Transfer And Transmission Of Shares Under The Companies Act, 2013

Introduction

While studying Company law, it is inevitable to understand the concept of shares and other sub-topics associated with it. Hence, while studying shares we come across the concept of transfer and transmission of shares. The two concepts seem similar but are far from it. Confusing one for the other would lead to further ambiguity and vagueness in one’s interpretation of these concepts. Hence, making it is essential to have a deeper understanding of the meaning of ‘transfer’ and ‘transmission’ of shares. While studying these concepts, we must first understand the meaning of certain terms that are often used in association with it and give a lucid explanation for these concepts which would make it comparatively easier to differentiate between the two, than it would otherwise.

Meaning of Shares

In this article, we will be focusing on the transfer and transmission of shares, therefore, it would not be right to explain the concept without first elucidating upon ‘shares’. The Companies Act, 2013 (hereinafter referred to as the “Companies Act”) has provided a rather straightforward and simple definition of shares and is embodied in Section 2 (84) of the aforesaid Act. According to it, a share is defined as “a share in the share capital of the Company including stocks.” It is the division of the capital into smaller yet equal units. These units are then referred to as ‘shares’. The people who invest and hold such shares are known as ‘shareholders’. In accordance with the Companies Act, there a primarily two types of Shares i.e., Preference Shares and Equity Shares. As the name suggests, the former is preferential in nature. Shareholders having such shares do not hold any voting rights.

During the liquidation process, once the debts of the creditors are settled, the preferential shareholders are paid out first. Preferential Shares are of many types depending upon several factors. To name a few, there are Cumulative Preference Share, Non- Cumulative Preference Share, Participating Preference Share, Non-participating Preference Shares, Non-Convertible Preference Shares, Convertible Preference Shares, Redeemable Preference Shares and Irredeemable Preference Shares. Further, the second type of Shares is Equity Shares. These shares are your basic, ordinary shares. Unlike Preference Shareholders, these shareholders have voting rights but earn dividends post Preference shareholders. The dividend is not fixed and is dependent on the profits. These shares are actively traded in the market.

Transfer of Shares

The concept of transfer of shares simply refers to the transfer of a particular share/s’ ownership. Such a transfer is voluntary. In case of transfer, there is stamp duty which depends upon the market value of such shares.

As mentioned before, this is one of the most important features of a company. Section 44 of the Companies Act provides that the shares or debentures or other interests of any member in a company may account for movable property, transferable in the manner that is given in the articles of the company. Furthermore, the securities or other interests of any member of a public company shall be freely transferable. The Companies Act also mentions that any contract or arrangement between 2 or more people regarding the transfer of securities shall be enforceable as a contract.

Transfer of Shares in Private Company

With reference to 2(68), a private company’s right to transfer its shares is restricted. Restricted must not be presumed to mean ‘prohibited’. by its articles. The transfer can be done by following the restrictions that have been laid down in the Article of the company. Due to such restrictions, it has become extremely necessary to study this topic specifically with Private Companies. Transfer of shares, in such a situation, will be in accordance with the provisions and restrictions of the Articles of Association and the transferee and transferor must be bound by them. There is no absolute prohibition on the right to transfer, nonetheless, section 44 specifies that if any such transfer is to be made it must be in the way it has been provided in the Articles of Association.

1. When restrictions on transfer are not applicable?

On the right of a member to transfer their shares where the shares are to be transferred to his/her representatives. In case of death of a shareholder, legal representatives may require the registration of shares in the names of heirs, on whom the shares have been devolved.

When the shares are proposed to be issued on a right basis, existing members would have a right to renounce shares likely to be allotted to them. If they do so, then these shares will be allotted to the renounces for the first time and therefore no transfer of shares will take place.

In the case of John Tinson & co. P. Ltd. v. Surjeet Malhan (Mrs.)[i], the Supreme Court held that where the articles of a private company required the transfers of the company shares to be made with the previous sanction of the company’s Board of Directors, a transfer without such approval would be deemed to be invalid.

2. Methods for placing restrictions on the right of transfer of shares.

When a member wishes to sell his shares, such shares shall first be offered to other existing members of the company. The price will then be left to be determined by the directors or by the auditor of the company or by the use of the formula set out in the articles. But where no existing member is willing to acquire such shares, then these shares can be transferred by the transferor to the proposed transferee. This is the Right of pre-emption.

The Powers of directors to refuse registration of transfer of shares are specified in the articles of association of the company. Nonetheless, there must be bonafide use of such power by the Board of directors. In Berry & Stewart v. Tottenham Hostpur Football and Athletic Co. Ltd.[ii], it was decided that such a power to refuse registration of shares, is a discretionary power and must be exercised reasonably, and in good faith for the benefit of the company. Unless otherwise proved, this power is said to have been exercised properly. In the case of M.J. Amrithalingam v. Gudiyatham Textiles Pvt. Ltd.[iii], some important points were made by the court. Firstly, where the articles confer a discretion on the directors with respect to acceptance of transfers, it is a fiduciary discretion and is to be exercised in good faith where the Board considers to be in the interest of the company. Secondly, if according to the interpretation of the articles, the power of the directors to reject is on the basis of certain prescribed grounds and if it is established the request for transfer was rejected on these said grounds, the Court shall not substitute the opinion of the Board. Lastly, where the articles of association provide unrestricted discretion, the court would interfere only when there lies some proof of it being rejected in bad faith.

It is pertinent to note that a statutory remedy is available against such refusal and the procedure has been laid down in Section 58 of the Companies Act.

3. Can share be transferred to a Minor?

This is one of the most interesting questions concerning the transfer of shares. The general notion surrounding contracts is that a minor cannot enter into a contract. Well, although it is true, a guardian can enter into a contract on behalf of the minor under certain laws of the country. As per Section 56 of the Companies Act, the execution of the transfer deed can be either done by or on behalf of the transferor or the transferee. Hence, we can say that it is possible for the transfer deed to be executed by a minor through his natural guardian acting like the transferee, and the contract so entered into by a minor through his natural guardian is a binding and valid contract as per Section 8 of the Hindu Minority and Guardianship Act, 1956. But what would happen if the minor is restricted from doing so by the purview of the Articles of association? It is said that the Articles cannot prohibit the transfer of shares in favour of a minor, as it would be viewed as unreasonable. If such a restriction would be permitted, it would be rather difficult for a legal heir (minor) to inherit the shares of a deceased member.

4. Can a share be transferred without the authority of the owner of the shares?

The answer to this question is negative. One can only sell the shares if he is the registered owner or by someone else with the registered person’s authority. If an unauthorized person sells, it will be deemed void.

Transfer of Shares in a Public Company

Section 58 (2) of the Companies Act paves the way for the possibility of the transfer of shares in a Public Company. Such a transfer, by means of any contract or some arrangement, between two or more people, will be deemed legally enforceable as a contract. There lies no transfer of shares unless 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 by the transferor or transferee within a period of 60 days (listed or unlisted company) from the date of execution along with the certificate relating to the securities, or if no such certificate is in existence, then along with the related certificate or letter of allotment of securities.

Where the instrument is lost, the company may register the transfer on terms of indemnity. In the case of Shri Parveen Sharda v. Chopsani Ice Aerated Water and Oils Mills Ltd[iv], an important point pertaining to the expression “duly stamped” was raised. The expression “duly stamped” has to be construed with reference to the provisions of Section 2(11) of the Indian Stamp Act, 1899 and the document in question would be an invalid one if the stamp affixed thereon has not been cancelled. Under Section 108(1) of the Companies Act, 1956 [Corresponds to section 56(1) of the Companies Act, 2013] it is mandatory that the company shall not register the transfer of shares unless a properly executed instrument of transfer duly stamped has been delivered to the company.

Transmission of Shares

Unlike the transfer of shares, the transmission of shares wouldn’t be considered ‘voluntary’ per se. This is due to the fact that transmission of share/s takes place when the shares are transferred due to the operation of law. Operation of law may include different circumstances/situations like the death of a member, member adjudicated as insolvent, lunatic, the order passed by court or arbitration award was given, etc. This process is devoid of a transfer deed or need for payment of stamp duty. Nonetheless, the liability associated with such shares persists even after transmission. Once the transmission of shares is completed, the person who receives such shares becomes the legal shareholder and may enjoy all the rights and duties (liabilities) attached to those shares.

1. Do legal heirs directly become the members in cases of transmission of shares?

Although the legal heirs are entitled to be registered as the shareholders of such shares, it is extremely important to understand that a legal heir can neither be forced to become a member nor does he have any such duty to do so.[v]

2. How is transmission different from the transfer?

As mentioned earlier, the transfer is voluntary, but transmission is due to the operation of law. A crucial point of difference between transfer and transmission of shares is that the former is usually for some consideration, while the latter is generally made in absence of any consideration for the same. Secondly, in case of transfer, an instrument of transfer is required. But in the case of transmission, no instrument of transfer is mandated. Similarly, transfer requires payment of stamp duty, while transmission does not have any such requirement.

Conclusion

While studying Company Law, we often tend to study the characteristics of a company and while doing so we often come across the concept of “transferability of shares” as one of its features. Hence, it becomes extremely important to study the same and understand how it differs in various types of companies and distinguish it from the transmission of shares. Understanding the process of transfer and transmission of shares may sound complicated, but once the nitty-gritty of the two has been thoroughly understood, the difference between the two can be lucidly explained. Furthermore, several judicial decisions have rendered some clarity on these topics.

References

1. https://www.karvyonline.com/knowledge-center/beginner/share-meaning-and-types-of-shares

2. https://taxguru.in/company-law/transfer-shares-companies-act-2013.html

3. https://www.legalwindow.in/all-you-need-to-know-about-procedure-of-transmission-of-shares-in-india/

4. https://support.zerodha.com/category/your-zerodha-account/transfer-of-shares-and-conversion-of-shares/articles/what-does-transmission-of-shares-of-mean?ref_query=transmission

5. Company Law Module by ICSI.

[i] AIR 1997 SC 1411.

[ii] 1936, 3 A11 E.R. 554

[iii] (1972) 42 Com Cases 350

[iv] Appeal No. 1 of 1982

[v] State of Kerala v. West Coast Planters Agencies Ltd., (1958) 28 Com Cases 13 (Ker)

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Aayushi Mittra

Aayushi Mittra is a Fourth Year Law Student pursuing 5 Years BLS LLB at SVKM's Pravin Gandhi College of Law. Securing AIR 18 in CS Foundation exams, she wishes to not restrict herself to the ambit of company law but also explore various other fields of law like IPR, Cyber Law, Real Estate, Tech Law and Sports Law. Apart from academics, she immensely enjoys participating in moots, MUNs and article writing competitions.

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