29 Feb Transmission of Shares
Transmission of shares can seem like a daunting concept to wrap your head around.In this article, we’ll break it down using simple, easy to understand language.
If you look it up online, the usual definition will be something like “Transmission of shares is a process by operation of law where under the Shares are registered in a Company in the name of deceased person or an insolvent person are registered in the name of his legal heirs by the Company on proof of death or insolvency as the case may be.”
Lots of big words. Let’s unpack them!
There are two main ways in which shares pass on from one person to another. The first is a simple share transfer, where ownership of share titles are passed on from one person to another. This can be initiated by the owner at any time.
Share transmission is like share transfer in that share titles are passed from one person to another. However, in transmission of shares, it takes place when the original owner passes away, the insolvency of owner or when the company is a member, on liquidation of said company.
Essentially, it means that transmission of shares occurs when the original owner (referred to as member) can no longer hold the title to the shares that they have purchased. It is an involuntary transfer, and occurs on account of operation of law.
A natural question is what exactly does “operation of law” mean. It means that a party has to do or receive something, irrespective of their wishes. For instance, in case of death, the shares have to be transmitted regardless of what the original owner wants. Such a situation is said to occur due to operation of law.
If you receive shares via transmission, you essentially have two options:
- Get registered as a member
- Transfer the shares.
In this article, we take a look at member registration. Transfer of shares will be explored in depth in a later post.
Get Registered as a Member:
To quickly recap, a member is the original owner of the shares. These shares are now getting transmitted involuntarily to you. To claim ownership of these shares, you need to register yourself with the company as the new member.
To do so, you’ll need to prove evidence of succession. That is, prove that you are the successor or heir of the original member, and what was theirs is now rightfully yours.
This process can be quite tricky, and the bureaucracy involved mind numbing. To prove evidence of succession, you’ll need:
- Evidence of succession
- Death certificate of member
- Letter of administration
And this is not an exhaustive list!
Once all the documents are in order, an application must be made to the company. They have internal processes to verify that the shares are going to the right people. Once all the protocols are completed (and all the hoops jumped through), you will gain ownership of these shares. You are also entitled to any dividends declared. There are other intricacies, but those usually vary on a company by company basis.
The gist of it is this: For transmission to happen smoothly, you need all your documents in order, you need to file the appropriate applications, and then you must wait! While the process might be frustrating, patience is unfortunately a necessary virtue when dealing with Indian bureaucracy.
It is important to note that during share transmission, any liabilities that exist on the original share are also transferred to the new owner. For instance, any lien (such as outstanding sums) would subsist.
Legal representative of the original member can also sell these shares as if they were the owner, but they are not allowed voting rights. Successors on the other hand, obtain full voting rights once they are registered as a member.
Another important distinction between share transmission and share transfer is that in transmission, no stamp duty is payable. For a quick reference, stamp duty is the tax payable on any single property or, as in this case, on a document. You also do not need an instrument of transfer (such as a deed or a contract).
To quickly recap, transmission of shares is occurs by operation of law, where shares go from the original owner to their heirs/successors involuntarily. It may occur due to death, lunacy or insolvency. To claim ownership of these shares, you have to ready the necessary documents and make an application to the company.
Once the title of these shares is passed to you, you are entitled to any dividends declared, and are a voting member.