Transfer of Shares in DEMAT or Physical Format for Private Companies

Transfer of Shares in DEMAT or Physical Format for Private Companies . A Private Limited Company, under Section 2(68), must have in its Articles of Association (INC-34) a restriction on the transferability of shares, commonly implemented through:

Right of First Refusal (ROFR) by Existing Shareholders of the Company: Before offering shares to outsiders, the selling shareholder must offer them to existing shareholders on the same terms.

Board Approval: Even if no shareholder is interested, the transfer is often subject to approval of the Board of Directors after execution.

Hence as per the definition of a private company under Section 2(68) of the Companies Act, 2013, the Articles of Association (AOA) in Form INC-34, must include a restriction on the transfer of shares which means that shareholders cannot freely transfer their shares to outsiders. Instead, they must first offer the shares to existing shareholders (commonly known as the right of first refusal). Only if the existing shareholders decline to purchase the shares, the transfer can be made to a third party, subject to the approval of the board. 
More at present, the transfer of shares must be carried out in dematerialised (DEMAT) form for companies falling under Rule 9B (Dematerialisation of Shares) of the Companies Act, 2013, applies to all private companies which is a other than small companies having either a paid-up capital of Rs.4 crores or more, or a turnover of Rs.40 crores or more, as well as to Section 8 companies and holding or subsidiary companies. For such entities, it is mandatory to maintain shares in demat form, and any transfer of shares must be executed through a depository in accordance with the dematerialisation requirements along with that before share transfer it is important to have existing physical shares to convert into the DEMAT a/c. 
The transfer of shares in a small private limited company is a detailed process specified by the Companies Act, 2013 under its section 56, where private companies are generally more restrictive in transferring shares compared to public companies, however they are allowed to transfer shares among existing shareholders or to outsiders after compliance with certain conditions laid down under the AOA and companies Act 2013. Through this article we will take you through the share transfer process in a private company and the requirement for SH-4 along with stamp duty implications, all with reference to the relevant provisions of the Companies Act, 2013.
Section 56 of the Companies Act, 2013: Transfer and Transmission of Securities
Section 56 lays down the procedural requirements for both transfer and transmission of shares and other securities. It applies to all companies, whether public or private, with certain flexibilities available to private companies under their Articles of Association (AOA).
Execution and Delivery of Instrument of Transfer in form SH-4

A company shall not register a transfer of securities unless: A proper instrument of transfer is duly stamped, dated, and executed by (or on behalf of) the transferor and transferee, and the Form SH-4 deed is delivered to the company within 60 days from the date of execution.

Time Limit for Issue of Certificates: Upon registration of the transfer, the company must deliver the share certificates: Within 1 month from the date of receipt of the duly executed transfer instrument (in case of physical shares) and in case of allotment of shares, certificates must be delivered within 2 months from the date of allotment.

Additional Requirement for Listed Companies: For companies whose shares are held in dematerialized form, transfer shall be effected only through the depository (this does not apply to most private companies).

Penalty for Non-Compliance: If a company fails to comply, a penalty of Rs.50,000 may be levied on the company and its officers in default.

Some key notes on Share Transfer 
When Transfer taken place through- 
DEMAT

If a private company falls under Rule 9B, physical share transfer using SH-4 and stamp duty is no longer applicable.

Instead, the transfer must take place through a depository participant (DP), with the shares held in dematerialised form.

The transferor and transferee must both have active demat accounts, and the transfer is initiated via Delivery Instruction Slips (DIS).

Physical

Failure to deliver SH-4 in time or not paying stamp duty can make the transfer invalid in the eyes of law.

Transmission vs. Transfer: Section 56 also governs transmission (due to death, inheritance, etc.) which does not require SH-4 or stamp duty.

Understanding Share Transfer in a Private Company
Under the Companies Act, 2013, the process of share transfer is specified under Section 56 read with Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014, procedure to be followed by a company when its shares are transferred. In a private limited company, the Articles of Association (AOA) , a document which plays an important role in the transferability of shares. Private companies include a clause in their AOA that restricts the free transfer of shares and gives first right to existing shareholders before offering the shares to outsiders, if they fail to accept the offer then the share can be offered to any outsider.
Once the conditions mentioned in the AOA are satisfied, the shareholder willing to transfer his/her shares must execute a share transfer deed in Form SH-4. The SH-4(Share Transfer Deed) is a physical instrument of transfer and must be duly signed by both the transferor (person selling the shares) and the transferee (person buying the shares) and at least one witness. It also requires the details such as the number of shares being transferred, the consideration received, folio number, and distinctive numbers of shares.
SH-4 and Stamp Duty Payment 
The SH-4 form must be affixed with proper stamp duty in accordance with the Indian Stamp Act, 1899 as amended by various state stamp Acts, the rate of stamp duty on transfer of shares is 0.015% of the total consideration amount or market value of shares, whichever is higher, as per the provisions of the Indian Stamp Act which also includes premium value on shares if any and stamp duty must be paid in the form of adhesive or e-stamps affixed to the SH-4 form. If the stamp in SH-4 is adhesive, it must be cancelled by marking across all of its edges.
For example, if the shares are being transferred for a consideration of Rs. 1,00,000, then the applicable stamp duty would be 0.015% of 1,00,000, i.e., Rs. 15, this amount must be paid and duly acknowledged before the form is considered valid. Without payment of proper stamp duty, the transfer is not considered legally effective and the company may refuse to register the transfer.
Time Limits and Procedure for Share Transfer
The Companies Act mandates that the share transfer deed (Form SH-4) needs to be executed between the transferor and transferee. After its duly execution of deed between both the parties, it needs to be submitted to the company within 60 days. The execution date is the date on which both parties sign from SH-4 and the company, upon receipt of this form, verifies the documents and checks if the transfer is in accordance with its AOA. Once verified and approved by the Board of Directors, the company records the name of the transferee in its Register of Members and issues a share certificate within one month from the date of registration of transfer.
Step by step process for share transfer shall be as follows:-

Review AOA of the company

Intimate to the company and existing shareholders for willing to sell shares of existing company

Execute the SH-4 Form by both the transferor and the transferee.

Payment of Stamp Duty on the SH-4 Form as per applicable laws.

Submit SH-4 and Original Share Certificate to the company including Split of Shares if any.

Approval by Board of Directors in a coming board meeting.

Update Register of Members (MGT-1) and register of share transfer

What is the role of Board and Approval?
It is important to note that the transfer of shares in a private company is subject to Board approval. Even if the transfer deed is complete in all respects, the Board of Directors has the authority to approve or reject the share transfer request based on reasons stated in the AOA.  If the Board disapproves the transfer, the same must be communicated to the transferor and transferee within 30 days from the date of receipt of the share transfer deed.
In summary, the transfer of shares in a private limited company under the Companies Act, 2013 requires adherence to both legal provisions and the internal rules set out in the Articles of Association. The process involves execution and submission of SH-4, payment of appropriate stamp duty, and approval by the Board of Directors. 
Draft Board Resolution for the approval of share transfer 
CERTIFIED TRUE COPY OF THE RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS OF [Company Name] HELD ON (Day) (Date) AT (Time) AT THE REGISTERED OFFICE OF THE COMPANY(Address)
Resolution for Transfer of Shares
“RESOLVED THAT pursuant to the provisions of Section 56 of the Companies Act, 2013 and the rules made thereunder, and subject to the Articles of Association of the Company, the consent of the Board be and is hereby accorded to transfer the following equity shares of the Company:

Name of Transferor

Name of Transferee

No. of Shares

Folio No.

Certificate No.

Distinctive No.

[Transferor Name]

[Transferee Name]

[Number]

[Folio]

[Cert No.]

[From – To]

RESOLVED FURTHER THAT the Share Transfer Deed in Form SH-4, duly executed by the transferor and transferee and duly stamped, be and is hereby approved.
RESOLVED FURTHER THAT the name of the transferee be entered into the Register of Members in respect of the shares transferred and that a fresh share certificate be issued to the transferee and the share certificate(s) of the transferor be cancelled.
RESOLVED FURTHER THAT Mr./Ms. (Name with DIN), Director of the Company, be and is hereby authorized to endorse the transfer of shares on the reverse of the relevant share certificate and to sign, execute and file all such forms and documents with the Registrar of Companies and do all such acts, deeds, and things as may be necessary to give effect to this resolution.”
Standard format of Form SH-4 (Share Transfer Deed) as per Companies Act, 2013:
Form No. SH-4
Securities Transfer Form 
[Pursuant to Section 56 of the Companies Act, 2013 and
Sub-rule (1) of Rule 11 of the Companies (Share Capital and Debentures) Rules 2014] 
Date of Execution: __________

FOR THE CONSIDERATION stated below “Transferor(s)” named do hereby transfer to “Transferee(s)” the named securities specified below subject to the conditions on which the said securities are now held by the transferor(s) and the transferee(s) do hereby agree to accept and hold the said securities subject to the conditions aforesaid.

CIN: Name Of the Company: 
Name of the Stock Exchange where the company is listed, if any:

Description of Securities:

Kind/Classof Securities

Nominal value of each unit of Securities

Amount called up per unit of Securities

Amount Paid-up per unit of Securities

(1)

(2)

(3)

(4)

No. of Securities being transferred

Consideration Involved (Rs.)

In figures

In words

In figures

In words

Distinctive Number

From

Corresponding Certificate No.

TRANSFERORS’ PARTICULARS

Registered Folio Number

Name

Signature

I hereby confirm that the Transferor has signed before me. 
Signature of witness: Name: Address:

Name

Father’s Name

Address & Email Id

Occupation

Existing Folio No.if any

Signature

(1)

(2)

(3)

(4)

(5)

(6)

Transferee’s Particulars
Folio No. of Transferee                                                         Specimen Signature of Transferee 
                                                                                                     ………………………………………
 Value of Stamp Affixed: ________(Total Consideration*0.015%)
Declaration:

Transferee is not required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to transfer of shares;

Transferee is required to obtain the Government approval under the Foreign Exchange                Management (Non-debt Instruments) Rules, 2019 prior to transfer of shares and the same has been obtained and is enclosed herewith.”

Enclosures:
(1) Certificate of shares or debentures or other securities
(2) If no certificate is issued, letter of allotment.
(3) Others, specify………………………………………. 
Stamps
For office use only
Checked by _______________
Signature tallied by _______________
 Entered in the Register of Transfer on ___________ vide Transfer No ___________ 
Approval Date ___________ 
Learn here Mandatory conversion of Physical Shares into Demat - Private Company, WOS and Subsidiary Company

A Private Limited Company, under Section 2(68), must have in its Articles of Association (INC-34) a restriction on the transferability of shares, commonly implemented through:

Right of First Refusal (ROFR) by Existing Shareholders of the Company: Before offering shares to outsiders, the selling shareholder must offer them to existing shareholders on the same terms.
Board Approval: Even if no shareholder is interested, the transfer is often subject to approval of the Board of Directors after execution.

More at present, the transfer of shares must be carried out in dematerialised (DEMAT) form for companies falling under Rule 9B (Dematerialisation of Shares) of the Companies Act, 2013, applies to all private companies which is a other than small companies having either a paid-up capital of Rs.4 crores or more, or a turnover of Rs.40 crores or more, as well as to Section 8 companies and holding or subsidiary companies. For such entities, it is mandatory to maintain shares in demat form, and any transfer of shares must be executed through a depository in accordance with the dematerialisation requirements along with that before share transfer it is important to have existing physical shares to convert into the DEMAT a/c.

The transfer of shares in a small private limited company is a detailed process specified by the Companies Act, 2013 under its section 56, where private companies are generally more restrictive in transferring shares compared to public companies, however they are allowed to transfer shares among existing shareholders or to outsiders after compliance with certain conditions laid down under the AOA and companies Act 2013. Through this article we will take you through the share transfer process in a private company and the requirement for SH-4 along with stamp duty implications, all with reference to the relevant provisions of the Companies Act, 2013.

Section 56 of the Companies Act, 2013: Transfer and Transmission of Securities

Section 56 lays down the procedural requirements for both transfer and transmission of shares and other securities. It applies to all companies, whether public or private, with certain flexibilities available to private companies under their Articles of Association (AOA).

Execution and Delivery of Instrument of Transfer in form SH-4

A company shall not register a transfer of securities unless: A proper instrument of transfer is duly stamped, dated, and executed by (or on behalf of) the transferor and transferee, and the Form SH-4 deed is delivered to the company within 60 days from the date of execution.
Time Limit for Issue of Certificates: Upon registration of the transfer, the company must deliver the share certificates: Within 1 month from the date of receipt of the duly executed transfer instrument (in case of physical shares) and in case of allotment of shares, certificates must be delivered within 2 months from the date of allotment.
Additional Requirement for Listed Companies: For companies whose shares are held in dematerialized form, transfer shall be effected only through the depository (this does not apply to most private companies).
Penalty for Non-Compliance: If a company fails to comply, a penalty of Rs.50,000 may be levied on the company and its officers in default.

Some key notes on Share Transfer

When Transfer taken place through-

DEMAT

If a private company falls under Rule 9B, physical share transfer using SH-4 and stamp duty is no longer applicable.
Instead, the transfer must take place through a depository participant (DP), with the shares held in dematerialised form.
The transferor and transferee must both have active demat accounts, and the transfer is initiated via Delivery Instruction Slips (DIS).

Physical

Failure to deliver SH-4 in time or not paying stamp duty can make the transfer invalid in the eyes of law.
Transmission vs. Transfer: Section 56 also governs transmission (due to death, inheritance, etc.) which does not require SH-4 or stamp duty.

Understanding Share Transfer in a Private Company

Under the Companies Act, 2013, the process of share transfer is specified under Section 56 read with Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014, procedure to be followed by a company when its shares are transferred. In a private limited company, the Articles of Association (AOA) , a document which plays an important role in the transferability of shares. Private companies include a clause in their AOA that restricts the free transfer of shares and gives first right to existing shareholders before offering the shares to outsiders, if they fail to accept the offer then the share can be offered to any outsider.

Once the conditions mentioned in the AOA are satisfied, the shareholder willing to transfer his/her shares must execute a share transfer deed in Form SH-4. The SH-4(Share Transfer Deed) is a physical instrument of transfer and must be duly signed by both the transferor (person selling the shares) and the transferee (person buying the shares) and at least one witness. It also requires the details such as the number of shares being transferred, the consideration received, folio number, and distinctive numbers of shares.

SH-4 and Stamp Duty Payment

The SH-4 form must be affixed with proper stamp duty in accordance with the Indian Stamp Act, 1899 as amended by various state stamp Acts, the rate of stamp duty on transfer of shares is 0.015% of the total consideration amount or market value of shares, whichever is higher, as per the provisions of the Indian Stamp Act which also includes premium value on shares if any and stamp duty must be paid in the form of adhesive or e-stamps affixed to the SH-4 form. If the stamp in SH-4 is adhesive, it must be cancelled by marking across all of its edges.

For example, if the shares are being transferred for a consideration of Rs. 1,00,000, then the applicable stamp duty would be 0.015% of 1,00,000, i.e., Rs. 15, this amount must be paid and duly acknowledged before the form is considered valid. Without payment of proper stamp duty, the transfer is not considered legally effective and the company may refuse to register the transfer.

Time Limits and Procedure for Share Transfer

The Companies Act mandates that the share transfer deed (Form SH-4) needs to be executed between the transferor and transferee. After its duly execution of deed between both the parties, it needs to be submitted to the company within 60 days. The execution date is the date on which both parties sign from SH-4 and the company, upon receipt of this form, verifies the documents and checks if the transfer is in accordance with its AOA. Once verified and approved by the Board of Directors, the company records the name of the transferee in its Register of Members and issues a share certificate within one month from the date of registration of transfer.

Step by step process for share transfer shall be as follows:-

Review AOA of the company
Intimate to the company and existing shareholders for willing to sell shares of existing company
Execute the SH-4 Form by both the transferor and the transferee.
Payment of Stamp Duty on the SH-4 Form as per applicable laws.
Submit SH-4 and Original Share Certificate to the company including Split of Shares if any.
Approval by Board of Directors in a coming board meeting.
Update Register of Members (MGT-1) and register of share transfer

What is the role of Board and Approval?

It is important to note that the transfer of shares in a private company is subject to Board approval. Even if the transfer deed is complete in all respects, the Board of Directors has the authority to approve or reject the share transfer request based on reasons stated in the AOA. If the Board disapproves the transfer, the same must be communicated to the transferor and transferee within 30 days from the date of receipt of the share transfer deed.

In summary, the transfer of shares in a private limited company under the Companies Act, 2013 requires adherence to both legal provisions and the internal rules set out in the Articles of Association. The process involves execution and submission of SH-4, payment of appropriate stamp duty, and approval by the Board of Directors.

Draft Board Resolution for the approval of share transfer

CERTIFIED TRUE COPY OF THE RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS OF [Company Name] HELD ON (Day) (Date) AT (Time) AT THE REGISTERED OFFICE OF THE COMPANY(Address)

Resolution for Transfer of Shares

“RESOLVED THAT pursuant to the provisions of Section 56 of the Companies Act, 2013 and the rules made thereunder, and subject to the Articles of Association of the Company, the consent of the Board be and is hereby accorded to transfer the following equity shares of the Company:

Name of Transferor	Name of Transferee	No. of Shares	Folio No.	Certificate No.	Distinctive No.
[Transferor Name]	[Transferee Name]	[Number]	[Folio]	[Cert No.]	[From – To]

RESOLVED FURTHER THAT the Share Transfer Deed in Form SH-4, duly executed by the transferor and transferee and duly stamped, be and is hereby approved.

RESOLVED FURTHER THAT the name of the transferee be entered into the Register of Members in respect of the shares transferred and that a fresh share certificate be issued to the transferee and the share certificate(s) of the transferor be cancelled.

RESOLVED FURTHER THAT Mr./Ms. (Name with DIN), Director of the Company, be and is hereby authorized to endorse the transfer of shares on the reverse of the relevant share certificate and to sign, execute and file all such forms and documents with the Registrar of Companies and do all such acts, deeds, and things as may be necessary to give effect to this resolution.”

Standard format of Form SH-4 (Share Transfer Deed) as per Companies Act, 2013:

Form No. SH-4

Securities Transfer Form

[Pursuant to Section 56 of the Companies Act, 2013 and

Sub-rule (1) of Rule 11 of the Companies (Share Capital and Debentures) Rules 2014]

Date of Execution: __________

CIN: Name Of the Company:

Name of the Stock Exchange where the company is listed, if any:

Description of Securities:

Kind/Classof Securities	Nominal value of each unit of Securities	Amount called up per unit of Securities	Amount Paid-up per unit of Securities
(1)	(2)	(3)	(4)

No. of Securities being transferred		Consideration Involved (Rs.)
In figures	In words	In figures	In words

Distinctive Number	From
	To
Corresponding Certificate No.

TRANSFERORS’ PARTICULARS

Registered Folio Number

Name

Signature

I hereby confirm that the Transferor has signed before me.

Signature of witness: Name: Address:

Name	Father’s Name	Address & Email Id	Occupation	Existing Folio No.if any	Signature
(1)	(2)	(3)	(4)	(5)	(6)

Transferee’s Particulars

Folio No. of Transferee Specimen Signature of Transferee

………………………………………

Value of Stamp Affixed: ________(Total Consideration*0.015%)

Declaration:

Transferee is not required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to transfer of shares;

Transferee is required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to transfer of shares and the same has been obtained and is enclosed herewith.”