Shares in a private limited company are movable property, but they are not as freely transferable as shares in a listed company. The very definition of a private company under the Companies Act, 2013 requires its articles to restrict the right to transfer shares. Understanding the correct procedure protects both the seller and the buyer and keeps the company's records clean.
The restriction on transfer
Most private companies include a right of first refusal (ROFR) in their Articles of Association. This means an existing shareholder who wishes to sell must first offer the shares to the other existing members before selling to an outsider. Always read the articles before initiating any transfer - ignoring the ROFR can make the entire transfer voidable.
Form SH-4: the share transfer deed
A transfer of shares is executed through Form SH-4, the instrument of transfer. It must be:
- duly stamped, dated, and signed by both the transferor (seller) and the transferee (buyer);
- delivered to the company along with the share certificate within 60 days of execution.
If the share certificate is not available, the application for registration of the transfer along with the allotment letter can be used.
Stamp duty on share transfer
Share transfers attract stamp duty at 0.015% (i.e., 15 paise per Rs. 100) of the consideration or the market value of the shares, whichever is higher. For shares held in physical form, this is paid by affixing stamps or through a franking. For shares in demat form, the depository collects the duty automatically. Underpaying stamp duty is a common error that can render the SH-4 inadmissible as evidence.
The step-by-step procedure
- Notice and ROFR: the seller gives notice to the company; the board offers the shares to existing members as per the articles.
- Execute SH-4: once a buyer is finalised, both parties sign the SH-4 with the correct stamp duty and date.
- Submit to the company: deliver the SH-4 with the share certificate within 60 days.
- Board approval: the board considers and approves the transfer at a meeting and passes a resolution registering it.
- Issue new certificate: the company endorses or issues a fresh share certificate in the buyer's name within one month.
- Update records: the register of members is updated to reflect the new ownership.
The register of members
A transfer is legally complete only when the company registers it and enters the buyer's name in the register of members. Until then, the seller remains the legal owner in the eyes of the law. This is why prompt board approval and record updates matter as much as the signed deed.
Transmission is different from transfer
Do not confuse a transfer with a transmission. Transfer is a voluntary act between a willing buyer and seller. Transmission happens by operation of law - for example, when shares pass to legal heirs on the death of a shareholder, or to an official assignee on insolvency. Transmission does not require an SH-4 or stamp duty; it requires documents such as a death certificate, succession certificate, or probate.
Before buying shares in a private company, always verify the seller's name in the register of members and check the articles for transfer restrictions. A signed SH-4 alone does not make you the owner.
Can the company refuse to register a transfer?
Yes - within limits. The board of a private company may refuse to register a transfer, but only for valid reasons rooted in the articles, and it must communicate the refusal with reasons within 30 days. A transferee who is unfairly refused can appeal to the National Company Law Tribunal. The board cannot, however, refuse arbitrarily or to entrench existing management; the power must be exercised in good faith and in the company's interest.
Documents the buyer should collect
- The duly stamped and signed SH-4 with the correct date
- The original share certificate
- A copy of the board resolution approving the transfer
- The new share certificate issued in the buyer's name
- A certified extract of the updated register of members
For any meaningful investment, a buyer should also carry out due diligence: review the company's financials, charges registered against it, litigation, and statutory filings before paying.
Tax angle for the seller
Selling shares can trigger capital gains tax for the seller. For unlisted shares, gains are treated as long-term if held for more than 24 months, attracting a lower rate with indexation benefits, and as short-term otherwise, taxed at the seller's slab rate. Additionally, if shares are transferred for less than their fair market value, anti-abuse provisions of the Income Tax Act may tax the difference in the hands of the buyer. Pricing the transfer at a defensible fair value is therefore important for both sides.
A worked example
Suppose Ravi sells 1,000 shares of a private company to Meena for Rs. 5,00,000. He signs an SH-4 and pays stamp duty of 0.015% of Rs. 5,00,000, i.e., Rs. 75. Meena submits the SH-4 with the share certificate to the company within 60 days. The board meets, approves the transfer, cancels Ravi's certificate, and issues a fresh certificate to Meena, updating the register of members. Only at this final step does Meena legally become a shareholder - not when she paid Ravi.
Partly paid shares and nomination
If the shares being transferred are partly paid - that is, the full face value has not yet been paid to the company - the SH-4 must also be signed in a way that records the transferee's agreement to take on the unpaid liability, and the company gives notice to the transferee before registering it. Separately, a shareholder can file a nomination (Form SH-13) naming who should receive the shares on their death. A registered nomination simplifies transmission later and overrides a will in respect of those shares, so it is worth keeping nominations current.
Demat shares: a smoother route
Where shares are held in dematerialised (demat) form, the transfer mechanics change. Instead of a physical SH-4 and certificate, the transfer happens electronically through the depository (NSDL or CDSL) via the depository participants of the buyer and seller, and stamp duty is collected automatically by the depository. Demat removes the risks of lost certificates, forged signatures, and stamp-duty errors, which is why many growing private companies now dematerialise their shares - and certain classes of companies are in any case required to issue and transfer securities only in demat form.
Key takeaways
- Private company shares carry transfer restrictions - read the articles first.
- Use Form SH-4, properly stamped at 0.015% of value, signed by both parties.
- Submit the SH-4 within 60 days; the board must approve the transfer.
- Ownership changes only when the register of members is updated.