Below are the steps for Transfer of Shares in a private company.

  1. Ensure the Articles of Association (AoA) allows for transfer of shares and check for any restrictions or special conditions.
  2. Preemptive rights or board approval may be required to proceed for transfer. Transferor gives notice of intention to transfer shares. The company must offer the shares to existing shareholders (usually in proportion to their shareholding). If existing shareholders, Accept, then Transfer is made to them or they decline or do not respond within the specified time, only then can the shares be offered to outsiders.Exception: If the AoA does not restrict such transfers or does not mandate offering to existing shareholders, the shares may be transferred freely.
  3. Transferor and transferee must execute a share transfer deed (Form SH-4).
  4. The transferor or transferee must submit duly executed and stamped Form SH-4 with 60 days from the date of execution of the deed to the company along with original share certificate.
  5. The Board of Directors must consider the transfer in their meeting. If approved, a resolution is passed to register the transfer.
  6. Upon approval, the company updates the Register of Members with details of the transferee.
  7. Issue of Share Certificate: The share certificate is endorsed in the name of the transferee and delivered within 1 month from the date of receipt of instrument, if transfer is approved.

Notes:

  1. Transfer Consideration – Price is often negotiated and mutually agreed upon by the transferor and transferee. Valuation by a Registered Valuer is required in certain cases or if there is chance of dispute.
  2. Income Tax Act (Section 56(2)(x)) – If shares are transferred below fair market value (FMV), the difference may be taxed as “income from other sources” in the hands of the buyer.
  3. Valuation is recommended if there is a chance of scrutiny under Income Tax Act (Section 56(2)(x)), if shares are transferred below FMV.