of the value of the shares at which shares were bought and not the face value of shares under transfer.
If a share transfer instrument is lodged with the company, which is sufficiently stamped but the stamps have not been cancelled, it would perfectly be in order of the company to return the transfer deed as incomplete. Such return of incomplete transfer should be distinguished from rejection of transfers.
The stamping has to be done by the transferor unless there is a contract to the contrary.
In the case of transfer of shares by the holder thereof to the name of a bank as a security for financial assistance granted by the bank to the holder and to none else and subsequent re-transfer of shares on the release of the security, the Central Government have reduced the stamp duty.
The following are the steps in transfer of shares:
1. On receipt of the transfer instrument, duly executed, in the prescribed form together with the share certificate or allotment letter, it is usual for companies to give an acknowledgment for the same.
2. The instrument is to be checked thoroughly to find out whether the same is in order.
3. Where the instrument of transfer is received from a person other than the transferor and the shares are partly paid-up, the company has to send a notice to the transferee.
4. It is also advisable to send notice to the transferor, as a measure of causation.
5. Before effecting any transfer, the company should ensure that the instrument is lodged within the time limit as prescribed in Sec. 108(1A) of the Companies Act.
6. Where the shares are intended to be transferred to a body corporate, it should be ascertained as to whether—
- the Memorandum and Articles of Association empower the transferee company to make the investment,
- the Board of directors of the intended transferee body corporate has passed the necessary resolution and has empowered the person concerned to deal with the matter in this behalf,
- the person executing the deed on behalf of the body corporate has valid authority to do so, and
- if the provisions of Sec. 108 A to 108 I are attracted, whether the necessary formalities there under have been complied with.
7. Where the intended transferee is a trust or a partnership firm or other association of persons, it should be ensured whether—
1. The trust is registered under the Societies Registration Act or not. If it is registered, as aforesaid, the trust becomes a body corporate and shares can be registered in the name of the trust. Otherwise, shares have to be registered in one or more names of the trustees of the trust, authorized by resolution of the Board of Trustees by whatever name called.
2. If the shares are purchased by a partnership firm or an association of persons, the shares are to be registered in the individual name(s) of one or more partners, in the case of partnership firms; or in the name or names of any of the office bearers of the association, in case of association of persons. Similarly, in case the shares are purchased by a Hindu Undivided Family, shares have to be registered in the name of the Karta, without mentioning the representative character.
8. Where the transferee is minor, transfer of shares should be in accordance with provisions of Articles of Association of the company. If they are fully paid-up shares, there wont be a problem in registering the same in favour of minors through guardian.
9. After making thorough scrutiny, the officer in charge will put his initial on the form and the particulars of the transfer instrument will be entered in the Share Transfer Register.
10. At periodic intervals, the register along with necessary transfer documents and enclosures will be put up to the Board or the Shares Transfer Committee thereof if there is one or such other authority as may be determined by the Board, in this behalf, depending upon the practice of the company and the concerned authority will initial the Share Transfer Register for having approved the transfer. The date of approval of the transfer will be indicated in the register.
11. Where transfer of shares are duly approved, endorsements in favor of the transferees will be made on the share certificates and the secretary or the officer authorized by the board certifies the same. Then the share certificates are returned to the sender together with a covering letter. New certificates are to be issued as per companies rules.
12. Necessary entries shall be made in the Register of Members in regard to the transferor and the transferee.
13. In case of a refusal to register the transfer, the company must send notice to the transferor and transferee as per the provisions of Sec. 111 of the Companies Act.