According to Section 2(84) of the Companies Act, 2013 “Share” means a share in the share capital of a company and includes stock. It represents the interest of a shareholder in the company, measured for the purposes of liability and dividend. It attaches various rights and liabilities. In CIT v. Standard Vacuum Oil Company (1996) Comp. L.J. 187 (S.C); A.I.R 1996 it was laid down that, “a share is not a sum of money but it is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place and also shows the interest.”
It was observed in Shri Krishna Pvt. Ltd. Etc vs ITO Calcutta & Ors jT 1996 (6), 440 1996 SCALE (3)353 that, “when a company is started, there are original shareholders at the time of registration of the company. It is not mandatory that the same shareholders will continue for lifetime, shares get transferred from one shareholder to another due to many reasons. Free transferability of shares is a normal and common feature of limited companies”.
Transfer of shares is a transaction resulting in a change of share ownership. A shareholder, whether in public or private company, has a property in his share which he has a right to dispose of, subject only to any express restriction which may be found in the articles of the company. The shares in a public company shall be freely transferable. As per Section 58(2), Companies Act, 2013 the Board of Directors of a Company or the concerned depository has no discretion to refuse or withhold transfer of any shares. The transfer has to be affected by the company/depository automatically and immediately.
Section 44 of the Companies Act 2013, categorically placed “shares” as movable properties and as feely transferred, and procedure involved in transfer and transmission of shares will not end in mere delivery of share certificates/instruments of transfer to the transferee.
In the case of S. Viswanathan v East India Distilleries and Sugar A.I.R 1957 Mad 341 It was observed by the court that: “A share is undoubtedly movable property but it is not movable property in the same way in which a bale of cloth or a bag of wheat is movable property. Such commodities are not brought into existence by legislation, but a share in a company belongs to a totally different category or property. It is incorporeal in nature and consists merely of a bundle of rights and obligations.”
Transfer of Shares
In Mahadeo Lal Agarwala And Anr. vs The New Darjeeling Union Tea Co. Ltd., AIR 1952 Cal 58, 55, it was upheld that transfer is by voluntary act of parties. It means the voluntary handing over of the rights and possibly, the duties of a member (as represented in a share of the company) from a shareholder who wishes to not be a member in the company any more, to a person who wishes to become a member. The court observed in Mannalal Khetan vs. Kedar Nath Khetan that, “without production of the share certificate along with the application for transfer, the transfer cannot be registered and if registered, the registration will be void.”
Transmission of Shares
It was observed in Finolex Industries Ltd. v. Anil Ramchand Chhabria,  3 Comp LJ 330;  144 Comp Cas 738 (Bom) that, “transmission of shares by operation of law, by succession or inheritance, there could be no instrument of transfer.” Transmission of shares takes place, when the registered shareholder dies; or when he is adjudicated an insolvent; or where the shareholder is a company it goes into liquidation. On the death of a shareholder, his shares vest in his legal representative. The legal representative may transfer the shares devolved upon him by transmission.
Provisions under Companies Act, 2013
Section 56 of Companies Act, 2013 read with Rule 11 of Companies (Share Capital & Debenture) Rules, 2014 deals with the transfer and transmission of shares.
- Transfer: As per Rule 11 of Companies (Share Capital and Debenture) Rules, 2014 a company shall register a transfer of securities of the company only if a proper instrument of transfer [Finolex Industries Ltd. v. Anil Ramchand Chhabria,  3 Comp LJ 330;  144 Comp Cas 738 (Bom)], in form SH-4 as given in rule 11(1) of Companies (Share Capital & Debentures) Rules 2014 duly stamped (Shri Parveen Sharda vs. Chopasani Ice Aerated Water and Oils Mills Ltd. Appeal No. 1 of 1982 decided on 10.1.1983 (CLB): “According to section 56(1) of the Companies Act, 2013, it is mandatory that the company shall not register the transfer of shares unless a properly executed instrument of transfer duly stamped has been delivered to the company”), dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of 60 days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities.
- Transmission: Imitation or application of transmission accompanied with the relevant documents is enough for transmission request. Execution of transfer deed not required in case of transmission of shares. Section 56(1) of the Companies Act, 2013 for transmission, instrument of transfer is not required, merely an application addressed to the company by the legal representative is sufficient.
Relevant Documents: Certified copy of Death certificate, Self-attested copy of PAN card, Succession certificate or Probate of will or Will or Letter of administration or Court decree, Specimen signature of the successor. Secretarial Standard SS-6 on transmission of shares and debentures by ICSI provides for the procedure to be followed for transmission.
- Transfer of partly paid shares: As per the Rule 11 of Companies (Share Capital and Debenture) Rules, 2014 a company will not register a transfer of partly paid shares, unless the company has given a notice in Form SH-5 to the buyer and has obtained no objection from the buyer within two weeks from the date of receipt of notice.
Time Limit for Delivery of Certificates
According to Section 56(4), every company, unless prohibited by any provision of law or any order of court, tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted, within a period of one month from the date of receipt by the company of the instrument of transfer or as the case may be of the intimation of transmission.
Section 56(4) states that where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.
According to Section 56(6), when any default is made in complying with the above provisions, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.
Power to Refuse Registration and Appeal against Refusal
According to section 58(1) of the Companies Act, 2013, if a private company limited by shares refuses to register the transfer of, or the transmission by operation of law of the right to, any securities of a member in, the company, it shall, within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.
Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd 2010 154 com. Cases 593 Bom. In this case, it was held that “the Company Act makes a clear distinction regarding the transferability of shares relating to private and public companies. By its definition, a ‘private company’ is a company, which restricts the right to transfer its shares.”.
Statutory Remedy against Refusal
The right of the holder of securities to transfer his securities in a company is absolute but subject to provisions of the Act and restrictions, laid down in the AOA.
In M.G. Amirthalingam vs. Gudiyatham Textiles Pvt. Ltd. the court held that “Where the articles of association of a company confers a discretion on the directors with regard to acceptance of transfers, this discretion is a fiduciary one to be exercised bona fide in what the Board considers to be in the interest of the company. If on a true construction of the articles, the directors are only given the powers to reject on certain prescribed grounds and it is proved that on these grounds the request for transfer was rejected, the Court cannot substitute the opinion of the Board. If the articles of association give an unrestricted discretion, the court would interfere with it only on proof of bad faith.”
As per Section 58(3), Companies Act, 2013, a private company limited by shares refuses to register the transfer or transmission, the transferee may appeal to the Tribunal against the refusal within 30 days from the date of receipt of the notice or in case no notice has been sent by the company, within 60 days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.
The Act provides under Section 58(4) that, if a public company without sufficient cause refuses to register the transfer of securities within 30 days from the date on which the instrument of transfer or the intimation of Transmission, as the case may be, is delivered to the company, the transferee may, within 60 Days of such refusal or where no intimation has been received from the company, within 90 Days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.
Chokhani v. Western India Theatres Ltd A.I.R 1957 Cal. 709 held that “If the director refuses the request for transfer of shares with mala fide intent i.e. if they act oppressively or corruptly, the Company Law Board (Now NCLT) will interfere and order Registration of the transfer of shares.”
The Tribunal, while dealing with an appeal, after hearing the parties, either dismiss the Appeal, or by order—
- Direct that the transfer or transmission shall be registered by the company and the Company shall comply with such order within 10 days of the receipt of the order; or
- As per Section 58(5), Companies Act, 2013, direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.
The Act provides under Section 58(6) that, if a person contravenes the order of the Tribunal, he shall be punishable with imprisonment for a term which shall not be less than 1 year but which may extend to 3 years and with fine Which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees.
Distinction between Transfer and Transmission of shares
|Basis||Transfer of Securities||Transmission of Securities|
|Nature||Transfer takes place by a voluntary act of the transferor.||Transmission is the result of the operation of law.|
|Instrument||An instrument of transfer is required in case of transfer.||No instrument of transfer is required in case of transmission.|
|Circumstances||Transfer is a normal course of transferring property.||Transmission takes place on death or insolvency of a holder of securities.|
|Consideration||Transfer of securities is generally made for some consideration.||Transmission of securities is generally made without any consideration|
|Stamp Duty||Stamp duty is payable on transfer of securities by a holder of securities.||No stamp duty is payable on transmission of securities.|
Cases Signifying Distinction between Transfer and Transmission
“There is a clear distinction between transfer and transmission of shares. Transfer is by voluntary act of parties whereas transmission is by operation of law”.
“Transfer by act of parties, requiring an instrument of transfer and in case of transmission of shares by operation of law, by succession or inheritance, there could be no instrument of transfer.”
- Stamp Duty:
“Section 56(1) of the Companies Act, 2013, makes it mandatory that, the company shall not register the transfer of shares unless a properly executed instrument of transfer duly stamped has been delivered to the company.”
There lies a simple conclusion for the distinction. The transfer of shares is a voluntary act by the holder of shares and takes place by way of contract. On the other hand, transmission of shares takes place due to the operation of law that is on the death of the holder of shares or in an event where the holder becomes insolvent or lunatic. While it is easy for a layman to confuse these two terms as semantically speaking, they are quite similar. However, it is essential to differentiate in the context of company or corporate law, which is what this article has tried to do. These case laws have provided certain clarity, although, it goes without saying that there will be more research and analysis on this subject.