Transfer and Transmission Of Shares – Section 56 Of Companies Act 2013

Transfer of shares means the voluntary handing over of the rights and possibly, the duties of a member (as represented in a share of the company) from a shareholder who wishes to not be a member in the company any more to a person who wishes of becoming a member. Thus, shares in a company are transferable like any other movable property in the absence of any expressed restrictions under the articles of the company.

What is Transmission of Shares?

A transmission of interest in shares of a company, of a deceased member of the company, made by the legal representative of a deceased member shall be considered as transmission of shares by operation of law. This transmission will be registered by a company in the Register of Members.

Section 56 of the Companies Act 2013

Section 56 of the Companies Act 2013 states that:

1. A company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer, in such form, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities:

Provided that where the instrument of transfer has been lost or the instrument of transfer has not been delivered within the prescribed period, the company may register the transfer on such terms as to indemnity as the Board may think fit.

2. Nothing in sub-section (1 ) shall prejudice the power of the company to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.

3. Where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the company gives the notice of the application, in such manner as may be prescribed, to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice.

4. Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted—

a. within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;

b. within a period of two months from the date of allotment, in the case of any allotment of any of its shares;

c. within a period of one month from the date of receipt by the company of the instrument of transfer under sub-section (1 ) or, as the case may be, of the intimation of transmission under sub-section (2 ), in the case of a transfer or transmission of securities;

d. within a period of six months from the date of allotment in the case of any allotment of debenture:

Provided that where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.

5. 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.

6. Where any default is made in complying with the provisions of sub-sections (1 ) to (5 ), the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

7. Without prejudice to any liability under the Depositories Act, 1996, where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable under section 447.

What is the Process of Transfer of Shares?

• At first, the deeds which are transferred need to be obtained in the prescribed form i.e., SH-4.
• There are some circumstances in which the instrument of transfer may not be in the prescribed form. These are:
• Under Section 187 of the Companies Act, 2013, when a Director or nominee transfers shares on behalf of another body incorporate.
• In case, the Director or nominee transfers shares on behalf of a corporation owned or controlled by the Central or state government.
• Shares transferred by way of deposit for repayment of any loan or advance if the deposit is made with any of the following banks:
• State Bank Of India
• Any Scheduled bank
• Any other Banking Company
• Financial Institution
• Central Government
• Any Corporation held by the Central or State Government. Government
• State Government
• Trustees.
• While for transferring of the Debentures, a standard format is used as the Instrument of Share.
• According to the provisions of the Companies Act, 2013, you need to get AOA in case of shares, trust deed in case of Debentures where the transfer deed is registered either by the transferor and the transferee.
• According to the provisions of the Indian Stamp Act, the transfer deed should need to have stamps. The present stamp duty rate of transfer of share is 25 paisa for every One Thousand rupees of the value of the share.
• The Stamp deed on the transfer deed is checked whether it is cancelled after the time or before the signing of the transfer deed.
• The person who has given his signature, name, and address as approval of transfer must verify that the transferor and transferee have signed the share/ debentures transfer deed.
• The relevant share or debenture certificate or allotment letter, along with the transfer deed, must be attached and sent to the company.
• If the application made by the transferor is for partly paid shares, the company has to notify the amount due on shares/ debentures of the transferee. In addition to this, a no Objection Certificate is required within two weeks from the date of receipt.
• The same value stamp is affixed on the written application if the signed transfer deed has lost. Here, the Board may register the transfer on the grounds of indemnity.
• In case the shares of the company are listed in a recognized stock exchange, then the company cannot charge any fee for the registration of transfer of shares and debentures.

What are Restrictions on Transfer of Shares?

I. General grounds

Malafide instrument of transfer, inadequacy of reasons, irrelevant considerations and bad delivery of transfer documents, contravention of law, prejudicial to company or public interest and stay order by Court are the reasons for restrictions on the transfer of shares.

II. Special circumstances

1) On transfer with regard to the company’s borrowing

2) Under SEBI Guidelines shares allotted to certain categories of shareholders such as promoters, employees, etc. are subject to condition of non-transferability for a period of 3-5 years accordingly.

3) CLBs power under Section 250 — prohibit public transfers.

4) Under FEMA and joint venture agreements.

What are the Penalties Involved?

The penalty involved is minimum plenty of Rs 25000 and a maximum of Rs 5 lakh in case of a company. And For an officer the minimum amount is Rs 10000 and maximum of Rs 1 lakh.

Board of Directors- Power of refusal

Where the AoA of a Company give power to the Board to refuse registration of a transfer of shares, such power must be exercised by a resolution of the Board. The Board may refuse to register the transfer as long as they are acting in the interests of the Company, but if they exercise their discretion to refuse malafide, i.e. they act oppressively or corruptly, the CLB or the Court will now interfere and order registration.

AoA of a company may be specific and empower the BOD to refuse to register transfers on certain specific grounds. Thus, where AoA of a company contain a provision to the effect that no share shall be transferred to an outsider if any member of the Company was willing to purchase the same at fair price to be determined by the directors, and transfer to an outsider shall be allowed only when the Board of Directors was unable to find a willing member within a stipulated period; the directors having offered to purchase those shares, the question of registering shares in favour of an outsider not arise. The refusal to register transfer of shares on the ground that the transferor had been indulging in acts which were against the interests of the company is not right. As per section 111 if a Company refuses to register the transfer of shares, within 2 months from the date of lodging the instrument of transfer, send notice of refusal to the transferor or transferee giving reasons. CLB on appeal may direct the registration of the transfer.

In Hemanigiri Finance & Leasing (P.) Ltd v. Tamilnad Mercantile Bank Ltd., the CLB/ Tribunal held that there is no blanket authority available to a company to refuse registration of transfer, even if Articles provide absolute discretion. When the Articles do not provide for any powers for refusal, the company cannot refuse.

In case of refusal, on appeal to the CLB/Tribunal, it is always for the party assailing the decision of the BOD to demonstrate that such decision suffers from unsustainable reasons. The Tribunal while dealing with an appeal against refusal may, after hearing the parties, either dismiss the appeal or, by order, direct that the transfer shall be registered by the Company and the company shall comply with such order within 10 days of the receipt of the order.

Certification of an instrument of transfer lodged with the company is a process in which the company certifies on the instrument of transfer that the share certificate as stated in the certification stamp has been lodged with the company for registration of transfer. It is an endorsement made by the company on the instrument of transfer lodged, to the effect that stated above. It is a kind of receipt. This provision has been made to facilitate the sale of smaller number of shares in case the share certificate is for a larger number of shares.

Conclusion

Transfer and transmission of Securities are two different things that are often confused by the non-technical people. These are the ordinary course of transferring property, but in the transmission of shares take place in case the member of the company is not alive or has become insolvent. Moreover, the transfer of shares is more common than the transmission of shares.