Transfer Of Securities

The Shares of an individual inside a company are transferable which facilitates the company in acquiring permanent capital and liquidating investments into the shareholders. But there are some constraints under which the securities are transferred. They are transferable by the acts mentioned in the Articles of Association (AOA) of the company under which the private companies are restricted in terms of section 2(68) of the Companies Act. The movement can be physical movement or the ownership of the title of the asset or both.

Meaning Of Transfer Of Securities

One of the most important characteristics of a company is that its shares are transferable. Section 44 of the Companies Act, 2013 states that the shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. Therefore, Transfer of Securities is basically handing over the rights and duties of a member of the company to any other person who wishes to become a member of the company. It is a voluntary act of a member that is accompanied according to the articles mentioned in the AOA of the company.

• Transfer in violation of Article Void: Share Transfer in violation of Article is void.
• Transfer without consideration is Void: Share transfer without consideration is void.
• Transfer in family arrangement: Transfer of shares on the basis of family arrangement without complying with provision of Section 108 is valid.

A. Provisions Related To Transfer Of Securities

1. Free Transferability of securities:

According to section 58(2), the shares in a public company shall be freely transferable. The Board of directors of a Company or the concerned depository has no discretion to refuse or withhold transfer of any shares. The transfer has to be affected by the company/depository automatically and immediately.

2. Instruments of transfer to be presented to the company:

Under section 56 of the Companies Act, 2013, a company will register a transfer of securities of the company, only when a proper instrument of transfer as per the format laid down in Form No SH. 4 (when such securities are held in the physical form) is submitted to the company. (Rule 11 of Companies (Share Capital and Debentures) Rules, 2014). The form needs to be duly stamped, with adequate value, dated and executed by or on behalf of the transferor and the transferee. The form needs to be sent to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the share certificate/certificate relating to the securities. In case there is no such certificate, the application must be sent along with the letter of allotment of securities.

3. Registration of partly paid up shares- Notice to the transferee:

A company will not register a transfer of partly paid shares, unless the company has given a notice in Form SH-5 to the buyer and has obtained no objection from the buyer within two weeks from the date of receipt of notice.

4. Intimation to Depositary:

Section 56(4) states 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. Transfer of Securities by legal representatives:

According to section 56(5) of the Companies Act, 2013, the transfer of any security 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. Stamp Duty Payable:

The transfer of securities attracts stamp duty under the Indian Stamp Act, 1899. Only the Central Government can levy stamp duty on share transfers. Stamps at the rate of twenty-five paise for consideration of Rs.100.

7. Penalties:

According to Section 56(6), when any default is made in complying with the above provisions, 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.

Punishment for Personification of Shareholders: Where any person deceitfully personates an owner of any share and
(i) thereby obtains or attempts to obtain any such share or
(ii) receives or attempt to receive any money due to any such owner, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to 3 years and with fine which shall not be less than one lakh rupees but which may extend to 5 lakh rupees.

8. Governing Law:

According to Section 56 of the Companies Act, 2013, securities are movable property and are transferred in a manner provides by the articles mentioned in the AOA of the company. A Shareholder is free to transfer shares to a person of his own choice, whereas shares in a Private Limited company are not freely transferable.

9.  Delegation of Powers for transfer:

It is the articles of the company which authorize the Board of directors to accept or refuse transfer of securities, at their discretion. The Board further has the power to delegate all or any of their powers to any of the directors of the company or any person even not in the employment of the company.

10. Transfer of shares to Minor: 

According to Section 11 of the Indian Contract Act, 1872, a minor is not competent to enter into any contract, it follows that his name cannot be entered in the Register of Members and therefore, he cannot become a member of a company. However, there is no objection in law to the guardian of a minor entering into a contract on behalf of a minor, by virtue of the statutory right conferred on the guardian of a minor under the Hindu Minority and Guardianship Act, 1956. Since Section 56 of the Companies Act, the transfer deed can be executed by a minor through his natural guardian as transferee, and the contract so entered into by a minor through his natural guardian is a binding and valid contract under Section 8 of the Hindu Minority and Guardianship Act, 1956.

The articles of association of a company cannot impose a blanket ban prohibiting transfer of shares in favor of a minor, as such a restriction is unreasonable. Where a blanket restriction is imposed on transfer to a minor, it would mean that the shares of a deceased member can never be inherited by the legal heir who might be a minor. This would lead to a highly unjust situation and cannot be accepted as tenable.

11. Transfer of shares to Partnership Firm:

A firm is not a person and as such is not entitled to apply for membership.

12. Transfer of shares to a Body Corporate:

An incorporated body being a legal person can acquire securities in its own name. Where a company is a transferee, the following documents are required to be submitted to the company: (a) A certified true copy of the Board resolution to execute the instruments; (b) A certified true copy of a Board resolution passed under Section 179(3)(e) of the Companies Act; and (c) A certified true copy of Memorandum and Articles of Association of a company. The Board of Directors of a company or the concerned depository has no discretion to refuse or withhold transfer of any security.

13. Transfer without the Authority of owner: 

Shares in a company can be transferred either by the registered owner or by anyone else with his authority. A sale by any unauthorised person will be void.

B. Procedure For Transfer Of Shares

The procedure for transfer of shares is as follows:

1. At first, the deeds which are transferred need to be obtained in the prescribed form i.e., SH-4.
2. There are some circumstances in which the instrument of transfer may not be in the prescribed form. These are:
3. Under Section 187 of the Companies Act, 2013, when a Director or nominee transfers shares on behalf of another body incorporated.
4. In case, the Director or nominee transfers shares on behalf of a corporation owned or controlled by the Central or state government.
5. Shares transferred by way of deposit for repayment of any loan or advance if the deposit is made with any of the following banks:
   1. State Bank of India
   2. Any Scheduled bank
   3. Any other Banking Company
   4. Financial Institution
   5. Central Government
   6. Any Corporation held by the Central or State Government. Government
   7. State Government
   8. Trustees.
6. While for transferring of the Debentures, a standard format is used as the Instrument of Share.
7. According to the provisions of the Companies Act, 2013, one needs 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.
8. According to the provisions of the Indian Stamp Act, the transfer deeds 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.
9. The Stamp deed on the transfer deed is checked whether it is cancelled after the time or before the signing of the transfer deed.
10. 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.
11. The relevant share or debenture certificate or allotment letter, along with the transfer deed, must be attached and sent to the company.
12. 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.
13. The same value stamp is affixed on the written application if the signed transfer deed is lost. Here, the Board may register the transfer on the grounds of indemnity.
14. 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.

Meaning Of Transmission Of Securities

Transmission of securities means where a person acquires an interest in property by operation of law, such as by right of inheritance or by reason of the insolvency or lunacy of the holder of securities or by purchase in a Court-sale. Therefore, transmission of securities means the shares are transferred to the deceased and the official assignee of the insolvent. Transmission of shares is an automatic process when the shareholder dies and immediately passes to the personal representative or if a member is declared bankrupt.

A. Provisions Related To Transfer Of Securities

The provisions related to transfer of securities are:

1. Transmission in case of Sole Owner:

On the death of a sole owner of shares, the rights and liabilities go in favour of the legal heirs. They are entitled to be registered as the holder of the shares. But the company can register them as members with only their consent and when they apply for it.

2. Transmission of shares in case of widow:

If a widow applies for transmission of the shares standing in the name of her deceased husband without producing a succession certificate and if the articles of association of the company so authorizes, the directors may dispense with the production of succession certificate, upon such terms as to indemnity as the directors may consider necessary, and transmit the shares to the widow of the deceased by obtaining an indemnity bond.

3. Transmission of joint holders:

In case some shares are registered in joint names and the articles of the company provide that the survivor shall be the only person to be recognized by the company as having any title to the shares, the company is justified in refusing to register the transmission of title by operation of law in favor of the son of the deceased holder even though he may obtain succession certificate from the Court.

4. Position of a Legal Representative:

The legal representative is, however, not a member of the company by reason only of being the legal owner of the shares. But he may apply to be registered as a member. On the contrary, instead of being registered as a member himself, he may make such transfer of the shares as the deceased member could have made. The Board of directors also have the same right to decline registration as they would have had in the case of transfer of shares before death. But if the company unduly refuses to accept a transmission, the same remedies are available to the legal representative as in the case of a transfer namely, an appeal to the Tribunal u/s 58.

5. Governing Law:

Section 56(1) of the Companies Act, 2013 states that the transfer of securities must be effected by a proper instrument of transfer and that a provision in the articles of an automatic transfer of securities of a deceased securities-holder is illegal and void. But for such transmission, instrument of transfer is not required, merely an application addressed to the company by the legal representative is sufficient.

6. Share transfer deed not required for Transmission: 

Execution of transfer deed not required in case of transmission of shares. Intimation/application of Transmission accompanied with relevant documents would be enough for a valid transmission request.

7. Documents required for Transmission of Shares:

In case of transmission of shares by operation of law, it is not necessary to execute and submit transfer deeds. A simple application to the company by a legal representative along with the following necessary evidences is sufficient: —

a. Certified copy of death certificate;

b. Succession certificate;

c. Probate;

d. Specimen signature of the successor.

8. Liability on shares shall continue:

In the case of a transmission of shares, shares continue to be subject to the original liabilities, and if there was any lien on the shares for any sums due, the lien would subsist, notwithstanding the devaluation of the shares.

9. Payment of consideration or stamp duty not required:

Since the transmission is by operation of law, payment of consideration or payment of stamp duty would not be required on instruments for transmission.

10. Penalty for Non-compliance:

Where any default is made in complying with the provisions related to transmission of shares, the company shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/- and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 10,000/- but which may extend to Rs. 1,00,000/-.

B.Procedure For Transmission Of Shares

Generally, articles contain the detailed provisions as regards the procedure for transmission of shares. Usually following steps shall be followed in order to give effect to the transmission of shares:

1. The survivor in case of joint holding or legal heir, as the case may be, who wants transmission by operation of law in his/her favour, shall file a simple application with the Company with relevant documents such as death certificate, succession certificate, probate, etc., depending upon various circumstances may be considered necessary for transmission by the Company.

2. The company records the particulars of the death certificate and a reference number of recording entry is given to the shareholder so as to enable him to quote such number in all future correspondence with the company.

3. The company reviews and verifies the documents submitted with the transmission request. In case all the documents are in order, the company shall approve the transmission request and register the shares in the name of the survivor or legal heir as the case may be.

4. However, in case documents submitted with transmission request are not in order and it is the case of refusal, company shall within thirty (30) days from the date on which the intimation of transmission is delivered to the company, communicate refusal to the concerned person.

5. Dividend declared before the death of the shareholder will be payable to legal representative but dividend declared after the death of a member can be paid to him only after registration of his name and till that period it has to be kept in abeyance.

Provisions In Relation To Both Transfer And Transmission Of Securities

The provisions in relation to both transfer and transmission of securities are:

1. Refusal of Registration of Transfer and Transmission and Appeal Against Refusal:

(1) If a private company limited by shares refuses, whether in pursuance of any power of the company under its articles  or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any  securities  or interest of a  member in the company, it shall within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, delivered to the company, send notice of the refusal to the transferor and the transferee or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.

(2) Without prejudice to subsection (1), the securities or other interest of any member in a public company shall be freely transferable:

Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.

(3) The transferee may appeal to the  Tribunal   against the refusal within a period of thirty days from the date of receipt of the notice or in case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.

(4) If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.

(5) The Tribunal, while dealing with an appeal made under sub-section (3) or sub-section (4), may, after hearing the parties, either dismiss the appeal, or by order—

(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or

(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.

(6) If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

2. Rejected Documents: 

Documents which are not duly stamped or where stamps are not cancelled should be returned to the person lodging them pointing out the errors so as to enable them to rectify the error.

3. Delivery of certificates:

Section 56(4) states that 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:

4. Holders of Beneficial Interest:

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.

Types Of Transfer of Securities

The different types of transfer of securities are:

1. Blank Transfer:

When a shareholder signs the transfer form without filling in the name of the transferee and the date of execution and hands it over with the share certificate to the transferee thereby enabling the transferee to deal with the shares, he is said to have made a transfer ‘in blank’ or a ‘blank transfer.’

2. Forged Transfer:

It may happen that a forged instrument of transfer is presented to the company for registration. In order to avoid the consequences which will follow a forged transfer, companies normally write to the transferor about the lodgement of the transfer instrument so that he can object if he wishes. The company informs him that if no objection is made by him before a day specified in the notice, it would register the transfer.

Distinction Between Transfer And Transmission

Conclusion

Transfer and Transmission of Securities are two different things that are often confused by 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, transfer of shares is more common than transmission of shares. Transferability feature of securities enables the company to get permanent capital, the shareholder, to get the liquid investments. Securities of a Public Company are freely transferable.

However, a Private Company is required to restrict the right to transfer its securities by its articles. Earlier, the securities were transferred only through physical mode, but now after the advent of the depository system, the securities are transferred in dematerialized form, to a large extent.