How to Transfer Shares in a Private Limited Company in India

Private Limited Company

How to Transfer Shares in a Private Limited Company in India

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How to transfer shares in a private limited company? The process of share transfer in a private limited company is a simple one. It entails the creation of the shares deed and the approval of the board of directors. However, in order to create the right share transfer deed, you need proper assistance from the experts.

In a Private Limited Company, it is the responsibility of the shareholders to determine the owner ship of the company. It is for this very reason that share transfer becomes an important aspect when new members are induced into the company. Throughout the course of this article, you are going to know the answer to the question: How to transfer shares in a private limited company in India?

Share Transfer Restrictions

Before we dive into the process associated with the share transferring process, it is necessary for us to know about the restrictions associated with this matter especially when the company concerned is a private limited company.

Now, much like a partnership firm, a private limited company is also considered to be a closed corporation. As a result of that, the Articles of Association of such a business entity provides restrictions associated with share transfer. For any share transfer to take place, reviewing the articles of association becomes a prime necessity. There are two kinds of Share transfer restrictions that are described in the AOA:

  1. Power of the directors to refuse:  Eventually, every decision that is made regarding the future of the company is in the hands of ht board of directors. Therefore, if there is a certain circumstance in the articles of association that is not being followed, this board is well within its power to refuse the share transfer.
  2. Rights to pre-emption: If any of the shareholders wants to transfer either some or all of their shares, then before moving forward and try to sell their share to an outside, they should ask the existing shareholders/members first. The price is these shares shall be predetermined by the board of directors or the auditor hired for this very purpose. The basis of the price shall be the articles of association. In case none of the existing shareholder shows interest in buying the shares, only then the member is allowed to sell the shares to an outsider.

Now, the restrictions associated with share transfer that are prescribed in Articles of Association are the only ones that have legal foundation. If there is a verbal/private agreement between the shareholders regarding this matter, then they are not to be considered legally binding in any form.

Starting the shares transferring process

In a private limited company, there are some caveats and pre-requisite steps that are to be followed before the process of share transference can actually be undertaken. The following are those pre-requisite steps:

  1. Step one is to review the Articles of Association for any sort of restriction associated with share transference. One thing to understand here that share transfer is only to be restricted according to AOA, not banned. Banning is not allowed at all in this matter.
  2. Step two entails the shareholder who is seeking to transfer their shares to give notice to the board of directors or director of the company about this intention.
  3. Step 3 entails price determination of the shares. The articles of association would be the matter to consider here when it comes to evaluating the price of the shares.
  4. Step 4 entails offering the shares to the current members of the company. It is an important step to consider if you wish to transfer your shares.
  5. Step 5 entails the company giving notice to the shareholders about the share availability, the purchase date of shares and the price of share.

In the above steps, if any of the shareholders comes forward with an intention to buy the shares, then shares are to be allotted to them at the prescribed price. If not, only then the shareholder with the intention of transferring shares can look for outside buyers.

Selling private company shares

The process of transferring shares involves the following:

  1. The first step is to obtain a share transfer deed in a proper and prescribed format
  2. Then, this share transfer deed is to be signed by the one who is transferring the shares and the one to whom the shares are being transferred to.
  3. Then, this deed is to be stamped according to the Indian stamp act.
  4. Then, a witness who was present at the time of signing during step 2 would have to provide their own signature to the deed.
  5. The share deed, along with the share certificate would then have to be forwarded to the board of directors for approval.
  6. After proper processing, if the company approves the share transfer, only a new share certificate is generated in the name of the one to who the shares are being transferred.

The above is the gist of what happens during the share transfer process.

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