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Procedure for Transfer of Shares Along with Recommended Audit Procedure to Verify Share Transfers

Procedure for Transfer of Shares

A firm's capital is divided into shares that are freely transferable, offering stability and liquidity to the business.


Shares in a public company can be transferred without restriction, whereas private company shares are subject to restrictions under Section 2(68) of the Companies Act, 2013. The transfer of shares of a private company requires adherence to the company's articles of association.


Transmission and transfer of shares are two different processes; transmission refers to the transfer of shares by methods other than transfer, including marriage, bankruptcy, inheritance, death, etc., while share transfers are voluntary acts.

 

The Companies Act, 2013 outlines the process of transferring shares, which includes sections 56 to 59. The basic procedure is as follows(for public company):


  • The transfer of shares can be registered by the board only if the documents related to the transfer are in order. Before registration, the board must pass a resolution.

  • The transferor and the transferee must execute the share transfer deed in the share transfer Form SH 4.

  • The share transfer deed must be stamped in compliance with the Indian Stamp Act, and the stamp duty must be paid to the respective state.

  • Along with the signatures of the transferor and transferee, two witnesses must also sign the deed and provide their names and addresses.

  • The share transfer certificate or allotment letter must be attached to the deed and submitted to the company by either the transferor or the transferee within 60 days of the deed's execution.

  • Once the company receives the deed, its board of directors will review it.

  • If the documentation is in order, the board will register the transfer of shares after passing a resolution.


Additional Procedure for transfer of shares in a Private Limited Company:


  • Intimation: The transferor must provide written notice of their intention to transfer their shares to the company.

  • Duty of the company: The company is required to inform its members about the availability of shares, along with their prices. Additionally, the members must be notified of the deadline to communicate their interest in purchasing the shares. If none of the members expresses interest in buying the shares, they can be sold to an outsider. 

  • Execution form: To transfer shares, one needs to obtain the Share Transfer Deed in Form SH-4. This form should be completed by both the transferor and transferee, stamped, and dated. The SH-4 form should include details such as the parties' names, father's names, addresses, occupations, folio numbers, distinctive numbers, certificate numbers, nominal values, and the consideration received. Both parties or their representatives must sign the SH-4 form and specify the period for depositing the instrument for transfer with the company.

  • Delivery of the instrument of transfer: The transfer of shares requires the completion of Form SH-4, which must be delivered to the company within 60 days of its execution. If the instrument of transfer is lost or not delivered within the prescribed period, the company may register the transfer based on the terms of indemnity approved by the Board.


Penalty:

If a company or any of its officers fail to follow the rules of Section 56(1) to (5), they will have to pay a penalty of Rs. 50,000. Also, according to Section 56(7), if a depository or depository participant transfers shares to cheat someone, they will be held responsible for fraud under Section 447, regardless of any liability under the Depositories Act, 1996.


Auditor's Roles and Responsibility in Checking Transfer of Shares


  1. Obtaining and Checking Share Transfer Form (SH-4) .

  2. Check and verify the details in SH-4 of name of transferror , name of transferree , Folio No. , Date of Transfer , No. of Shares, Consideration for Transfer .

  3. Verify the Specimen Signature of Transferror and Transferree

  4. Check and Verify that is SH-4 adequately stamped or else transfer will be considered void.

  5. Check and Verify the Board Resolution registering transfer of shares .

  6. Check and Verify the Minutes of Meeting recording the transfer of shares.

  7. Obtain any Share Purchase Agreement entered by transferror and transferee.

  8. In case of private company , verify the procedure of obtaining approval of all existing shareholder;s for transfer of shares to new shareholders / investors

  9. Check for the parallel entry in Shareholder's Register recording the transfer of shares.

  10. Check the carbon copy of share certificate issued to shareholder registering the transfer of shares



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