Share Transfer

Shares in a private limited company are transferred by an instrument of transfer in Form SH-4, executed by both transferor and transferee, stamped, and delivered to the company together with the share certificate. The board then approves the transfer and the register of members is updated.

The company does not file a form with the Registrar for an ordinary transfer — which is why people assume nothing formal is needed. The transfer is nonetheless a legal act with tax consequences for both sides, and the corporate record is what proves who owns the company.

Private company articles almost always restrict transfers, typically through pre-emption rights giving existing members first refusal. A transfer executed in breach of the articles is voidable, and that is exactly the kind of defect a buyer’s lawyer finds during diligence.

Selling below fair value taxes both sides

Section 56(2)(x) taxes the buyer on the difference where shares are acquired for less than fair market value. Section 50CA deems the seller’s consideration to be fair market value for capital gains. A transfer at face value between founders, done casually, can create a tax charge for both of them on a gain nobody actually made. A registered valuer report is the answer, and it needs to exist before the transfer, not after a notice.

Stamp duty is small but fatal if missed

At 0.015% of consideration, the duty on most transfers is trivial. An unstamped instrument, however, is inadmissible in evidence — so the one document proving the transfer cannot be produced in a dispute.

Non-residents bring FEMA into it

A transfer between a resident and a non-resident must comply with FEMA pricing guidelines — broadly, a non-resident cannot buy below or sell above fair value — and requires Form FC-TRS to be filed with the Reserve Bank through an authorised dealer bank, generally within sixty days of receipt of consideration. This is missed regularly and is awkward to regularise.

Transmission is not transfer

Shares passing on death or insolvency are transmitted by operation of law, not transferred. No SH-4 and no stamp duty; the legal heir applies with a succession certificate or probate. Treating a transmission as a transfer creates both a tax problem and a defective title.

The register is the title document

A share certificate is evidence, but the register of members is the primary record of who owns the company. Where the register has not been maintained — which is common in companies that never had a company secretary — reconstructing ownership before a transaction is slow and sometimes contentious.

The governing provisions are in section 56 of the Companies Act, 2013, administered by the Ministry of Corporate Affairs, with cross-border transfers regulated by the Reserve Bank of India.

The seller reports capital gains in their income-tax return for the year. Unlisted shares held for more than twenty-four months are long-term; held for less, the gain is short-term and taxed at slab rates. The holding period and cost basis should be documented at the time, while the facts are fresh.

Where the transfer changes control or significant beneficial ownership, further filings follow — BEN-2 for significant beneficial owners, and MGT-14 where any related resolution was passed. A change in the majority shareholder is also usually a notification event under bank facilities and major contracts.

Keep the executed SH-4, the stamped instrument, the valuation report, the board resolution and the updated register together. This bundle is what a future buyer will ask to see.