What is Transfer of Shares?

What is Transfer of Shares?

Shares, as the name suggests, is splitting of wealth of the company. Shares take many forms. They can be equity shares, preference shares, optionally convertible preference shares, compulsorily convertible preference shares, etc. This blog confines itself to the equity shares of the company which are traded in stock exchanges.

‘Share transfer’ or transfer of shares is a simple process with which the owner of the share, transfers the rights and liabilities of the share to another person for a consideration.

In the olden days share transfer procedure was not complicated. Owner of the shares simply prepares share transfer form in SH4 format and the share transfer procedure will be complete. Share transfer requires stamp duty to be paid. Stamp duty on transfer of shares will be 0.50% of the consideration or market value of the shares if the share is listed in the listed stock exchange. To recapitulate prior to 2018, an equity share can be transferred by effecting share transfer form in SH4 format (this is considered as deed of transfer of shares) and paying stamp duty on shares @ 0.5% and register with the company. All these were laid down in Section 56 of Companies Act 2013. This process is still valid for companies not listed in recognized stock exchanges. However, procedure for listed companies is different.

Before getting into transfer of shares for listed companies, it is better to understand the history of shares.

It also pays to understand the difference in nuances between transfer and transmission. Often, transfer and transmission of shares is mentioned in one go. Transfer of shares is different, and transmission of shares is different. Transfer of shares is by one legal person to another legal person by own will and for a consideration or as gift. Only a living person having shares in his own name can transfer the shares to another person.

Transfer of shares on the other hand is by the operations of law wherein ownership of the share is transferred from the owner to his legal heirs or to the beneficiary in case of the will. In other words, transmission of shares happens only if the owner of the shares is no more. If the owner has died intestate or after providing will, the subject ownership of the shares gets transferred to the beneficiary of the share in case of a will and to the legal heirs equally in case there is no will, this is transmission of shares. In this blog, we are confining ourselves to transfer of shares.

It was said that presently the transfer of shares procedure laid down under Section 56 under Companies Act 2013, is applicable only in case of private limited companies. What about public limited companies?

Before addressing transfer of shares in case of public limited companies listed in stock exchanges, let us look at the fascinating history of shares.

At the beginning the commercial activity of any kind used to happen only with the owner’s personal capital. It may take the form of individuals or partners. Essentially, there were no outside funds. Slowly, bank borrowings came into being. Borrowings means owners become responsible to repay the loans. This prove to be overwhelming in case where the entrepreneur lost his money by act of god (force majeure).So then came the concept of treating business as the legal person and limited liability companies came into being in the middle of 19th century (around 1850). Industrial revolution and the subsequent necessity of substantial capital made it impossible for individual entrepreneurs to finance all the needs of business. Thus was born widely held companies with public participation and the public issue of share capital.

In India, right from 1970’s issue of share capital was vibrant and after Reliance and Ambani, many middleclass people also start investing in shares. These shares were sold to one another by filling share transfer forms and paying stamp duty as discussed above. With the advent of computers, shares turned electronic and public issue of shares were necessarily in demat form from 1999. i.e., no new paper shares were placed in the market after 1999. Government of India then passed the legislation stating that all dividends that are paid as dividend warrants have to be stopped and all dividends have to be paid electronically with effect for accounting year 2018 – 2019. They also made a mandate stating that share transfer in physical form is not possible beyond 31st March 2019. This means shares can be sold only after dematting it. In other words, transfer of shares formality as discussed in detail above has become infructuous as far as companies listed in the stock exchange are concerned. These shares have to be demated and then sold through stock exchange only. However, it is still applicable for privately held companies.

Glorious history, physical / paper shares and their transfer formalities have become inapplicable for public limited companies listed in stock exchanges while thus formalities are still valid in transfer of shares in case of private limited companies and public limited companies having a share capital of less than Rs.50 crores.