When we talk about changes in the ownership of an asset, we often use the term “transfer.” This shift could involve physically moving the asset, handing over legal ownership, or both. In the world of securities, these changes can occur in two key ways: voluntarily, when the current holder willingly initiates it, or mandatorily, when legal circumstances require it.
In the context of shares, a transfer is typically a deliberate, contractual move by the shareholder. On the other hand, the transmission of shares is a legal process that comes into effect automatically. This usually happens upon the death of a shareholder or if they are declared insolvent or mentally incapacitated. Let’s explore both processes in detail better to understand the difference between transfer and transmission of shares.
What is the Transfer of Shares?
A share transfer refers to intentionally shifting ownership from one person (the transferor) to another (the transferee). In public companies, shares are generally transferable without restrictions unless the company has valid grounds for refusal. However, in private limited companies, this process is subject to limitations and is only allowed under specific circumstances.
A legal document known as a transfer deed is typically executed to facilitate a share transfer. This document lays the foundation for the transfer and must be appropriately signed and filed.
Why Does Share Transfer Occur?
Share transfers may occur for several reasons, each involving the movement of ownership rights.
Sale Transaction:
The shareholder sells shares to another party in exchange for a monetary payment. This is formalised through a share transfer deed.
Gifting:
Shares can be gifted voluntarily, with no money exchanged. This process is usually backed by a gift deed.
Lending Shares:
In cases of securities lending, shares are temporarily passed from lender to borrower, often as collateral. They are returned after the lending period ends.
Transmission Errors:
Sometimes, shares may be wrongly recorded. For example, they may be listed under only one member in a multi-generational holding. If shares are shown under the grandparent alone instead of a lineage that includes the parent and child, a technical transfer through the parent may be required to correct the error.
These instances show how share transfers serve different purposes and can arise in a variety of ownership-related scenarios.
Duration for Finalizing Share Transfers
According to SEBI regulations, listed companies must ensure the timely processing of share transfers.
Dematerialized (Demat) Shares: Transfers must be completed within 15 days of receiving the request.
Physical Share Certificates: These should be processed within 1 month of submission.
Investors who still hold certificates in paper form often convert physical shares to demat to speed up and improve future transactions.
If the process takes longer than the prescribed time, the company may be required to compensate affected shareholders through penal interest.
In cases where a company rejects the transfer request due to incorrect or incomplete documentation, the applicant must be informed within 30 days of receipt. This communication should clearly explain the reason for the rejection so the applicant can correct any errors.
What is the Transmission of Shares?
Unlike a transfer, the transmission of shares is not a voluntary act. It occurs by law due to specific events such as:
– The death of the shareholder
– Their mental incapacity
– Their insolvency
– Dissolution of a corporate shareholder
No transfer deed is required in this case. Instead, the legal rights to the shares are automatically passed to the rightful heir, assignee, or nominee after they provide the company with supporting documentation.
For example, the shares will be transmitted to their legal representative if the shareholder passes away. In cases of insolvency, the shares go to the official assignee.
Reasons for Share Transmission
Transmission typically results from one of two key scenarios. These may involve registered nominees or situations where no nominee was declared.
a) Absence of Nominee Registration
– Shares may be passed as per the will left by the deceased, distributing them among the legal heirs.
– In the absence of a will, succession laws determine how the assets, including shares, are distributed.
b) Nominee(s) Registered
– The shares are directly passed on to the nominee(s) listed in the shareholder’s nomination form.
– If Class I legal heirs refuse the shares, they may pass to Class II nominees with limited rights.
A nomination or succession plan helps simplify the transmission process and prevents legal complications related to ownership.
Timeline for Completing Transmission of Shares
Because verifying the legal heir or nominee involves detailed checks, transmission procedures take longer than standard transfers. As per SEBI guidelines, companies must complete the process within 1 to 3 months, depending on whether the shares are in physical or demat form.
If companies delay beyond this period, they may have to compensate legal heirs through penal interest. Furthermore, they are expected to provide a status update within 20 days, clearly stating the processing stage and estimated completion date.
Legal Provisions for Share Transfer and Transmission
Both processes are governed by the Companies Act, 2013 and the Companies (Share Capital and Debenture) Rules, 2014.
Transfer of Shares:
As per Rule 11, the transfer occurs only after a duly executed Form SH-4 is submitted, stamped, and dated. The document should include:
– Names, addresses, and occupations of both the transferor and the transferee
– Delivery of this form to the company within 60 days of execution
– Accompanied by the share certificate or letter of allotment
In the case of partly paid shares, the transferor must issue Form SH-5 to the transferee. The transferee then has 2 weeks to file their consent or objection.
Transmission of Shares:
No transfer deed is required for transmission. However, the applicant must submit:
– A certified copy of the death certificate
– A self-attested PAN copy
– Legal documents such as a succession certificate, probate, will, letter of administration, or court order
– A specimen signature of the successor
Only after reviewing and verifying these documents can the company process the transmission.
Consequences of Non-Compliance
A company may face financial penalties if it does not comply with these legal obligations.
– The company may be fined between ₹25,000 and ₹5,00,000
– Any officer responsible for the non-compliance could be fined between ₹10,000 and ₹1,00,000
These penalties underline the importance of adhering to the correct procedures for share ownership changes.
Final Thoughts
While share transfer and transmission result in the ownership of shares changing hands, the underlying reasons and processes are different. A transfer is a conscious, voluntary action initiated by the shareholder or buyer and involves contracts and documents. Transmission, on the other hand, is a legal outcome of events like death or insolvency and requires no formal transfer deed.
Understanding this distinction helps investors and companies manage share ownership effectively. Transfer processes usually wrap up within 15 to 30 days, while transmission may take up to 3 months due to verification requirements. Transfers can involve various costs, while transmission typically requires fewer expenses.
Crystal Peak Wealth advises clients to keep their documentation in order, especially when families hold shares jointly or across generations. Knowing when to initiate a transfer or a transmission and being aware of the timelines and requirements involved can help prevent unnecessary delays and legal complications.
FAQs
The key legal difference lies in the nature and cause of the ownership change. Share transfer is a voluntary act initiated by the shareholder, often involving a contract and a share transfer deed. Share transmission, however, occurs by operation of law due to events like the shareholder’s death or insolvency and does not require a transfer deed.
No. A transfer deed (Form SH-4) is mandatory for a share transfer, as it is a contractual agreement between the transferor and transferee. In contrast, share transmission does not require a transfer deed, as ownership is passed automatically to the legal heir or nominee upon submission of supporting legal documents.
As per SEBI guidelines, listed companies must process demat share transfers within 15 days and physical share transfers within 1 month for transfers. The process can take 1 to 3 months for transmissions, depending on document verification and whether the shares are in physical or demat form.