Transfer of Securities in India: Process, Forms, Stamp Duty and Pitfalls

A transfer of securities happens when an existing shareholder passes their shares to someone else, whether by sale, gift or another arrangement. Unlike allotment, no new shares are created. Only the ownership changes.

For private companies in particular, transfers come with restrictions and paperwork that people often underestimate.

The legal framework

Under the Companies Act, 2013, the basic rule is that a company can't register a transfer of shares unless a proper instrument of transfer, duly stamped and executed by the transferor and transferee, has been delivered to it.

A private company must also restrict the right to transfer shares in its Articles of Association. So the Articles are always the first document to read. They may contain:

• Board approval requirements for transfers
• Right of first refusal (ROFR) for existing shareholders
• Tag-along and drag-along provisions, often reinforced by a shareholders' agreement
• Lock-in periods for certain shareholders

A transfer that breaches these provisions can be refused, or challenged later.

Transfer versus transmission

• Transfer is a voluntary act by the holder, such as a sale or gift.
• Transmission happens by operation of law, for example on the death or insolvency of a shareholder. It follows a different process and different documents.

Step-by-step: transferring shares in a private company

1. Check the Articles and any shareholders' agreement for restrictions, ROFR and approval requirements.
2. Agree the terms. Price, payment mode and any conditions should be recorded in a share purchase agreement.
3. Determine fair value. For unlisted shares, the price matters for tax, and for FEMA if a non-resident is involved.
4. Execute the instrument of transfer (Form SH-4), signed by both the transferor and the transferee and witnessed.
5. Pay the stamp duty on the instrument of transfer, at the rate prescribed under the Indian Stamp Act.
6. Submit SH-4 with the share certificates to the company. If the shares are dematerialised, the transfer is done through the depository system instead.
7. Board approval. The board passes a resolution approving the transfer, and can refuse it only on grounds allowed by the Act and the Articles. If it does refuse, it must communicate that within the statutory period.
8. Update the register of members, and issue new share certificates to the transferee or credit the demat account.
9. File any required forms. For example, a change in the shareholding of a company's beneficial owners or significant beneficial owners may trigger additional filings.

Dematerialisation

Companies other than small companies have been required to move their securities into dematerialised form, and to facilitate transfers in demat form. If your company is subject to this, transfers happen through your depository participant rather than physical share certificates. Confirm where your company stands.

Transfers involving non-residents

If either party is a non-resident, FEMA applies:

• Resident to non-resident, or the reverse, requires compliance with the pricing guidelines and sectoral rules.
• The transaction must be reported to the RBI through Form FC-TRS, within the time limit prescribed.
• Payment must be through proper banking channels.

Getting the price wrong here is a common reason for compounding applications later.

Tax points to keep in mind

• The seller may face capital gains tax on the sale.
• If unlisted shares are sold below their fair value, the tax authorities can treat the fair value as the sale consideration for the seller, and can also tax the buyer on the difference.
• Gifts of shares to relatives are treated differently from other gifts.

Tax outcomes depend on individual facts, so take advice before pricing the deal.

Common mistakes

• Ignoring the Articles. A transfer that violates ROFR or approval clauses can be invalid.
• Unstamped or under-stamped SH-4. This creates legal and evidentiary problems.
• Pricing without a valuation, especially where a non-resident is involved.
• Not updating the register of members, so the company's records don't match reality.
• Informal transfers. A handshake deal or a payment without SH-4 doesn't transfer legal ownership.
• Missing the FC-TRS filing for cross-border transfers.

How we help

We prepare the share purchase agreement, SH-4, board resolutions and updated registers, check compliance with the Articles and any investor agreements, coordinate valuation, and handle FEMA filings where needed.

Buying into a company or exiting one? Talk to us before you sign the transfer form.

This article is for general information and isn't legal or tax advice. Stamp duty rates, thresholds and filing timelines change, so please confirm current provisions with a qualified professional.