Understanding The Difference Between Transfer And Transmission Of Shares
In corporate finance and company law, the concepts of transfer and transmission of shares are fundamental to understanding how ownership of shares changes hands. If you are a shareholder, part of a company, or handling legal matters, it is important to know how these processes work.
Shares represent ownership in a company and are a critical component of corporate finance. Understanding how shares can change hands is essential for shareholders. Two primary mechanisms govern this process: the transfer of shares and the transmission of shares. While both involve the change of ownership, they differ significantly in their nature, process, and legal implications.
Read on to explore the concepts and differences between share transfer and transmission.
What is the Transfer of Shares in a Company?
The transfer of shares is a fundamental process in the corporate world involving the intentional transfer of ownership of shares from one party to another. This process is crucial for shareholders who wish to sell, gift, or otherwise transfer their shares to another individual or entity. Specific legal and procedural frameworks govern the transfer of shares to ensure transparency and validity.
Meaning of Transfer of Shares
Transfer of shares means passing the ownership of shares from one person to another. The person giving the shares is called the transferor, and the one receiving them is the transferee. In public companies, shares can usually be transferred freely unless the company has a valid reason to stop it. In private limited companies, share transfers are more restricted and may need special approval. To complete the process, a transfer deed (a legal document) is signed and submitted as proof of the share transfer.
Meaning of Transmission of Shares
Transmission of shares happens when the shareholder can no longer hold the shares due to reasons like death, mental illness, or bankruptcy. It also applies when a company (that had the shares) is closed down.
Unlike a transfer, no transfer deed is required here. Instead, the person who wants to take over the shares must show legal proof (like a death certificate or a legal heir certificate) to get the shares in their name.
For example:
– If the shareholder has passed away, the shares go to the legal heir.
– If the shareholder is declared insolvent, the official receiver takes over the shares.
It’s a legal process, not a sale or gift.
Key Aspects of Share Transfer:
Parties Involved:
Transferor: The individual or entity currently owning and wishing to transfer the shares.
Transferee: The individual or entity receiving the shares from the transferor.
Transferability of Shares:
Public Companies:
In the case of public companies, shares are generally freely transferable. This means shareholders can sell or transfer their shares without significant restrictions unless the company has a valid reason to disallow the transfer. This free transferability is a key feature that makes public company shares liquid and attractive to investors.
Private Companies:
On the other hand, shares of a private limited company are not as freely transferable. The transfer of shares in a private company is often subject to certain restrictions. These restrictions are implemented to maintain control over who becomes a shareholder, ensuring that the company remains closely held.
What is the Transmission of Shares
Transmission of shares refers to the transfer of ownership of shares due to the operation of law rather than through a voluntary transaction. This process occurs in specific circumstances, such as the death, insolvency, or lunacy of the shareholder or when the shareholder is a company that has been wound up. Unlike the transfer of shares, which involves a deliberate act by the shareholder, transmission is triggered by legal events and does not require the execution of a transfer deed.
Distinguish Between Transfer And Transmission of Shares
The following table illustrates the differences between the transfer of shares and the transmission of shares:
Transfer vs. Transmission of Shares
The difference between transfer and transmission of shares lies in how and why the ownership changes hands. Transfer is done by choice, while transmission happens due to unavoidable life events.
Transfer of Shares | Transmission of Shares |
Voluntary and intentional | Involuntary, triggered by death, insolvency, etc. |
Requires a share transfer deed and Board approval | Requires legal documents like a death certificate or probate |
Involves an agreement between the transferor and the transferee | Involves transmission to heirs or legal representatives |
Mandatory approval by the company’s Board | Not required, but documentation may need to be submitted |
Share transfer deed, payment of stamp duty | Death certificate, legal heirship certificate, etc. |
Subject to the company’s Articles of Association (for private companies) | No restrictions, as it is based on legal succession |
Provisions Under the Companies Act, 2013 and the Companies (Share Capital & Debenture) Rules, 2014
The provisions related to the transfer and transmission of shares are outlined under Section 56 of the Companies Act, 2013, and further detailed in Rule 11 of the Companies (Share Capital & Debenture) Rules, 2014. These provisions lay down specific procedures, documentation requirements, and penalties for non-compliance, ensuring a company’s smooth transfer or transmission of securities. Below is an in-depth explanation of these provisions:
Transfer of Shares
The transfer of shares in a company is a legal process that must follow the guidelines specified under the Companies Act, 2013 and the Companies (Share Capital & Debenture) Rules, 2014. Key steps for the transfer process include:
Instrument of Transfer:
A proper instrument of transfer, as outlined in Form SH-4 (specified under Sub-rule 1 of Rule 11 of the Companies (Share Capital & Debenture) Rules, 2014), must be duly executed. The instrument should be:
– Stamped as per applicable stamp duties.
– Dated correctly.
– Executed by both the transferor and transferee or their authorised representatives.
– It must specify all necessary details, such as the name, address, and occupation (if any) of the transferee.
Submission to the Company:
The transfer form must be submitted to the company within 60 days from the date the transfer deed is executed. Either the transferor or the transferee can make this submission.
Transfer of Partly Paid Shares:
If the transfer concerns partly paid shares, the transferor must apply for the transfer using Form SH-5 (as given in Sub-rule 3 of Rule 11). The company must notify the transferee about the application, and the transferee must provide a No Objection to the transfer within 2 weeks of receiving the notice.
Transmission of Shares
Transmission of shares, unlike transfer of shares, is a legal process which does not require execution of a transfer deed. The transmission is usually initiated in cases of death, incapacity, or legal incapacity of the shareholder. For transmission one must be able to submit:
Certified Copy of the Death Certificate (in case of the shareholder’s death).
Self-attested Copy of PAN Card of the deceased or the successor.
Legal Documents such as:
– Succession Certificate
– Probate of Will
– Will
– Letter of Administration
– Court Decree
Specimen Signature of the successor.
These documents must be submitted along with the application for the transmission of shares to the company, which will process the request accordingly.
Difference between transfer and transmission of shares under Companies Act 2013
Transfer of Shares
– A voluntary act by a shareholder to pass ownership to another person.
– Usually done through sale, gift, or exchange.
– Requires a duly executed transfer deed and payment of stamp duty.
– Needs approval of the company’s Board of Directors.
– Involves the transferor (existing shareholder) and the transferee (buyer/new holder).
– Governed by Section 56 of the Companies Act, 2013.
Transmission of Shares
– Happens automatically by law, not by the act of the shareholder.
– Occurs in cases like death, insolvency, or the inheritance of a shareholder.
No transfer deed or stamp duty required.
– Legal heirs, nominees, or representatives must submit legal documents (e.g., death certificate, succession certificate).
– Board approval is procedural, not discretionary.
Covered under Section 56(2) and relevant rules of the Companies Act, 2013.
Time Limit for Delivery of Share Certificates
In either the transfer or the transmission process, the company is bound by law to issue share certificates to the parties involved. The time limit for issuing certificates is as follows:
For Transfer of Shares:
The company must issue the certificate within 1 month from the date of receipt of the transfer instrument.
For Transmission of Shares:
The company must also deliver the share certificates within 1 month from the receipt of the transmission request and supporting documents.
However, this time frame may be extended if prohibited by law or any court order, tribunal, or other relevant authority.
Penalties for Non-Compliance
Failure to comply with the prescribed regulations can result in significant penalties for the company and its officers. Specifically:
The company may face a fine of a minimum of Rs. 25,000, extending up to Rs. 5,00,000. Every officer of the company who is in default may be penalised with a fine of a minimum of Rs. 10,000 to a maximum of Rs. 1,00,000.
Conclusion
The transfer and transmission of shares are two distinct but equally essential processes in company law. While transfer involves a voluntary change in ownership, transmission occurs automatically due to legal events. Understanding these concepts is crucial for shareholders, companies, and legal professionals.
There are proper procedures to be followed, and companies must comply with the law, in order to make smooth ownership transfers and avoid any lack of transparency in operations. It is always better to seek professional counsel to understand the intricacies of company law, whether it is a matter of transferring shares to a new owner or transmitting shares due to other unforeseen circumstances.
At Crystal Peak Wealth, we specialise in expert assistance with transferring and transmitting shares. Our team of professionals ensures that all legal and procedural requirements are met, making the process seamless and hassle-free for our clients. From drafting share transfer forms to handling transmission documentation, we are here to support you every step of the way.
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