COMPANY LAW
Share Transfer under Companies Act, 2013
Share transfer means transfer of ownership rights in shares from one person to another. Though the securities or other interest of any member in a public company shall be freely transferable, such transfer mandatorily involves the Compliance of Companies Act, 2013 and the Indian Stamp Act. The applicability of the Foreign Exchange Management Act, 1999 on share transfer depends upon the residential status of the Parties involved.
Scope
This article aims to cover various aspects relating to different compliances required to be done by a transferor and a transferee in accordance with the Companies Act, Indian Stamp Act, Foreign Exchange Management Act as the case may be. We further aim to cover the aspects relating to transfer of shares in the form of a gift and transfer of partly paid shares.
Companies Act, 2013
Section 56, 57, 58 of Companies Act, 2013
Rule 11 – The Companies (Share Capital and Debentures) Rules, 2014
Conditions for Transfer of Shares
- Execution of an instrument of transfer between the transferor and the transferee
- Transfer instrument (SH4) to be duly stamped, dated and executed
iii. Articles of Association of a Company should not restrict such transfer of shares
- Instrument to be delivered to the company within 60 days of execution
Enclosures with the Transfer Instrument i.e. SH4
- Certificate of shares or debentures or other securities
- If no certificate is issued, letter of allotment.
TIME FRAME TO REGISTER THE TRANSFER OF SHARES
Within one month from the date of receipt of instrument of transfer by the Company.
In case of a deceased shareholder – Transfer by his/ her legal representative shall be deemed to be valid.
PENALTY
| PARTY INVOLVED | FINE |
| Company | Fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees |
| Officer of the company who is in default | Fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees. |
Refusal of Registration and Appeal Against Refusal
If a Company refuses to register the transfer of 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 was delivered to the company, send notice of the refusal to the transferor and the transferee giving reasons for such refusal. A subsequent appeal can be made to the Tribunal by the Transferee in this regard.
Indian Stamp Act, 1899
Section 11 and 12 of the Indian Stamp Act, 1899
The Transferor has to pay the stamp duty at the rate of Rs 0.25 for every Rs. 100 worth of shares. For stamping purpose in case of transfer of shares special adhesive stamps known as share transfer stamps are used. Such adhesive stamps are required to be cancelled once they are affixed on the transfer instrument. Any instrument bearing an adhesive stamp which has not been cancelled so that it cannot be used again, shall so far as such stamp is concerned, be deemed to be unstamped.
FOREIGN EXCHANGE MANAGEMENT ACT, 1999
In case of transfer of capital instruments of an Indian Company by or to a person resident outside India Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 are required to be complied with.
Governing Regulations
- Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 Regulation 10 – Transfer of capital instruments of an Indian company by or to a person resident outside India
- RBI User Manual for Single Master Form-FIRMS
Capital Instruments means
| Equity shares | Equity shares issued in accordance with the provisions of the Companies Act, 2013 shall include equity shares that have been partly paid. |
| Debentures | Compulsorily and mandatorily convertible debentures |
| Preference shares | Fully, compulsorily and mandatorily convertible preference shares |
| Share Warrants | Issued by an Indian Company in accordance with the Regulations issued by the Securities and Exchange Board of India |
TRANSFER OF CAPITAL INSTRUMENTS OF AN INDIAN COMPANY BY OR TO A PERSON RESIDENT OUTSIDE INDIA
| Transferor | Nature of transfer | Transferee | Remarks |
| A person resident outside India, not being a non-resident Indian or an overseas citizen of India or an erstwhile overseas corporate body | Capital instruments of an Indian company or units held by him by way of sale or gift | Any person resident outside India | Prior govt. approval required for companies engaged in such sectors where the person resident outside India is an FPI and the acquisition of capital instruments made under Schedule 2 of these regulations has resulted in a breach of the applicable aggregate FPI limits or sectoral limits, the FPI shall sell such capital instruments to a person resident in India eligible to hold such instruments within the time stipulated by Reserve Bank in consultation with the Central Government. |
| NRI or an OCI | Capital instruments of an Indian company or units on repatriation basis by way of sale or gift; | Person resident outside India | |
| A person resident outside India | Capital instruments of an Indian company or units in accordance with these Regulations by way of sale/ gift or may sell the same on a recognised stock exchange in India in the manner prescribed by Securities and Exchange Board of India; | Person resident in India | To comply with pricing guidelines (Not to apply if capital instruments are held on non repatriable basis) |
| A person resident in India holding capital instruments of an Indian company or units, or an NRI or an OCI or an eligible investor under Schedule 4 of these Regulations | Capital instruments of an Indian company or units on a non-repatriation basis by way of sale | Person resident outside India | Adherence to entry routes, sectoral caps/ investment limits, pricing guidelines and other attendant conditions as applicable for investment by a person resident outside India and documentation and reporting requirements for such transfers as may be specified by Reserve Bank from time to time; |
| Capital instruments of an Indian company or units on a non-repatriation basis by way of a gift
|
Person resident outside India | prior approval of the Reserve Bank | |
| An NRI or an OCI or an eligible investor under Schedule 4 | Capital instruments of an Indian company or units on a non-repatriation basis, may transfer the same by way of gift | NRI or an OCI or an eligible investor under Schedule 4 of these Regulations | To be held on non-repatriable basis |
A person resident outside India holding capital instruments of an Indian company containing an optionality clause in accordance with these Regulations and exercising the option/ right, may exit without any assured return, subject to the pricing guidelines prescribed in these Regulations and a minimum lock-in period of one year or minimum lock-in period as prescribed in these Regulations, whichever is higher.
REMITTANCE OF SALE PROCEEDS
An authorized dealer may allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India only if such security was held by the seller on repatriation basis.
REPORTING REQUIREMENTS
| Name of the Form | Event | Time line | ||||||||||||||
| Form Foreign Currency- Transfer of Shares (FC-TRS) | Transfer of capital instruments of an India Company between a resident and non-resident and vice versa*
PROI-Person Resident Outside india (Includes NRI and OCI) PRII – Person Resident in India To be filed for every tranche of payment. The onus of reporting shall be on the resident transferor/ transferee. |
Form Foreign Currency-Transfer of Shares (Form FCTRS) is required to be filed with the Authorised Dealer bank within sixty days of transfer of capital instruments or receipt/ remittance of funds whichever is earlier.
The onus of reporting is on the resident transferor/ transferee or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be. |
List of documents to be attached along with form FC-TRS – For Transfer by way of Gift
- Relevant regulatory approvals, wherever applicable, to be attached as “other attachment”.
- Consent letter: Consent letter between donor and donee for the transfer to be attached as other attachment.
- Non-resident declaration
- FCGPR Approval proof towards the allotment of shares being gifted.
- Delay letter in case form is being submitted after the prescribed time.
List of documents to be attached along with form FC-TRS – For Transfer by way of sale:
- Transfer agreement: relevant extracts of the transfer agreement along with the consent letter between buyer and seller. For sale/ purchase on stock exchange, the contract note may be attached, at “Transfer agreement/ Valuation certificate”
- Valuation Certificate: valuation certificate as per FEMA 20 (R) to be attached at “Transfer agreement/ Valuation certificate”.
The valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company.
- Non-resident declaration: As per the format provided in RBI User Manual, to be attached as “other attachments”
- In case of sale by a non-resident, acknowledgement of FC-GPR/ FC-TRS as applicable for the capital instruments being sold, to be attached as “other attachment”.
- FIRC /Outward remittance certificate and KYC to be attached at the specified attachment
- Board resolution for transfer of shares
- Delay letter in case form is being filed after the prescribed time.
TRANSFER OF PARTLY PAID SHARES
Companies Act, 2013 (Section 56)
If an application for transfer 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 form SH5 to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice.
Foreign Exchange Management Act, 1999
In case of transfer of capital instruments between a person resident in India and a person resident outside India:
- 75% of the total consideration is to be paid upfront and only 25% can be deferred up to a period of 18 months.
- Can be settled through an escrow arrangement between the buyer and the seller for a period not exceeding eighteen months from the date of the transfer agreement; or
iii. Can be indemnified by the seller for a period not exceeding eighteen months from the date of the payment of the full consideration, if the total consideration has been paid by the buyer to the seller.
Transfer of partly paid up capital instruments, shall be reported in Form FC-TRS to the Authorized Dealer on receipt of every tranche of payment.
Conditions for Transfer of shares as a Gift
A person resident in India holding capital instruments or units of an Indian company or an NRI or an OCI an eligible investor under Schedule 4 of these Regulations holding capital instruments or units of an Indian company on a non-repatriation basis may transfer the same to a person resident outside India by way of gift with the prior approval of the Reserve Bank, in the manner prescribed, and subject to the following conditions:
- a) The donee is eligible to hold such a security under relevant schedules of these Regulations;
- b) The gift does not exceed 5 percent of the paid up capital of the Indian company/ each series of debentures/ each mutual fund scheme; Explanation: The 5 percent will be on cumulative basis by a single person to another single person
- c) The applicable sectoral cap in the Indian company is not breached;
- d) The donor and the donee shall be ‘relatives’ within the meaning in section 2(77) of the Companies Act, 2013;
- e) The value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift during the financial year does not exceed the rupee equivalent of USD50,000;
- f) Such other conditions as considered necessary in public interest by the Reserve Bank.
Conclusion
Though share transfer between two parties is primarily governed by the applicable laws, related rules and regulations, the terms of agreement agreed between such parties in the form of share transfer agreement also play an equally important role in the same and might provide a separate set of compliances to make such transfer effective. However, terms and conditions of such share transfer agreement shall not override the law.