Procedure for Transfer of Shares Held in Physical Form in a Private Company

The transfer of shares is a common corporate activity in private limited companies, arising from business restructuring, exit of shareholders, succession planning, or induction of new investors. Although the dematerialisation of shares is increasingly encouraged, many private companies in India continue to hold shares in physical form. The transfer of such shares is governed by a defined legal framework and procedural requirements.

This blog will explain the step-by-step procedure forthe transfer of shares held in physical form in a private company, in strict alignment with the Companies Act, 2013, applicable rules, and prevailing MCA practice.

Meaning of Transfer of Shares

Transfer of shares basically refers to the voluntary transfer of ownership of shares by an existing shareholder (transferor) to another person (transferee), with or without consideration. Upon registration of transfer by the company, all rights, obligations and various benefits attached to the shares pass to the transferee.

In the case of a private company, share transfers are restricted but not prohibited and must comply with the company’s Articles of Association (AOA).

Legal Provisions Governing Share Transfer

The transfer of shares held in physical form is governed by the following provisions: -

• Section 56 of the Companies Act, 2013
• Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014
• Applicable provisions of the Indian Stamp Act, 1899 and relevant State Stamp Laws
• Articles of Association of the Company

Key Conditions Before Transfer

Before initiating a share transfer, the following conditions must be satisfied: -

• Shares must be fully paid-up
• Transfer must be permitted under the Articles of Association
• Proper stamp duty must be paid as per applicable State law
• Share transfer deed must be duly executed
• Approval of the Board of Directors is mandatory

Step-by-Step Procedure for Transfer of Shares Held in Physical Form

Step 1: Examine the Articles of Association (AOA)

The first and most critical step is to review the Articles of Association of the company. Private companies generally include provisions such as: -

• Right of pre-emption in the favour of existing shareholders
• Restrictions on transfer to non-members or outsiders
• The board’s power to approve or refuse registration of the transfer

The proposed share transfer must strictly comply with these provisions.

Step 2: Obtain Share Transfer Deed (Form SH-4)

The transfer of physical shares must be executed using Form SH-4, which is the prescribed share transfer deed under the Companies Act, 2013.

Form SH-4 must contain the following details: -

• Name, address and signature of the transferor and transferee
• Consideration amount or nature of transfer
• Details of share certificate (certificate number, folio number and distinctive numbers)
• Date of execution

Step 3: Payment of Stamp Duty

Stamp duty on share transfer must be paid in accordance with the applicable State Stamp Act.

• Stamp duty is generally charged as a percentage of the share value or the price paid, as per the applicable State law
• Duty may be paid through physical stamping or electronic modes, where permitted
• Form SH-4 must be duly stamped before or at the time of execution

An unstamped or inadequately stamped share transfer deed is not eligible for registration by the company.

Step 4: Execution of Share Transfer Deed

The share transfer deed must be properly executed as follows: -

• Signed by both the transferor and transferee
• Dated correctly
• Witnessed by at least one person

If the transferor is a body corporate, the deed must be executed by an authorised signatory pursuant to a valid board resolution.

Step 5: Submission of Documents to the Company

The transferee is required to submit the following documents to the company within 60 days from the date of execution of Form SH-4: -

• Duly executed and stamped Form SH-4
• Original share certificate
• Any additional documents as required by the company (such as identity proof or any declarations)

Failure to submit all these documents within the prescribed time restricts the company from registering the transfer in compliance with the Section 56 of the Companies Act, 2013.

Step 6: Board Meeting for Approval of Share Transfer

The company must convene a Board Meeting to consider the proposed share transfer. The Board shall: -

• Verify the documents submitted
• Ensure the compliance with the Articles of Association (AoA) and statutory provisions
• Approve or refuse the registration of transfer

If the transfer is approved, a Board Resolution is passed. In case of refusal, the company must communicate the reasons for refusal to the transferee within 30 days of receipt of the transfer documents.

Step 7: Entry in the Register of Members

Upon approval of the transfer, the company must: -

• Enter the name of the transferee in the Register of Members
• Update internal shareholding records
• Cancel the old share certificate

The transfer becomes legally effective only after the transferee’s name is entered in the Register of Members.

Step 8: Issue of New Share Certificate

The company is required to issue a new share certificate in the name of the transferee within the duration of one month from the date of approval of the transfer.

The share certificate must: -

• Be signed by authorised directors or company officials
• Contain details of the transferee as the registered shareholder
• Bear the company seal, if the company has adopted one (company seal is optional under the Companies Act, 2013)

Timeline Summary

Special Situations

Transfer Without Consideration

Even where shares are transferred by way of gift or without monetary consideration, stamp duty remains payable based on the applicable valuation norms under State stamp laws.

Transfer on Death of Shareholder

Transfer of shares upon the death of a shareholder constitutes transmission of shares, not transfer. In such cases: -

• Form SH-4 is not required
• Shares are transmitted to legal heirs or nominees upon submission of prescribed documents

Common Mistakes to Avoid

• Ignoring restrictions contained in the Articles of Association
• Payment of inadequate or incorrect stamp duty
• Delay in submission of Form SH-4 and share certificate
• Improper execution or witnessing of transfer deed
• Failure to update statutory registers

Such lapses may result in rejection of transfer or future legal disputes.

Penalties for Non-Compliance

As per Section 56 of the Companies Act, 2013: -

• The company and its officers may be liable to monetary penalties for default
• Delay in the issuance of share certificates attracts statutory penalties
• Improperly registered transfers may be challenged before appropriate authorities

Conclusion

The process of transferring shares held in physical form in a private company is clear, organised and regulated by law. Every step, such as filling Form SH-4, paying stamp duty, getting board approval and issuing new share certificates, is legally important.

Although physical share transfers are gradually being replaced by dematerialised systems, a clear understanding of this procedure remains essential for private companies in India. Strict adherence to the Companies Act, 2013, applicable rules and the Articles of Association ensure a smooth, compliant and legally valid share transfer process.