A company issues shares to each of its members which represent that that they hold such part of company and a person/entity holding such shares are known as shareholders. A share is not a negotiable instrument, but it is a movable property. Section 44 of the Companies Act, 2013 provides that a share or other interest of any member in a company is a movable property transferable in the manner provided by the articles of the company. In India, a share is regarded as goods. According to the Sale of Goods Act, 1930, “Goods” means any kind of movable property other than actionable claim and money, and includes stock and shares. A private company with a share capital, by its very nature as provided by Section 3(1)(iii) of the Act restricts the right of transfer in shares by its articles. Transfer of shares is less strict in a public company. In a public company, every shareholder has right to transfer his shares to any person without the consent of other shareholders subject to such express restrictions as are found in the articles of the company. A restriction on transfer of shares which is not specified in the articles is not binding on the company or the shareholders. A transfer of share is valid if it is not forbidden under the articles of the company, even if it has been made with the object of escaping liability on the shares.
One of the most important characteristics of a company is that its shares are transferable. Section 44 of the Companies Act, 2013 states that the shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.
As per section 58(2), the securities or other interest of any member in a public company shall be freely transferable. Proviso to section 58(2) provides that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. In terms of Section 2(68), a private company is required to restrict the right to transfer its shares by its articles. Section 56 of the Companies Act deals with transfer and transmission of securities.
Transfer of Shares:
Transfer of shares means the voluntary handing over of the rights and the duties / liabilities of a company member (as represented in a share of the company). The rights and duties of the share transfer happen from a shareholder who wishes to not be a member of the company any more called transferor to a person who wishes of becoming a member called transferee. From time to time there are certain situations where an existing shareholder wanted to transfer their shares of respective company to other person/entity. A transfer of share can only be transferred for only existing shares and from existing shareholders.
Shares may be transferred by executing an instrument of transfer (called the ‘transfer deed’). The instrument of transfer must be in the prescribed form. Before it is signed by or on behalf of the transferor and before any entry is made therein, it shall be presented to the prescribed authority which shall stamp or otherwise endorse on it the date of presentation.
Once a transfer form has been executed, the transfer is complete as between the transferor and the transferee and the transferee acquires the right to have his name entered in the register of members. No further application is necessary for having the name of the transferee entered in the register of members and the transferee perfects his title to the share after the entry in the Register of Members.
In Killick Nixon Ltd. v. Dhanraj Mills Pvt. Ltd., (1983) 54 Com Cases 432 (DB) (Bom) case, the Court held that once the transferee becomes a member of the company, a contractual relationship arises with the company.
According to Section 56(5) of the Act, the transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.
Procedure of Transfer of Shares:
According to Section 56 of the Act, the following is the process to transfer the Shares step wise: –
- Deal between transferor and transferee for transfer of shares.
- Execution of Share transfer deed in SH-4 duly executed, signed and stamped by transferor and transferee as per Law. The transfer deed must specify the name, address and occupation, if any, of the transferee, folio number, number of shares, and distinctive number of shares.
- Either transferee or transferor will send share transfer deed along with original certificates or letter of allotment of securities (if no certificate is given to shareholder) to the Company at the registered office in case of unlisted Company and to Registrar of Companies (RTA) in case of listed company within a period of sixty days from the date of execution.
- If the board of directors approves the transfer, the name of transferor is removed from the register of members of company and the name of transferee is entered on the register of members of the company.
- The Company within a period of one month from the date of receipt by the company of the instrument of transfer shall register the transfer and issue the new share certificate to transferee with his name endorsed thereon.
According to Section 56(6) of the Act, where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.
Punishment for Personation of Shareholders:
According to Section 57 of the Act, where any person deceitfully personates an owner of any share and (i) thereby obtains or attempts to obtain any such share or (ii) receives or attempt to receive any money due to any such owner, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to 3 years and with fine which shall not be less than one lakh rupees but which may extend to 5 lakh rupees.
Blank Transfer:
when transferor signs the transfer form without filling 1) in the name of transferee and 2) date of execution and 3) hands over such transfer deed along with the share certificate to the transferee to let him deal with those shares, it is called as blank transfer.
The blank transfer enables the buyer to sell the shares again to a subsequent buyer without filling his name and signature. The process of purchase and sale can be repeated any number of times with the blank deed and any transferee can fill in his name and date and get it registered in the register of members of company. For such ultimate transfer and registration, the first seller will be treated as the transferor.
A blank transfer deed is not a negotiable instrument merely because it may be transferred by mere delivery. Accordingly, the title of the transferee acquiring shares through a blank transfer shall invariably be subject to the title of the transferor. Thus, the bonafide transferee from a person who has acquired a blank transfer deed by fraud does not acquire good title to the shares included in the deed.
The widespread practice of blank transfers which was prevalent before the Companies Act, 2013, lead to some abuses, the most important of which were:
- avoidance of transfer stamps;
- concealment of the identity of the real beneficial owners behind their nominees;
- evasion of tax by suppression of ‘secret’ profit invested in holdings on blank transfers.
A blank transfer, however, can remain in circulation only for 12 months after its signing by the prescribed authority or up to the time of closure of the register of members by the company, whichever is later. This provision has been made to curb the abuse of this system.
In P. J. Thakkar v. Shelat, (1973) 45 Co Cases 203 case, Gujarat High Court observed that an instrument of transfer signed only by transferor is not illegal. The ultimate transferee who acquires the instrument in the good faith and for consideration gets a good title to the shares.
Transfer of Shares of Private Company:
A private limited company is considered to be a “closed corporation” of members, similar to a Partnership Firm. Therefore, the share transfer in a Private Limited Company can be restricted by the Articles of Association (AOA) and any restrictions in AOA, must be rectified.
Restrictions on right of the shareholders to transfer shares are usually in two forms:
Rights of pre-emption:
If a shareholder wishes to sell some or all of his shares, such shares must first be offered to other existing members of the private limited company at a price determined by the Directors or the Auditor of the Company. The value of the shares can be determined based on the formula / method prescribed in the Articles of Association. In no existing shareholder is interested, then shares of the Company can be freely transferred to an outsider. A member is not bound to sell his shares to other members under pre-emption clause unless any other member or members agree to buy all the shares proposed to be sold. The transfer between the members is outside the purview of pre-emption clause. The pre-emption clause cannot place a complete ban on right to transfer; they cannot completely prohibit the transfer.
Powers of Directors to refuse:
The Director may have the powers to refuse registration of transfer of shares under certain circumstances – prescribed in the Articles of Association.
Only restriction contained the Articles of Association are considered legally binding. Any private agreement between the shareholders are not binding either on the company or on the shareholders. Further, share transfer can only be restricted by the Articles of Association. The right to transfer shares of a private limited company cannot be an total prohibition or ban on share transferability.
According to section 58(1) of the Companies Act, 2013, if a private company limited by shares refuses to register the transfer of, or the transmission by operation of law of the right to, any securities of a member in, the company, it shall, within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.
If a private company limited by shares refuses to register the transfer or transmission, the transferee may appeal to the Tribunal against the refusal within 30 days from the date of receipt of the notice or in case no notice has been sent by the company, within 60 days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company. [Section 58 (3)]
Transfer of Shares in DEMAT Form:
Depository system maintains the ownership records of securities in the book entry form while in physical mode every share transfer is required to be accomplished by physical movement of share certificates to, and registration with the company concerned. The process of physical movement of share certificates often involves long delays and a significant portion of transactions end up as bad deliveries due to the faulty completion of paperwork, or signature differences with the specimens on record with the companies, or for other procedural lapses. Investors also face problems on account of loss of share certificates, forgery and mutilation. The significant time involved in effecting ownership changes also impounds a substantial volume of shares at any given time leading to lower trading volumes.
Section 7 of the Depositories Act, 1996 lays down that every depository shall, on receipt of intimation from a participant, register the transfer of shares in the name of the transferee and where the beneficial owner or a transferee of any shares seeks to have custody of such shares, the depository shall inform the issuer accordingly.
The transfer deed and all other provisions stipulated in Section 56 of the Companies Act, 2013 shall not apply to the transfers affected within the depository mode. No stamp duty is levied on transfer of securities held in DEMAT form. Any number of securities can be transferred/ delivered with one delivery instruction. Therefore, the paperwork and signing of multiple transfer forms is done away with.
Refusal to Transfer of Shares:
According to section 58(2), the shares in a public company shall be freely transferable. The Board of directors of a Company or the concerned depository has no discretion to refuse or withhold transfer of any shares. The transfer has to be effected by the company/depository automatically and immediately.
If a public company without sufficient cause refuses to register the transfer of securities within 30 days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within 60 days of such refusal or where no intimation has been received from the company, within 90 days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal. [Section 58 (4)]
A company cannot refuse to register a transfer on the ground that the transfer was without consideration or that there was a collusion and connivance between the transferor and transferee. Any objection about inadequate consideration can be raised only by the transferor himself and not by the company particularly where the shares are fully paid.
The Tribunal, while dealing with an appeal, after hearing the parties, either dismiss the appeal, or by order— (a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within 10 days of the receipt of the order; or (b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved. [Section 58 (5)] If a person contravenes the order of the Tribunal, he shall be punishable with imprisonment for a term which shall not be less than 1 year but which may extend to 3 years and with fine which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees. [Section 58 (6)]
In Shri Nirmal Kumar vs. Jaipur Metal and Electrical Limited, Appeal to the CLB No.27, of 1975 case, the Court held that a refusal to register share transfer on suspicion that the employee if admitted as a member will attend general meetings of the company and may create nuisance by raising irrelevant issues and also obtain access to the records to the company as a shareholder is not a valid reason.
In M.J. Amrithalingam vs. Gudiyatham Textiles Pvt. Ltd., 19 July, 1970case, the Madras High Court held that where the articles of association of a company confers a discretion on the directors with regard to acceptance of transfers, this discretion is a fiduciary one to be exercised bona fide in what the Board considers to be in the interest of the company. If on a true construction of the articles, the directors are only given the powers to reject on certain prescribed grounds and it is proved that on these grounds the request for transfer was rejected, the Court cannot substitute the opinion of the Board. If the articles of association give an unrestricted discretion, the court would interfere with it only on proof of bad faith.
In Bajaj Auto Limited v. N.K. Firodia, AIR 1971 SC 321 case,the Supreme Court observed, in the exercise of the discretion, the directors will act in the paramount interest of the company and in the general interest of the shareholders. The directors are, therefore, required to act bona fide and not arbitrarily and not for any collateral motive”. In this case, the articles permitted the directors to decline to register transfer of shares without stating reasons, the Court would not draw un-favorable inferences against the directors because they did not give reasons. The Court would assume that the directors acted reasonably and bona fide and those who allege to the contrary would have to prove and establish the same by evidence. However, if the directors gave reasons, the Court would consider whether they were legitimate and whether the directors proceeded on right or wrong principle. The Court has also laid down three tests to determine the proper exercise of power by the Board of directors. The tests are:
- Whether the directors acted in the interest of the company;
- Whether they acted on a wrong principle; and
- Whether they acted on a collateral purpose.
Forged Transfer:
An instrument on which the signature of the transferor is forged is called forged transfer. It is a null transfer and does not confer any title. It is so because in case of forgery there is not merely an absence of free consent but there is no consent at all. Hence, this transfer will never confer an ownership upon the transferee, however important the transaction may appear it.
If the company registers any forged transfer, the real owner can apply to the company for the rectification and get his name placed back in the register.
In People’s Ins. Co. vs. Wood and Co., IR 1960 P H 388case, the Court held that a forged transfer is a nullity and, therefore, the original owner of the shares continues to be the shareholder and the company is bound to restore his name on the register of members.
In Kaushalya Devi vs. National Insulated Cable Company of India The fact that the transferee was a bona fide purchaser for value did not make any difference and the transferee was bound to return the scrips to the person to whom the same rightfully belong.
Conclusion: