TRANSFER OF SHARES IN CASE OF PRIVATE LIMITED COMPANY: Private limited companies are closely held companies with less than 200 members. The transfer of share of a private limited company are governed by the provision of the companies act, 2013. However, the restriction on transfer of shares in a private company is not applicable in certain cases such as, on the right of a member of the company to transfer his share to his legal representative & in event of death of a shareholder.
The shareholding of the company decides the ownership of an individual in the business that has the private limited company interest could be sold to attract new investors or to pass control of the company. Also, a private company enjoys a special right of restricting the transferability of shares, which enables them to maintain ownership. In this article, we look at how shares of a private limited company can be transferred.
SHARE TRANSFER RESTRICTIONS IN AOA
A private limited company is considered to be a “closed corporation” of members, similar to a partnership firm. Generally a private company is guided by the article of association. AS per section 2(68) of companies act, 2013 private company restricts the transfer of shares and prohibit invitation to public to subscribe to any securities of the company. Hence, the company must be the reviewed prior to beginning the share transfer procedure.
Restrictions on right of the shareholders to transfer shares are usually in two forms:
- Rights of pre-emption : when a shareholder wishes to sell some or all of his shares, such shares must be offered to other existing members of the private limited company at a price determined by the directors or he auditor of the company. The share value can be based on the formula/method started in the article of association .In the absence of existing shareholder, the company can be freely transferred to an outsider.
- Director’s power to deny: The director may have the power to deny. Under some conditions, the registration of the transfer of securities, provided for in the articles of association.
Only restriction contained the AOA are considered legally binding. Any private agreement between the shareholders is not binding on the company or the shareholders either. Therefore AOA can limit the transfer of shares.
BENEFITS OF SHARE TRANSFER
- The benefits of equity share investment are pay entitlement, capital increment, limited liability, control, right shares, demand over earnings and assets, liquidity, bonus shares, etc.
- You can lower your tax bill.
- Further, you will be the owner of the growing business.
- You will be aligned with the new private equity buyer.
- By having a share transfer agreement, the parties would know their respective rights and liabilities related to transfer of shares.
- Share should be legal registered under the company share transfer
SHARE TRANSFER PROCEDURE INITIATION
To initiate the share transfer procedure, the following steps must be followed:
- Review the AOA article of association of the private limited company must be reviewed and restrictions, if any must be addressed.
- The shareholder will give the company’s manager a written notice of intent to move the company’s share.
- Determine the price according to the AOA where the company’s shares would be sold of first to its current shareholders.
- The company give notice to the other shareholders about the availability of share, the last date to purchase the shares and the price at which the share are available.
- Get the SH-4 share transfer act duly executed by both the transferor and transferee.
HOW TO TRANSFER SAHRES OF A PRIVATE LIMITED COMPANY
Corporations are considered legal entities regardless of who the shareholders are. Therefore, transferring shares does not change or nullify the legal structure of corporation. However, the transfer of existing shares, or the issuance of new shares can affect how a corporation is managed and its value.
To effect the share transfer, the following step must be taken:
- Get the share transfer deed as required.
- Execute the transfer of shares duly signed by the transferor and transferee.
- Have a witness sign the share transfer deed with his/her signature, name and address.
- Stamp the share transfer deed in compliance with the Indian stamp act and the state stamp duty notice.
- Attach the share certificate or allotment letter with the transfer deed and deliver the same to the company.
- The company shall process the paperwork, and the transferor shall grant if accepted, a new share certificate.
DOCUMENTS REQUIRED FOR TRANSFER OF SHARES
- Noticed by the transfer the company.
- Board resolution for examining the notice by the transferor to company.
- Offer letter presented by the company to the current shareholder.
- Objection letter from the present shareholders
- Share transfer agreement in SH-4 form along with stamp duty returned.
- Share certificates.
- Board decision for filing the transfer of shares.