TRANSFERABILITY OF SHARES IN A COMPANY

CORPORATE LAW- I

Submitted By:

KRISHNA KANT JAIN

UID Code:

SM0115022

3rd Year, 5th semester

NATIONAL LAW UNIVERSITY , ASSAM

7TH NOVEMBER, 2017

 Contents
TABLE OF CASES........................................................................................................................iii

INTRODUCTION...........................................................................................................................1

AIM..................................................................................................................................................2

SCOPE AND LIMITATIONS........................................................................................................2

RESEARCH QUESTIONS.............................................................................................................2

RESEARCH METHODOLOGY....................................................................................................3

SHARES: AN ANALYSIS.............................................................................................................4

TRANSFERABILITY OF SHARES IN CASE OF PUBLIC COMPANY....................................8

RESTRICTIONS FOR THE TRANSFER OF SHARES OF PUBLIC COMPANIES................12

TRANSFERABILITY OF SHARES OF PRIVATE LIMITED COMPANY..............................14

RESTRICTIONS OF TRANSFER OF SHARES OF THE PRIVATE LIMITED COMPANY..15

LEGAL ANALYSIS.....................................................................................................................17

CONCLUSION..............................................................................................................................18

BIBLIOGRAPHY............................................................................................................................v

TABLE OF CASES

1. Chiranji Lal Jasrasaria and Anr. v. Mahabir Dhelia and Ors.

2. Messer Holdings v. Shyam Madanmohan Ruia and Ors
3. Messers Holding Limited V. Shyam Madanmohan Ruia And Others
4. Rangpur Tea Association Ltd. V. Makkan Lal Samadder
5. Shri Parveen Sharda V. Chopsani Ice Aerated Water And Oils Mills Ltd
6. V B Rangaraj  v. V B Gopalakrishnan and Others
7. Vardhman Publishers Ltd. V. Mathrubhumi Printing & Publishing Co.

2
 8. Vodafone International Holding B.V Vs. Union Of India
9. Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Limited

TABLE OF STATUTES

1956- Companies act

1882- Transfer of Property act

TABLE OF STATUTES

Sr. No. Abbreviation Expansion

1. AIR All India Reporter

2. All Allahabad

3. Anr. Another

4. Bom Bombay

5. SCC Supreme Court Case

6. SCR Supreme Court Reporter
7. AOA Article of Association
8. BOD Board of Directors
9. HC High Court

10. ibid Ibidem

11. IPC Indian Penal Code

12. P&H Punjab & Haryana

13. MP Madhya Pradesh

14. Pp Pages

15. Raj Rajasthan

16. SCC Supreme Court Cases

17. Vol. Volume

18. MLJ Maharashtra Law Journal

3
19. Ed. Edition

20. Cal Calcutta

21. Luck Lucknow

22. PC Privy Council

23. Mad Madras

24. LR Law Review

4
 INTRODUCTION

This research paper deals with transferability of shares in a company. A company is basically
either privately owned or public company. This research paper deals with transfer of shares in
both the type of companies. Section 58 (2) of CA 2013 provides that the securities or other
interest of any member in a public company shall be 'freely transferable'.

Shares are the authorized capital of the company which the company invites public to buy the
shares and invest in the company so as to increase the profits. The holders of the shares are the
Shareholders. They are the real owners of the company. The shares of company are movable
property and are transferable in the manner provided in the Articles of Association. A share is
undoubtedly a movable property in the same way in which a bale of cloth or a bag of wheat is a
movable property. Such commodities are not brought in to existence by legislation but a share in
a company belongs to a totally different category of property. It is incorporeal in nature and it
consists merely of a bundle of rights and obligations.

The shares of a company are movable property and are generally freely transferable.  Though
there might be certain restrictions on transfer of shares of private companies provided in the
articles of the company, such restrictions are generally added to protect the rights of one set of
investors or the shareholders. However, shares of a public company are always freely
transferable.

Transfer of shares refers to the intentional transfer of title (rights as well as duties) to shares by
one person to another. There are two parties to transfer of shares, i.e. transferor and transferee.

The shares of the public company are freely transferable unless there is an express restriction
provided in the articles of association. However, the company can refuse the transfer of shares, if
it has a valid reason for the same. In the case of a private company, there is a restriction on the
transfer of shares subject to certain exceptions.

5
AIM
The aim of the research paper is to focus on the transfer of shares under public and private
company.
Objectives

The objectives are:

1. TO understand the concept of Shares.

2. TO understand the process of transfer of shares in public and private company
3. To study the restrictions of the transferability of shares
4. To legally analyze the transferability of shares

SCOPE AND LIMITATIONS

The scope of the research paper is limited to the study of transferability of shares in public and
private company.

LITERATURE REVIEW

Singh Avatar, COMPANY LAW, (16th edn, 2015)

This book by Avtar Singh,. Firstly, the book maps out the general principles that are a part and
parcel of the concerned field of study. Secondly, the book provides explanatory notes with lucid
illustrations, explaining the various situations where the general principles have been applied.
Thirdly, the book gives updated account of case laws, which ought to fall into two categories- the
cases should either be such that the decision therein adds a new dimension to the existing
understanding of the subject area or they may be such as to reaffirm the existing notions and
authorities.

RESEARCH QUESTIONS
The research Questions are:

1. What is the concept of shares?

2. What is the procedure to transfer share in public and private company?

6
 3. What are the restrictions related to the transferability of shares?
4. What is the legal analysis of the transferability of shares?

RESEARCH METHODOLOGY
In this project, the researcher has adopted Doctrinal type of research. This research is
totally based on library and other online sources. Various types of books were used to get
the adequate data essential for the project. Computer laboratory was used to get important
data related to this topic. Several websites found to be very useful to better understand
this topic. Here the researcher has followed Bluebook Mode of Citation, 19th edition

7
 SHARES: AN ANALYSIS
A unit of ownership that represents an equal proportion of a company's capital. It entitles its
holder (the shareholder) to an equal claim on the company's profits and an equal obligation for
the company's debts and losses.

There are two types of shares, ordinary shares and preferred shares. Preferred shares are the
shares on which some fixed amount of dividend is paid, after working expenses taxes, interests,
etc. are paid. Sometimes, when the profit is not enough even to meet the other expenses, even the
preferred share holders do not get any dividend and in case of the ordinary shares, the
shareholders get dividend only after the holders of preference shares receive their share of profit.
Due to this only the rate of dividend is not fixed and keep on varying.

The share capital is the most important requirement of a business. It is divided into a ‘number of
indivisible units of a fixed amount. These units are known as ‘shares’. According to Section 2
(46) of the Companies Act, 1956, a share is a share in the share capital of a company, and
includes stock except where a distinction stock and shares is expressed or implied. The person
who is the owner of the shares is called ‘Shareholder’ and the return he gets on his investment is
called ‘Dividend'.

For example, total capital of a company is Rs 5,00,000 divided in to 50,000 shares of Rs. 10
each, each unit of Rs. 10 is called share. In this case there are 50,000 unit i.e. shares of Rs. 10
each and the capital is Rs. 5, 00,000.

The shares of company are movable property and are transferable in the manner provided in the
Articles of Association. A share is undoubtedly a movable property in the same way in which a
bale of cloth or a bag of wheat is a movable property. Such commodities are not brought in to
existence by legislation but a share in a company belongs to a totally different category of
property. It is incorporeal in nature and it consists merely of a bundle of rights and obligations.

According to Section 86 of the Companies Act, a company can issue only two types of shares.
They are preference shares and equity shares. 1

1
Prof Rahul J. Malkan, Fundamental of Accounting, Chapter 9, Unit
http://www.icaiknowledgegateway.org/littledms/folder1/introduction-to-issue-forfeiture-and-reissue-of-shares.pdf

8
Preference Shares. The law defines preference share capital as that part of the share capital of a
company which fulfills both the following conditions namely:

(i) It carries a preferential right in respect of the dividends;

(ii) It carries preferential right in regard to the repayment of capital.

The preference shareholders are entitled to receive the fixed rate of dividend out of the net profits
of the company. After the payment of dividends at fixed rate is made to them, the balance can be
used for declaring a dividend on ordinary shares. Similarly, the assets remaining after payments
of debts of the company are first used for returning the capital contributed by the preference
shareholders. The rate of dividend on preference shares is specified in the articles of association.

The limitation of the preference shares is that it does not carry voting rights. Preference
shareholders have no voting rights except on those issues which affect their interests such as
non-payment of dividends for more than two years.

Preference shares can be divided into four types; cumulation of dividend, basis of participation,
basis of conversion, basis of redemption.

On the basis of cumulation of dividend:

cumulative preference shares: these are those shares on which the dividend at a fixed rate goes
on cumulating till it is all paid.

Non-cumulative preference shares: These are those shares on which the dividend does not
cumulate.

On the basis of participation:

Participating preference shares: This type of shares are allowed to participate in surplus profits
during the lifetime of the company and surplus assets during winding up.

Non participating shares: These shares are not entitled to participate in surplus profit. Dividend is
given at a fixed rate.

On the basis of conversion:

9
Convertible preference shares: The owners of this type of shares have the option to convert their
preference shares into equity shares as per their terms of issue.

Non- convertible preference shares: The owners of this type of shares does not have the option to
convert their preference share into equity share.

On the basis of redemption:

redeemable preference shares: These are to be purchased back by the company after a certain
period as per the terms of issue.

Irredeemable preference shares: These are not to be purchased back by the company during its
lifetime.

Equity shares are those shares which are not preference shares. These shares do not enjoy any
preferential rights. They rank after the preference shares for the purpose of dividend payment
and repayment of capital. The rate of dividend is also generally not fixed and may vary from year
depending upon the profit of the company. This rate of dividend is recommended by the directors
of the company. They are the real owners of the company. They have voting rights in the
management of the company.

There is a difference between share and stock. Shares are the authorized capital which are issued
by the company for the public whereas stocks are the combination or accumulation of shares.

When the market value is more than the face value of the shares, then the shares are sold at
premium as per section 78 of the companies act, 1956 whereas when the face value is more than
the market value, then the shares are sold at discount as per section 79 of the companies act,
1956.

Shares are issued for cash or for consideration other than cash. In case, where the shares are
issued for cash, first there is prospectus, then application, allotment and calls.

Prospectus is a legal document which contains information regarding company and securities. It
is an invitation to the public to subscribe to the shares of the company.

10
Share application is an offer made by the public to subscribe to the shares of the company.
Application should be accompanied with the application money as demanded by the company.
The minimum application money should be 5% of the nominal value of shares as per the
companies act. As per the SEBI guidelines, minimum application money should be 25% of the
issue price.

Allotment is the acceptance of the offer made by the company. It is the stage where the shares
become legal. Public will have to pay allotment money on the allotment of shares. Public
company cannot make allotment of shares unless the amount of minimum subscription is
collected. According to SEBI: a company must receive minimum 90% subscription before
making any allotment of shares. If the company does not receive minimum subscription then
they need to refund the entire application money within 15 days of closure of issue. If there is a
delay in refund then the company is liable to pay interest ranging from 4% to 15% depending
upon the delay in period.

Call is demand made by the company to pay the unpaid amount of shares. The company can
demand the entire amount on a single call or may make divide in more than one calls. Calls made
should be uniform on all shares. Article of Association authorizes the board to make a call.
According to SEBI, the amount on share shall be collected in one year period.

11
 TRANSFERABILITY OF SHARES IN CASE OF PUBLIC COMPANY
Section 58 (2) of CA 2013 provides that the securities or other interest of any member in a public
company shall be 'freely transferable'. Further, proviso to Section 58 (2) of CA 2013 provides
that any contract or arrangement between two or more persons in respect to transfer of securities
shall be enforceable as a 'contract'. The aforesaid provisions of Section 58 (2) of CA 2013 are
similar to the provisions of Section 111A (2) of the erstwhile Companies Act, 1956, except the
aforesaid proviso to Section 58 (2) of CA 2013.2

In the erstwhile Companies Act, 1956, there were some debatable issues with respect to the
expression 'freely transferable'. However, in the matter of Messer Holdings Limited vs. Shyam
Madanmohan Ruia & Others3 the Hon'ble Bombay High Court held that any contract or
arrangement between two or more persons with respect to transfer of securities can be enforced
like any other contract and does not impede the free transferability of shares at all. Therefore, the
aforesaid proviso to Section 58(2) of the CA 2013 has been incorporated in line with the
aforesaid judgment of the Bombay High Court.

Transferability is one of the most important features of securities of the company. Section 44 of
the Companies Act, 2013 states that the shares or debentures or other interest of any member in a
company are movable property, and these are transferable in the manner provided by the articles
of the company. As per the provision of company law, the securities or other interest of any
member of a public company shall be freely transferable. The concept of free transferability of
shares in a public and private company is very succinctly discussed in the case of Western
Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd 4. In the case, it was held that the
Company Act makes a clear distinction regarding the transferability of shares relating to private
and public companies. By its definition, a ‘private company’ is a company, which restricts the
right to transfer its shares. In the case of a public company, the Act provides that the shares or
debentures and any interest of the company are freely transferable. The provision contained in
the law for the free transferability of shares in a public company is founded on the principle that

2
https://taxguru.in/company-law/procedure-transfer-shares-companies-act-2013.html
3
Messer Holdings Limited vs. Shyam Madanmohan Ruia & Others, 2010 159CompCas29(Bom)
4
Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd 2010 154 Com Cases 593 Bom. 

12
members of the public company must have the freedom to purchase and every shareholder the
freedom to transfer.5

Earlier the share of companies was transferred only through physical mode, but, now after the
advent of a depository system, the securities are transferred in dematerialized form, to a large
extent. Section 56-59 of the Companies Act, 2013 discussed the detailed provisions regarding the
transfer of a share of a company.

Some important rules and procedures for transfer of shares of a public company are discussed
below-

Instrument for Transfer to be presented to the company: As per the provision of section
56(1) of the Companies Act 2013, a company shall not register or transfer securities of the
company unless and until a proper instrument of transfer duly stamped, dated and executed by or
on behalf of the transferor and the transferee has been delivered to the company along with the
certificate relating to the securities. If there is no such existing certificate, then the related letter
of allotment of securities must be presented6

 Rule 11 of Companies (Share Capital & Debentures) Rules 2014: According to Rule

11 of Companies Rules 2014, an instrument of transfer of securities held in physical form
shall be in Form No. SH.4 and every instrument of transfer with the date of its execution
specified thereon shall be delivered to the company.

 The period for deposition of Instrument for Transfer: A specific time limit must be
followed for deposition of the instrument of transfer. The instrument of transfer of shares
i.e. Form No. SH.4 with the date of its execution specified thereon shall be delivered to
the company within sixty days from the date of such execution by or on behalf of the
transferor and by or on behalf of the transferee.7

Stamp duty on share transfer: The transfer of shares of a public company attracts stamp duty
under Indian Stamp Act, 1899.A Company cannot register transfer of shares unless the
instrument of transfer is duly stamped and is delivered to the company. According to section

5
https://taxguru.in/company-law/procedure-transfer-shares-companies-act-2013.html
6
ibid
7
ibid

13
56(1) of Companies Act 2013 which is correspondence to section 108(1) of the Companies Act
1956, it is mandatory that the company shall not register the transfer of shares unless properly
executed an instrument of shares duly stamped has been delivered to the company. 8 [Case
reference: 

 Affixation and cancellation of stamps: In Vardhman Publishers Ltd. V. Mathrubhumi

Printing & Publishing Co. Ltd 9, the Kerala High Court held that affixing stamps on a
separate sheet of paper and attaching it to the transfer application or cancellation of
stamps by drawing a line across the stamp was not improper and would not invalidate the
said application.

 The value of share transfer stamps to be affixed on the transfer deed: The Stamp
duty for transfer of shares is 25 paisa for every Rs. 100 or part thereof of the value of
shares.

Time limit for issue of certificate of transfer: According to Section 56(4), Every company,
unless prohibited by any provision of law or of any order of any Court, Tribunal or other
authority, must within One month deliver, the certificates of all shares transferred after the
application for the registration of the transfer of any such shares, debentures or debenture stock
received.10

Power to refuse registration and appeal against refusal: According to the section 58(4) of
CA13, a public company may on sufficient cause, refuse, to register the transfer of securities.

In the case, Rangpur Tea Association Ltd. V. Makkan Lal Samadder 11 it was held that The mere
attempts of a person to wind up a company more than once cannot be a ground for refusing to
register transfer by the directors. In such a case the public company may send an intimation of
the refusal.

 Time Limit for Refusal of Registration of Transfer: As stated in Section 58 of

Companies Act 2013, the Power of refusal of registration of transfer of shares is to be
8
Shri Parveen Sharda V. Chopsani Ice Aerated Water And Oils Mills Ltd., Appeal No.1 Of 1982 Decided On
10.1.1983 (Clb)]
9
Vardhman Publishers Ltd. V. Mathrubhumi Printing & Publishing Co. Ltd 1990
10
https://taxguru.in/company-law/procedure-transfer-shares-companies-act-2013.html
11
Rangpur Tea Association Ltd. V. Makkan Lal Samadder (1979) 43 Com Cases 58

14
 exercised by the company within thirty days from the date on which the instrument of
transfer or the intimation of transfer, as the case may be is delivered to the company.

 Time Limit for Appeal against refusal to register Transfer by Public Company: As
per section 58(4) of the said Act, a transferee of shares 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.12

The Penalty for Non-compliance: As per to the provision of section 56 (6) of companies Ac t
2013, Where any default is made in complying with the provisions related to the transfer 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/-

Transfer of securities by legal representatives: Section 56(5) of the Companies Act 2013,

states that, 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.13

Transfer to shares by depository with intent to defraud: As per section 56(7), without
prejudice to any liability under the Depository 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 for fraud which is a severe punishment14

The basic procedure for transfer of shares in a public company are as follows:

A company to give effect to the transfer of shares must follow the following steps:

 The deed of Share transfer in form SH-4 must be duly executed both by the transferor and
the transferee.

12
https://taxguru.in/company-law/procedure-transfer-shares-companies-act-2013.html
13
https://blog.ipleaders.in/procedure-transfer-shares-public-company/
14
Ibid

15
  The share transfer deed must bear stamps according to the Indian Stamp Act, and Stamp
Duty must be given in the State concerned.

 A person giving his signature, name, and address must witness the signatures of the
transferor and the transferee in the deed of transfer.15

 The relevant share certificate or allotment letter should be attached to the share transfer
deed and deliver the same to the company.

 The deed of share transfer must be deposited with the company within sixty days from
the date of such execution by or on behalf of the transferor and transferee.

 After receiving of share transfer deed, the board shall consider the same. And if the
documentation for transfer of share is in order, the board shall, by passing a resolution
register the transfer.16

RESTRICTIONS FOR THE TRANSFER OF SHARES OF PUBLIC COMPANIES

n accordance with the provision of Sections 2(68) and 2(71) of the Companies Act, 2013, a
public company is defined as a company, which inter alia, does not restrict the right to transfer
its shares. These provisions of the said act have already been notified and have come into force
from the corresponding provisions of the Companies Act, 1956.

Further, as specified under Section 58(2) of the Act of 2013, the shares of a public company are
freely transferable. However, it is also stated that in the proviso to Section 58(2) “any contract
or arrangement between two or more persons in respect of the transfer of securities shall be
enforceable as a contract.”17

The above-mentioned provisions of the Company Act 13 appear to be an attempt to codify the
principles laid down in an important judgment of the Bombay High Court in the case
of Messers Holding Limited V. Shyam Madanmohan Ruia And Others, 18in this case, it stated
that:

15
https://blog.ipleaders.in/procedure-transfer-shares-public-company/
16
https://blog.ipleaders.in/procedure-transfer-shares-public-company/
17
https://www.ilntoday.com/2013/12/legal-validity-of-restrictions-on-transfer-of-shares-of-public-companies/
18
Messers Holding Limited V. Shyam Madanmohan Ruia And Others, [2010] 104 SCL 293 (Bom)

16
 An agreement by a particular shareholder or between two shareholders relating only to their
shares is a consensual arrangement entered into by them, in exercise of their right of free
transferability and it consequently imposes no restriction on transferability…..The concept of
free transferability of shares of a public company is not affected in any manner if the
shareholder expresses his willingness to sell the shares held by him to another party with right
of first purchase at the prevailing market price at the relevant time. 19 So long as the member
agrees to pay such prevailing market price and abides by other stipulations in the Act, Rules,
and Articles of Association, there can be no violation. For the sake of free transferability both
the seller and purchaser must agree to the terms of sale.20

In another case of Vodafone International Holding B.V Vs. Union Of India 21, the Court has
taken the view that law can restrict freedom of contract only in cases where it is for some good
of the community. The Companies Act or other legislations do not explicitly or impliedly forbid
shareholders of a company to enter into agreements as to how they should exercise voting rights
attached to their shares.22

In Messer Holdings v. Shyam Madanmohan Ruia and Ors23, it was effectively ruled that
restrictions expressed in an agreement between shareholders do not violate of the 1956 Act and
that they can be enforced inter se among shareholders. In doing so, the Court diverged from the
ruling of a single judge in Western Maharashtra Development Corpn. Ltd.  v. Bajaj Auto
Limited,24 wherein a pre-emption clause in a shareholders’ agreement was held to be in violation
of Section 111A25of the 1956 Act.

19
http://sntca.in/share-transfer-under-companies-act-2013/
20
http://sntca.in/share-transfer-under-companies-act-2013/
21
Vodafone International Holding B.V Vs. Union Of India (2012) 6 SCC 613,
22
http://taxguru.in/company-law/procedure-transfer-shares-companies-act-2013.html
23
Messer Holdings v. Shyam Madanmohan Ruia and Ors [2010 ]159CompCas 29 (Bom)
24
Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Limited, [2010] 154 CompCas 593 (Bom)
25
Section 111A of the Companies Act, 1956-Rectification of register of transfer; Available
at http://www.manupatrafast.in.elibrary.symlaw.ac.in:2048/ba/fulldisp.aspx?iactid=785&snos=200

17
 TRANSFERABILITY OF SHARES 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. According to the Companies Act of 2013, a private limited company cannot invite the
public to subscribe to any securities of the company. Also, a private company enjoys a special
right of restricting the transferability of shares, which enables them to maintain
ownership.26 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 transfer of share to his legal heir cannot
be restricted. It is also to be noted that the restriction cannot be made as prohibition but only by
the Articles of Association (AOA) of the company.27Transferability of shares in private limited
companies make convenient for shareholders to change their stake amongst the members.
Therefore, private limited companies are preferred by entrepreneurs over the other business
mode. Generally, transfer of shares in a private company is governed by the articles of
association of the company.28 Generally, a private company follows the following steps:

i) The seller should give a written notice to the company about his intention to transfer his share.

(ii) The company would in turn notify other members of the company, stating that certain shares
are available which can be purchased by the members. It would generally state the price of such
shares along with the time limit within which the members should notify their interest of
purchasing such shares.  However, if none of the members agrees to purchase the shares, the
shares can be transferred to an outsider, to which the company cannot refuse.29

iii) Once there is a prospective buyer, one need to fill up the share transfer deed in Form No-
SH.4

iv) The transfer deed needs to be duly executed both by the transferor, which should be duly
stamped, with adequate value, dated and cancelled.
26
KCP Limited, Procedure for Transfer & Transmission of Securities, available at
http://www.kcp.co.in/downloads/investor/shareholders-information/procedure-for-transfer-transmission-of-
securities.pdf
27
https://blog.ipleaders.in/transfer-shares-india-under-companies-act-2013/
28
https://legaldesk.com/business/transfer-of-shares-in-a-private-limited-company
29
ibid

18
(v) Attach the relevant share certificate or allotment letter with the transfer deed and send the
same to the company within sixty days from the date of execution.

vi) Execute Shareholders Agreement and Share Transfer Agreement to regulate the relationship
between the shareholders.

Transfer procedure under the depositories system

Under Section 56(4) of the Companies Act, 2013, when a company is transferring the securities
through a depository, the company should immediately inform the details of allotment of
securities to the depository. If any depository or depository participant has fraudulently
transferred the shares, it shall be liable under section 447.30

If a private limited company refuses to register the transfer of or the transmission of the right to
shares. Then company 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, send notice of the refusal
to the transferor and the transferee giving reasons for such refusal. Then, 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 of 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. A company shall
not register a transfer of partly paid shares, unless the company has given a notice in Form No.
SH.5 to the transferee. The transferee has given no objection to the transfer within two weeks
from the date of receipt of notice.31

RESTRICTIONS OF TRANSFER OF SHARES OF THE PRIVATE LIMITED

COMPANY
In terms of the provisions of CA 2013, a private company is required to restrict the transfer of its
shares through its articles of association ("AOA") [Section 2(68) of CA 2013]. Hence, any
restriction on transfer of shares as agreed under the shareholders agreement / consensual
arrangement and duly incorporated in its AOA shall be valid and binding on such a private

30
https://www.indiafilings.com/learn/transfer-shares-private-limited-company/
31
https://www.indiafilings.com/learn/transfer-shares-private-limited-company/

19
company and may be enforced against the shareholders of a private company. 32 33However, if a
private company refuses to register the transfer of any securities or interest of a member, whether
in pursuance of any power of the company under its AOA or otherwise, it is required to intimate
the transferor and transferee within the stipulated time period [Section 58 of CA 2013].   34

A private limited company is considered to be a “closed corporation” of members, similar to a

Partnership Firm. Therefore, the share transfer in a Private Limited Company can be restricted by
the Articles of Association. Hence, the Articles of Association of the Company must be reviewed
prior to beginning the share transfer procedure.35

Restrictions on right of the shareholders to transfer shares are usually in two forms:

 Rights of pre-emption: If a shareholder wishes to sell some or all of his shares, such
shares must first be offered to other existing members of the private limited company at a
price determined by the Directors or the Auditor of the Company. The value of the shares
can be determined based on the formula / method prescribed in the Articles of
Association. In no existing shareholder is interested, then shares of the Company can be
freely transferred to an outsider.

  Powers of Directors to refuse: The Director may have the powers to refuse registration
of transfer of shares under certain circumstances – prescribed in the Articles of
Association.

Only restriction contained the Articles of Association are considered legally binding. Any private
agreement between the shareholders are not binding either on the company or on the
shareholders. Further, share transfer can only be restricted by the Articles of Association. The
right to transfer shares of a private limited company cannot be an total prohibition or ban on
share transferability36 It was held in Chiranji Lal Jasrasaria and Anr. v. Mahabir Dhelia and
Ors.37 that a restriction which amounts to a prohibition on transfer of shares or which precludes a
32
V B Rangaraj v. V B Gopalakrishnan and Others,  AIR 1992 SC 453.
33
http://www.mondaq.com/india/x/603222/Shareholders/Is+Restriction+On+Transfer+Of+Shares+Valid+Under+Co
mpanies+Act+2013
34
http://www.mondaq.com/india/x/603222/Shareholders/Is+Restriction+On+Transfer+Of+Shares+Valid+Under+Co
mpanies+Act+2013
35
https://www.indiafilings.com/learn/share-transfer-procedure-private-limited-company/
36
ibid
37
Chiranji Lal Jasrasaria and Anr. v. Mahabir Dhelia and Ors., AIR 1966 Gau 48.

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shareholder altogether from transferring is invalid. Moreover, a prohibition on the transfer of
shares will amount to violation of Section 8238 (which corresponds to Section 44 of the 2013
Act) of the 1956 Act and Section 639of the Transfer of Property Act, 1882.40

LEGAL ANALYSIS
In light of the revised definitions under Companies Act 2013 and the recent judgments, the legal
position with respect to validity of restrictions on transfer of shares of a public company can be
summarized as under:41

 An agreement between shareholders restricting the transfer of shares in a public company

does not violate the legal mandate of free transferability of shares of a public company;

 Restrictions on transfer of shares must not be in violation of the articles of association of

the public company or the governing law (i.e. the CA13);

 Such agreement restricting transfer of shares can be enforced as a contract amongst and
against the shareholders who are partying thereto;

 However, such contractual restrictions on the transfer of shares of a public company are
not enforceable against the company, in case the company is not a party to the agreement
containing such restrictions.42

38
Section 82, Companies Act, 1956- Nature of shares; Available at
http://www.manupatrafast.in.elibrary.symlaw.ac.in:2048/ba/fulldisp.aspx?iactid=785&snos=150
39
Section 6, Transfer of Property Act, 1882- What may be transferred; Available
at http://www.manupatrafast.in.elibrary.symlaw.ac.in:2048/ba/fulldisp.aspx?iactid=794, 
40
ibid
41
https://blog.ipleaders.in/procedure-transfer-shares-public-company/
42
ibid

21
 CONCLUSION
Given the rationale behind the establishment of a private company, the restrictions imposed on
the transfer of shares seem reasonable, especially considering that the proposed transferee has an
option to move the Tribunal in case the Board of directors appears to have exercised its powers
of refusal capriciously or in a mala fide manner. These restrictions help maintain the sanctity of
the private company and help the founders/promoters retain majority control and thereby steer
the company in the desired direction.

With respect to a public company, considering that the shares belonging to a person are his
movable property and can be transferred in accordance with Section 6 of Transfer of Property
Act, 1882, the Court has tried to strike a balance between the conflicting principles of this
aforementioned ownership and the free transferability of shares that characterizes a public
company and provides liquidity to its stock. As a result of the effort, the Court correctly ruled
that as long as the agreement to transfer complies with the AOA of the Company and relevant
statutory provisions governing the transfer, shareholders of a public company are free to deal
with their shares as they please and can enforce an agreement for such transfer.

It is also important to analyze the expression 'freely transferable', which has not been defined
under CA 2013. The expression 'freely transferable' is a mandate against the board of directors to
register the transfer of the specified shares and such expression should be given wider
interpretation. Any consensual arrangement / contract providing restriction on transfer of shares
or providing pre-emptive rights pertaining to transfer of shares should not be construed as
violation of the expression 'freely transferable'. Had that not been the intention of the legislature,
the proviso to Section 58(2) of the CA 2013 would not have been specifically inserted and
appropriate restriction would have been placed in CA 2013 in relation to transfer of shares in
terms of consensual arrangement. However, such expression does not in any way restrict the
power of the board of directors of a public company to refuse the registration of transfer of such
shares on 'sufficient cause'.

22
 BIBLIOGRAPHY
Books:

1. Company law by Avatar Singh

2. Company Law and Practice; A Comprehensive textbook on Companies Act, 2013 by Dr. G
Kapoor and Sanjay Dhamija.

3. Guide To The Companies Act (Providing Guidance On The Companies Act, 2013 by
Ramaiya.

4. Lectures on Company Law: Covering Companies Act, 2013 and Limited Liability Partnership
Act by K S Anantharaman.

Articles

KCP Limited, Procedure for transfer or transmissibility of shares, available at

www.kcp.co.in/.../shareholders.../procedure-for-transfer-transmission-of-securities.pdf

Prof Rahul J. Malkan, Fundamental of Accounting, Chapter 9, Unit

http://www.icaiknowledgegateway.org/littledms/folder1/introduction-to-issue-forfeiture-and-
reissue-of-shares.pdf

Web sources

https://blog.ipleaders.in/procedure-transfer-shares-public-company/

http://www.mondaq.com/india/x/603222/Shareholders/Is+Restriction+On+Transfer+Of+Shares+
Valid+Under+Companies+Act+2013

https://www.indiafilings.com/learn/share-transfer-procedure-private-limited-company/

https://legaldesk.com/business/transfer-of-shares-in-a-private-limited-company

http://sntca.in/share-transfer-under-companies-act-2013/

http://taxguru.in/company-law/procedure-transfer-shares-companies-act-2013.html

23