Transfer of Shares
Shivang Goyal
Shivang Goyal is a Practicing Company Secretary,with over a decade of experience in the field of corporate law, his expertise lies in managing corporate actions and ensuring routine compliance for listed companies, making him a trusted professional in the domains of the Companies Act and Securities Law.
Shivang’s deep understanding of regulatory frameworks and his commitment to excellence have established him as a go-to expert for navigating complex corporate governance challenges.
Introduction:
The transfer of ownership rights in a company’s capital from one individual to another is referred to as a transfer of shares. Such a transfer may occur through a sale, gift, inheritance, or corporate reorganization. Under the Income-tax Act of 1961, transfers can occur with or without consideration, but each has different tax ramifications. To prevent tax evasion and ensure accurate reporting, specific valuation and tax rules are applied to transactions in which the actual consideration is less than the fair market value (FMV), or zero in the case of gifts. Therefore, valuation is essential to ensure transparency and compliance.
Transfer of Shares: With and Without Consideration
- With Consideration: The transferor receives something in return, usually money. For example, selling shares to an investor for ₹10 lakh constitutes a transfer with consideration. The FMV (Fair Market Value) must be compared to the sale price to determine the tax impact of capital gains and avoid income underreporting.
- Without consideration: This refers to gifts, inheritance, or free allotments. In such circumstances, the person transferring shares receives no reward or profit. However, the recipient may still be taxed if the FMV exceeds the prescribed exemption limits, as specified under Section 56(2)(x) of the Income Tax Act.
Steps involved in the Transfer of shares:
- Execution of the transfer instrument: The first step in transferring shares is the execution of a properly signed and stamped instrument of transfer. A legal agreement between the transferor and the transferee is contained in this document. This form must be completed accurately, as any errors may delay or even invalidate the transfer.
- Submission to the business: Following execution, the transfer document must be delivered to the business together with the allocation letter or share certificate. After the transfer instrument is executed, this stage needs to be finished within 60 days. Since missing this deadline can complicate the transfer process, adherence to timelines is essential.
- Verification by the business: The company will verify the transfer instrument and associated documents upon receipt. This entails verifying the documents’ legitimacy and making sure all required information is accurately entered. The business will move forward with the transfer if everything is in order.
- Transfer registration: Following verification, the business will enter the transfer into its records. To reflect the new ownership, the company’s records must be updated. After obtaining the documentation and transfer instrument, the corporation has one month to finish the registration process.
- Issuance of new share certificates: The business will provide the transferee with new share certificates after the transfer is recorded. These documents, which operate as evidence of ownership, are essential for any upcoming share transfers. These new share certificates must be sent by the corporation within a month of the transfer being registered.
Special cases in share transfers:
- Delays or lost transfer instruments: What happens if the transfer instrument is delayed or lost? In some situations, the Board of Directors may choose to register the transfer by indemnity terms. In such cases, the transferor may be required to provide a guarantee or an indemnity bond to protect the company from future legal claims.
- Partially paid shares: There is an extra step involved in transferring partially paid shares. The transferee has two weeks to object after the company notifies them of the transfer. The transfer is deemed approved if there are no objections within this time frame, and the business can move on with registration.
Types of transfer of shares:
1. Equity shares: Ordinary shares, sometimes referred to as equity shares, are ownership stakes in a business. After all debts and preference shares have been settled, shareholders holding equity shares are considered the true owners of the business and are entitled to voting rights, dividends, and a share in the residual earnings.
a. Quoted equity shares: Shares traded on stock exchanges like the NSE and BSE have transparent value, as their market price reflects current consensus. However, off-market transfers or gifts require calculating the Fair Market Value (FMV) to ensure proper tax compliance due to the absence of a clear market price.
b. Section 56(2)(x) applies to shares received without due consideration.
c. Section 50CA requires that capital gains be calculated using FMV if the transfer price is lower.
2. Unquoted equity shares: Private enterprises often require careful appraisal when transferring shares that are not listed on stock exchanges since they lack public market pricing. This is important when shares are issued below market value to investors, family members, or staff, necessitating a thorough fair value analysis.
Tax Impact: Section 56(2)(x) and Section 50CA apply to capture tax on undervalued transactions.
Requirements:
In businesses, particularly private and public limited firms, it is a standard procedure. Some requirements must be adhered to ensure that the transfer is completed correctly. The documents include:
- Company’s name and number.
- Type of shares and quantity being transferred.
- Name and address of the transferor.
- Name and address of the transferee.
- Price of shares.
- Signature of the transferor.
- Stamp duty receipt, if applicable.
Tax Implications:
The transfer of shares is subject to stamp duty, a type of tax paid to the government under the Indian Stamp Act, 1899. With effect from July 1, 2020, security transactions have been centralized and are now regulated by the Indian Stamp Act as amended.
- For dematerialized share transfers (through stock exchanges or depositories), the buyer must pay 0.015% of the transaction value.
- For off-market physical share transfers, the rate is 0.015% of the consideration or the market value, whichever is higher.
Conclusion:
The transfer of shares is an important mechanism that allows shareholders to realize the value of their investments and adds liquidity to the securities market. It ensures that ownership changes occur smoothly and without disrupting the company’s continuity. To ensure transparency and impartiality, the process must adhere to legal regulations, corporate policies, and regulatory standards. A well-documented transfer procedure aids in ensuring corporate governance.
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