CH 3 : Transfer & Transmission of Securities

TRANSFERABILITY :

) One of the most important characteristics of a company : Shares are transferable.

) Section 56 of the Companies Act, 2013 deals with transfer and transmission of securities.

) Section 44 :
• The shares or debentures or other interest of any member in a company shall be movable
property.
• Manner of transferability : They are transferable in the manner as provided by the articles of the

company.

) Section 58(2) : The securities or other interest of any member in a public company shall be freely
transferable.

) Proviso to section 58(2) : Any contract or arrangement between two or more persons in respect of

transfer of securities shall be enforceable as a contract.

) Section 2(68) : A private company is required to restrict the right to transfer its shares by its articles.

TRANSFER OF SECURITIES IN PRIVATE COMPANY :

) Shares of a private company are not marketable securities :

• AOA of Private Company contains restrictions on right to transfer its shares.

• Shares of private company are not freely transferable in the market.

) The objective behind the right of restriction on the transfer of shares : To preserve the composition of
the shareholding.

) Section 2(68) :
• Restricts the right to transfer shares but does not prohibit the right to transfer shares.
• In case of transfer of shares of a private company : The provisions or restrictions contained in the
Articles of Association should be duly complied with by the transferor and transferee.

) Section 44 : Shares or debentures or other interest are movable property, transferable in the manner
provided by the Articles of the company.
Restrictions upon transfer of shares in private companies are not applicable in following cases :
a. In case where the shares are transferred to legal representative(s).

b. In the event of death of a shareholder : The legal representatives may require the registration of
shares in the names of heirs, on whom the shares have been devolved.
c. In respect of shares which are proposed to be issued on a right basis : Existing members would

have a right to renounce shares likely to be allotted to them.

Restriction on right to transfer shares is generally placed by using following two methods :
a. Right of pre-emption : Pre-emption means the purchase of shares by one person (existing member)

before the opportunity is given to others (person not a member).

• If a member wishes to sell some or all of his shares : Such shares shall first be offered to other
existing members of the company at a price determined by :

i. The directors or

ii. The auditor of the company or

iii. The use of formula set out in the articles.

• If no existing member is determined to acquire shares, then shares can be transferred by the

transferor to the proposed transferee (Any person who is not an existing member).
• NOTE : A member is not bound to sell his shares to existing members under pre-emption

clause unless any existing member agree to buy all the shares proposed to be sold.

If any existing member is agree to buy all of the proposed shares then the seller member is

bound to transfer.

• The pre-emption clause can’t place a complete ban on right to transfer; they can’t completely

prohibit the transfer.

Valuation of Shares under Preemption clause :

) Articles of private company provide that the shares are to be sold under pre-emption clause at a fair
price determined by the directors or the auditor of the company.

) The fair price would be certified by the auditor of the company.

) If the pre-emption clause requires that the shares are required to be offered to other members at a

price certified by the directors or auditor(s), the court are not in a position to enquire into the

correctness of valuation, unless there is evidence that valuation was not correctly made.
b. Powers of directors to refuse registration of transfer of shares : The Powers of directors to refuse
registration of transfer of shares are specified in the articles of association of the company. This

power is to be exercised by the Board of directors in good faith.

TRANSFER OF SECURITIES IN PUBLIC COMPANY :

Section 58(2) :
• The securities or other interest of any member in a public company shall be freely transferable.

• The Board of directors of a Company or the concerned depository has no discretion to refuse or
withhold transfer of any security.
• The transfer has to be effected automatically and immediately by the company/depository.

Proviso to section 58(2) : Provides that any contract or arrangement between two or more persons in
respect of transfer of securities shall be enforceable as a contract.

Instruments of transfer to be presented to the company by transferor or transferee :

) A company shall not register a transfer of securities of the company, unless a proper instrument of
transfer has been delivered to the company within a period of 60 days from the date of execution.

) The transfer deed shall be delivered along with the share certificate.

) If no such certificate is in existence, then along with :

• The related certificate or
• Letter of allotment of securities.

) The instrument of transfer shall be :

• Duly stamped,
• Dated, and
• Executed by or on behalf of the transferor and the transferee.

) In case of loss of the instrument : The company may register the transfer on terms as to indemnity.

) Form of Instrument of Transfer of securities held in physical form : Form No. SH.4.
 Shri Parveen Sharda v. Chopsani Ice Aerated Water and Oils Mills Ltd :
A company can’t register transfer of shares unless the instrument of transfer is duly stamped and is
delivered to the company.

The expression “duly stamped” [Section 2(11) of the Indian Stamp Act, 1899] means the the prescribed

stamp duty paid and the stamp affixed thereon has been cancelled.

Registration of partly paid up shares :

Section 56(3) : Where an application is made by the transferor alone and relates to partly paid shares, the

transfer shall not be registered, unless :

• The company gives the notice in Form No. SH.5 to the transferee, and

• The transferee gives ‘no objection’ to the transfer within 2 weeks from the receipt of the notice.

Time Limit for Delivery of certificates [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:

i. In the case of subscribers to the memorandum : Within a period of 2 months from the date of

incorporation.

ii. In the case of any allotment of any of its shares : Within a period of 2 months from the date of

allotment.

iii. In case of transfer or transmission of securities : Within a period of 1 months.

iv. In the case of any allotment of debentures : Within a period of 6 months from the date of

allotment.

Intimation to depository [Proviso to Section 56(4)] :

Where the securities are held in depository, the company shall intimate the details of allotment of

securities to depository immediately on allotment of such securities.

No transfer deed is required for transfer of shares, where the shares are held in dematerialized form.
Transfer of securities by legal representative [Section 56(5)] :
In case of death of holder of any security, the transfer of such security by the legal representative of the

deceased shall be valid :

• Even though the legal representative is not the holder of such security;
• As if the legal representatives were the holder of such security.

Penalties [Section 56(6)] :

When any default is made in complying with the provisions of sub-sections (1) to (5) :
) The company shall be punishable with : Fine which shall not be less than Rs. 25,000 but which may

extend to Rs. 5 lakh.

) Every officer in default shall be punishable with : Fine which shall not be less than Rs. 10,000 but
which may extend to Rs. 1 lakh.

Transfer of shares by depository with an intent to defraud, is liable under Section 447 for fraud :
As per section 56(7), any depository or depository participant has transferred shares with an intention to

defraud a person, it shall be liable under section 447 for fraud.

Procedure for transfer of shares as per the Companies Act, 2013 :

1. Obtain the transfer deed in the prescribed form i.e. Form SH-4.

2. The instrument of transfer may not be in the prescribed form in the following cases :
I. Shares transferred by a director or nominee on behalf of another body corporate under
section187 of the Companies Act, 2013;

II. Shares transferred by a director or nominee on behalf of a corporation owned or controlled by

the central or state Government;

III. Shares transferred by way of deposit as a security for repayment of any loan or advance : If

they are made with any of the following :

a. State Bank of India; or g. Any corporation owned or
b. Any scheduled bank; or controlled by the Central or State
c. Any other banking company; or Government; or

d. Financial Institution; or h. Trustees who have filed the

e. Central Government; or declarations.
f. State Government; or
3. For transferring debentures, the instrument of transfer need not be in prescribed form but standard
format can be used, being convenient to do so.

4. Get the transfer deed duly executed.

5. The transfer deed should bear stamps according to Indian Stamp Act and stamp duty notification in
force in the state concerned.

The present rate of transfer of shares is 25 paise for every Rs. 100.

6. Proper cancellation of stamp duty paid at the time or before signing of the transfer deed.
7. The signatures of the transferor and the transferee in the share/debentures transfer deed must be

witnessed by a person giving his signature, name and address.

8. Attach the relevant share or debenture certificate or allotment letter with the transfer deed and deliver
the same to the company.

9. The company give notice in Form SH-5 of the amount due on shares/debentures to the transferee and
the transferee shall give no objection within 2 weeks from the date of receipt of the said notice.
10. If signed transfer deed has been lost, affix the same stamp on a written application.

In such case, the Board may, if it thinks fit to do so, register the transfer on such terms of indemnity as

it thinks fit.

11. Listed Company can’t charge any fee for registration of transfers of shares and debentures.
 TRANSMISSION OF SECURITIES :

Section 56(2) : A company shall have power to register on receipt of an intimation of transmission of any
right to securities by operation of law from any person to whom such right has been transmitted.

In case of transmission of shares, no transfer deed shall be necessary.

A company shall not register a transfer of partly paid shares, unless the company has given a notice in

Form No. SH.5 to the transferee and the transferee has given no objection to the transfer within 2 weeks

from the date of receipt of notice.

POWER OF BOARD TO REFUSE REGISTRATION

STATUTORY REMEDY AGAINST REFUSAL UNDER SECTION 58 :

Section 58 : Process to be followed on refusal to register the transfer of securities.

i. If a private company limited by shares refuses to register the transfer of, or the transmission of the

right to any securities or interest of a member in the company, then the company shall send notice

of the refusal to the transferor and the transferee or to the person giving intimation of such

transmission, within 30 days from the date on which the instrument of transfer, or the intimation of

such transmission, was delivered to the company.

Notice shall contain the reasons for refusal to register the transfer or transmission.

ii. The transferee may appeal to the Tribunal against the refusal :

• In case notice has been sent by the company : 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, was delivered to the company.[Section

58(3)]

iii. 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, is
delivered to the company, the transferee may appeal to the Tribunal against such refusal :

• Where intimation has been received from the company : within 60 days of such refusal.

• Where no intimation has been received from the company : within 90 days of the delivery of

the instrument of transfer or intimation of transmission. [Section 58(4)]

iv. The Tribunal, while dealing with an appeal may, after hearing the parties, either dismiss the appeal,
or by order :

a. Direct that the transfer or transmission shall be registered by the company and the company

shall comply with such order within a period of 10 days of the receipt of the order; or

b. Direct rectification of the register and also direct the company to pay damages, if any,
sustained by any party aggrieved.[Section 58(5)]
v. If a person contravenes the order of the Tribunal : He shall be punishable with :

• Imprisonment for a term not less than 1 year but may extend to 3 years, and
• Fine not less than Rs. 1 lakh which may extend to Rs. 5 lakh. [Section 58(6)]

Shri Nirmal Kumar v. Jaipur Metal and Electrical Limited :

Refusal to register share transfer on suspicion that the employee if admitted as a member will attend

general meetings of the company and may create nuisance by raising irrelevant issues and also obtain

access to the records to the company as a shareholder is not a valid reason.

Rangpur Tea Association Ltd. v. Makkan Lal Samaddar (1979) :

Case related to determine the ground for refusal of transfer of share : The mere attempts of a person to

wind up a company more than once can’t be a ground for refusing to register transfer by the directors.

Berry & Stewart v. Tottenham Hostpur Football and Athletic Co. Ltd., 1936 :

The power to refuse registration of shares which is conferred on the directors by the articles, is a
discretionary power and must be exercised reasonably, and in good faith for the benefit of the company.

Unless the contrary is proved, the power is deemed to have been exercised properly.

M.J. Amrithalingam v. Gudiyatham Textiles Pvt. Ltd., (1972) :

Articles of company confers a discretion on the directors to register transfer : This discretion is a fiduciary

one to be exercised bona fide in what the Board considers to be in the interest of the company.

True construction of the articles : The directors are empowered to refuse registration of transfer on certain

prescribed grounds.
 Bajaj Auto Limited v. N.K. Firodia, AIR 1971 :
The Court has also laid down three tests to determine the proper exercise of power by the Board of
directors. The tests are :
1. Whether the directors acted in the interest of the company;
2. Whether they acted on a wrong principle; and

3. Whether they acted on oblique motive or for a collateral purpose.

The refusal on the ground of rivalry will be justified : Where the appellant transferee and respondent

company were in the same line of business and were rivals.

 RECTIFICATION OF REGISTER OF MEMBERS [SECTION 59] :

The procedure for the rectification of register of members after the transfer of securities :
1. Remedy to the aggrieved for not carrying the changes in the register of members :

The person aggrieved, or any member of the company, or the company may appeal in such form as
may be prescribed, to the Tribunal.

The person aggrieved

or

Any member of the company may appeal (In form prescribed)  NCLT
or

The company

In case of foreign members or debenture holders residing outside India : The appeal shall be filed in
a competent court outside India as may be specified by the Central Government by notification.

Foreign Members
In a competent court
or Shall file appeal  
outside India. 
Debenture Holders

Grounds of appeal : If, without sufficient cause :

1. Wrongly entered the name of any person in the register of members; or

2. Name of member omitted from the register of members; or

3. If a person becomes member : Default or unnecessary delay is being made in entering in

the register, or

4. If a person ceased to be a member : Default or unnecessary delay is being made in

entering in the register. [Removing the name of person ceased to be a member and enter

the name of person become member].

2. Order of the Tribunal [after hearing the parties to the appeal] :
The Tribunal may by order, either :

• Dismiss the appeal, or

• Direct that the transfer or transmission shall be registered by the company within a period of 10
days of the receipt of the order, or

• Direct rectification of the records of the depository or the register of member maintained by
company, or
• Direct the company to pay damages, if any, sustained by the party aggrieved.

3. Right to transfer not restricted : Section 59 of the Act shall not restrict the right of a holder of
securities, to transfer such securities.

Any person acquiring such securities shall be entitled to voting rights unless the voting rights have

been suspended by an order of the Tribunal.

4. Contravention of provisions of the law : Where the transfer of securities is in contravention of any of
the concerned provisions, the Tribunal may, on an application made by the depository, company,

depository participant, the holder of the securities or the SEBI, direct any company or a depository to

set right the contravention and rectify its register or records concerned.

Transfer of securities must be in compliance of :

i. The Securities Contracts (Regulation) Act, 1956,

ii. The Securities and Exchange Board of India Act, 1992 or

iii. The Companies Act, 2013 or

iv. any other law for the time being in force.

5. Default in complying with the order :

) The company shall be punishable : Fine which shall be minimum Rs. 1 lakh but which may
extend to Rs. 5 lakh.

) Every officer in default shall be punishable with :

• Imprisonment up to 1 year, or

• Fine : Which shall be minimum Rs. 1 lakh but which may extend to Rs. 3 lakh, or
• Both.
 6. Specific instances of rectification :
a. Rectification has been held to be permissible in the following cases:

b. Applicant induced to take shares by misrepresentation;

c. Shareholders’ name removed under unlawful surrender of his shares;
d. Irregular allotment;

e. Name of nominee entered in register without his knowledge or consent;

f. Allotment of shares to a non-resident without taking necessary permission for foreign exchange.
g. Allotment in violation of memorandum of association of the company.

7. Mutation of name in other Company’s register of members :

Sulphur Dyes v. Hickson & Dadajee Ltd. (1995) :

The Company which has changed its name would be entitled to ask those companies in which it is

holding shares to substitute a company’s new name in their register of members in the place of old

name.

TRANSFER DEED LOST IN TRANSIT OR NOT DELIVERED :

) The proviso to section 56(1) provides that where the instrument of transfer has been lost or the

instrument of transfer has not been delivered within the prescribed period, the company may register
the transfer on such terms as to indemnity as the Board may think fit.

Prescribed Period : Within 60 days from the date of execution of the instrument of transfer.

) The Board of directors of the company should be satisfied that the instrument of transfer has been
lost.

) The proof of such lost may be in the form of an affidavit from the transferor or the transferee and
supported by :
a. The purchase or sale note of the broker, and

b. The registration receipt issued by the postal authorities.

 TRANSFER

TRANSFER OF SHARE TRANSFER OF DEBENTURE

1. Transfer of shares to minor : Guardian In case of transfer of debentures :

of minor can hold shares or transfer 1. A proper instrument of transfer shall be made

shares on his behalf. 2. Duly stamped and dated,

2. Transfer of shares to Partnership Firm : 3. Executed by or on behalf of the transferor and the

The DCA (Now, MCA) has stated that a transferee

firm not being a person can’t be 4. The transfer deed should be delivered to the

registered as a member of a company company within 60 days from the date of

except where the company is licensed execution along with the certificate relating to the
under Section 8. debentures or the letter of allotment of
3. Transfer of shares to Body Corporate : debentures (If no such certificate is in existence).
An incorporated body being a legal 5. After registering the transfer, the particulars
person can acquire securities in its own recorded in the Debenture Transfer Register and
name. should be initialed (signed) by the appropriate

authority.

TRANSFER OF SHARES TO A MINOR :

) Section 11 of the Indian Contract Act, 1872 : A minor is not competent to contract except through a

guardian.
) Section 56 of the Companies Act, 2013 enables execution of transfer deed by or on behalf of the

transferor or the transferee :

The transfer deed can be executed by a minor through his natural guardian as transferee, and the

contract is binding and valid under Section 8 of the Hindu Minority and Guardianship Act, 1956.

) Section 153 : No notice is required regarding the fact that the guardian holds shares on behalf of a

minor as trustee.

The name of guardian can’t be entered in the Register of Members and therefore, he can’t become a

member of a company.
) Prohibiting transfer of shares in favour of a minor [Blanket ban] : The articles of a company can’t
prohibit or restrict transfer of shares in favour of a minor. Such restriction is unreasonable and not

sustainable.
) In case, the restriction imposed on transfer to a minor is accepted : It would mean that the shares of a
deceased member can never be inherited by the legal heir who might be a minor.

Saroj v. Britannia Industries Ltd. :

Shares can be transmitted in favour of a minor.

The shares which are fully paid-up is transferable to the minor.

Transfer of shares : Shares in a company can be transferred either by :

i. Registered owner or

ii. Anyone else with his authority.

A sale by any unauthorized person will be void and the transferee obtained no rights.

TRANSFER IN VIOLATION OF ARTICLES :

John Tinson & co. P. Ltd. v. Surjeet Malhan (Mrs.) (1997) :

Where the article of a private company requires that transfers of the company shares should be made

with the previous sanction of the company’s Board of Directors, the Supreme Court held that any transfer

without such approval would be invalid.

 TRANSMISSION OF SECURITIES :

) Transmission of securities has not been defined by the Companies Act.

) Transmission by operation of law is not a transfer.
) Transmission refers to cases where a person acquires an interest in property by operation of law.

Example :
a. Right of inheritance or succession in case of death of registered member, or
b. By reason of the insolvency or lunacy of the holder of securities, or
c. By purchase in a Court-sale.

) Transmission of securities takes place :

I. When the registered holder of securities dies or
II. When the registered holder of securities is adjudicated as an insolvent, or

III. If the holder of securities is a company, it goes into liquidation.

Case Laws related to Transmission in Case of Sole Owner :

Scott v. Scott (London) Ltd., (1940)

&
Safeguard Industrial Investments Ltd. v. National Westminister Bank Ltd., (1980) :
On the death of a sole owner of shares, the legal heirs are entitled to be registered as the holders of

shares.

Re, Cheshire Banking Co. Duff’s Executor’s case, (1886) :

But the legal heirs don’t by itself become members of the company. The company can’t register them as
members without their consent.

State of Kerala v. West Coast Planters Agencies Ltd., (1958) :

A company can’t compel the legal heirs to become member nor it is a duty to do so.
 Transmission of shares to widow :

) If a widow applies for transmission of the shares standing in the name of her deceased husband
without producing a succession certificate :

If the articles of the company so authorizes, the directors may dispense with the production of
succession certificate, probate or letter of administration upon such terms as to indemnity as the
directors may consider necessary, and transmit the shares to the widow of the deceased by obtaining
an indemnity bond.

Vickers System International Ltd. v. Mahesh P. Keshwani (1992) :

Transfer of shares by HUF :
Section 56 [Section 108 of the Companies Act, 1956] enables the execution of a transfer deed by or on

behalf of the transferor or the transferee.

HUF is transferee : In the case of a HUF, the transfer form would be executed by the holding member or,
in his absence, by the Karta.

The CLB directed the company to register shares in the name of the HUF.

FORGED TRANSFER :

) Demanding No Objection from the member : In order to avoid the consequences of a forged transfer,

companies normally write to the transferor about the lodgement of the transfer instrument so that he
can object if he wishes.

) The company informs him that if no objection is made by him before a day specified in the notice, it

would register the transfer.

The consequences of a forged transfer are detailed hereunder :

a. A forged document never has any legal effect :

• It can never move ownership from one person to another, however, genuine it may appear.
• It follows that if a company registers a forged transfer, the true owner can apply so as to be
replaced on the register and his name will be restored.

People’s Ins. Co. v. Wood and Co., 1961 :

A forged transfer is a nullity and the original owner of the shares continues to be the shareholder and

the company is bound to restore his name on the register of members.

 b. If the company issues a share certificate to the transferee and he sells the shares to an innocent
purchaser :

The company is liable to compensate such a purchaser :

• If it refuses to register him as a member, or
• If his name has to be removed on the application of the true owner.

c. If the company have paid damages to an innocent purchaser : it may recover the same
independently from the person who lodged the forged transfer.

NOTE : In case of joint shareholdings, a transfer to be effective must be executed by all and if the
signature of any one be forged, the transfer will be void.

DEATH OF A JOINT SHAREHOLDER :

) Where shares are held in joint names, and one of the joint shareholder dies the survivor alone will be

recognized as the holder of the said shares.

) It would be sufficient for the company to delete the name of the deceased shareholder after obtaining

satisfactory evidence of his death.

TRANSPOSITION OF NAME :

) In the case of joint-shareholders, one or more of them may require the company to alter or rearrange

the serial order of their names in the register of members of the company.
) New share certificate is required to be issued with transposition of name.
) If the company provides in its articles that the senior-most among the joint-holders will be recognised

for all rights and obligations.

) Transposition is not transfer of shares and no need to execute any transfer deed.
) No stamp duty required to be paid on transposition of name.

Department of Economic Affairs :

No need of execution of transfer deed for transposition of names, if the request for change in the order of
names was made in writing, by all the joint-holders.

Execution of transfer deed will be required : If transposition is required in respect of transfer of part of the

holding from one holder to another.

 EFFECTS OF TRANSFER :

Once a transfer form has been executed, the transfer is complete as between the transferor and the
transferee and the transferee acquires the right to have his name entered in the register of members.

Killick Nixon Ltd. v. Dhanraj Mills Pvt. Ltd., (1983) :

Once the transferee becomes a member of the company, a contractual relationship arises with the

company.

Sanatan Investment Co. Pvt. Ltd. v. Prem Chand Jute Mills Ltd. (1983) :
A company can’t refuse to register a transfer on the ground that the transfer was without consideration or

that there was a collusion and connivance between the transferor and transferee.

Priority among Transferees :

Society General De Paris v. Jonet Walker and other (1886) :

A shareholder has fraudulently sold his shares to two different transferees : The first purchaser will, on

the ground of time alone, be entitled to the shares in priority to the second.

Peat v. Clayton, (1906) :

A person assigned his shares to a person for the benefit of his creditor.

The assignee gave notice of assignment to the company, but failed to get the share certificates registered

in his name.

The assignor sold the shares to another who applied for registration.

It was held that the assignee’s claim was prior in time and therefore, entitled to registration.
 Pledging of Shares :

) Section 2(7) of the Sale of Goods Act, 1930 : Shares are goods and can be a subject matter of pledge
under the Indian Contract Act, 1872.

Kanhaiyalal Jhanwar vs Pandit Shirali And Co. And Ors :

The Calcutta High Court held that the deposit of share certificates themselves is sufficient to create a

pledge thereon.

Re Cheshire Banking Co., Duff’s Executor’s case (1886) :

On the death of a sole owner of shares, the rights and liabilities goes in favour of the legal heirs.

They are entitled to be registered as the holder of the shares.

But the company can register them as members with only their consent and when they apply for it.

DISTINCTION BETWEEN TRANSFER AND TRANSMISSION

Transfer
Transfer takes place by a voluntary or deliberate
act of the parties by way of a contract.
An instrument of transfer is required in case of
transfer.
Transfer is a normal course of transferring property.
Transfer of securities is generally made for some
consideration.
Stamp duty is payable on transfer of securties by a
holder of securities.
As soon as transfer is complete, the liability of the
transferor ceases.
Transmission
Transmission is the result of the operation of law.
For example, due to death, insolvency or lunacy of
a member.
No instrument of transfer is required in case of
transmission.
Transmission takes place on death or insolvency of
a holder of securities.
Transmission of securities is generally made
without any consideration.
No stamp duty is payable on transmission of
securities.
Shares continue to be subject to the original
liabilities.