Comprehensive Guide to Share Transfer Provisions under the Companies Act, 2013 and FEMA, 1999

Share transfer is a process by which a person can transfer the shareholding held by him in a company incorporated in India to another person. The company is of two types: (i) public and (ii) private.

Whereas the shares in a public company are freely transferable, however, in a private company, they can be subject to some restrictions in their Articles of Association (AOA).

The share transfer is governed by the provisions of the Companies Act, 2013, and in case the share transfer is from a resident to a non-resident or vice-versa, then the provisions of the Foreign Exchange Management Act, 1999 (“FEMA 1999”) are required to be adhered to.

In this article, we will discuss the process of share transfer in a private limited company.

Share Transfer procedure as per the Companies Act, 2013

• Review the AOA of the company: In a private limited company, the shares are not freely transferable, therefore, it is important to check the AOA of the company to comply with the pre-requirement of the share transfer.
• Once the requirements, if any, are identified, the transferor is required to complete such requirements before the transfer. These restrictions could be the right of first refusal, lock-in period, etc.
• Determination of price: The transferor is required to determine the per-share price for the proposed transfer. The price can be determined by obtaining the valuation of the company.
• Identification of buyer: The transferor is required to identify the proposed buyer of the shares. The buyer can be any person such as an individual whether Indian or foreigner, a company, a body corporate, etc.
• Preparation of the transfer documents: The seller is required to prepare and execute the share transfer documents as per the Companies Act, 2013. The relevant document as per the Companies Act, 2013, is a share transfer deed in form SH-4, compliant with legal requirements, must be prepared. This deed must be stamped according to the Indian Stamp Act.
• Presenting documents to the company: Once the form SH-4 is duly executed by the transferor and transferee, the same shall be submitted to the company within a period of sixty 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.
• Convening of the board meeting: The company shall, on receipt of the share transfer documents, convene a board meeting to record and approve the share transfer and will make an endorsement at the back of the share certificate and deliver the certificates within a period of one month from the date of receipt by the company of the instrument of transfer. 
• Entry in the statutory register: The company shall make necessary entries related to the share transfer in its statutory registers.

While undertaking the share transfer, it is also essential to comply with the provisions of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”), if the transfer is to a person resident outside India.

Share Transfer procedure as per the NDI Rules

A person resident in India holding equity instruments of an Indian company or units, may transfer the same to a person resident outside India by way of sale, subject to the adherence to entry routes, sectoral caps or investment limits, pricing guidelines, and other attendant conditions as applicable for investment by a person resident outside India and documentation and reporting requirements for such transfers as may be specified by the Reserve Bank in consultation the Central Government from time to time.

Provided that a person who is a citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan cannot purchase equity instruments without prior government approval:

1. Procurement of valuation report: If a share transfer is to a person resident outside India, then it is mandatorily required to procure a valuation report from a Chartered Accountant or SEBI-registered Merchant Banker.

2. Preparation of Share Purchase Agreement (“SPA”): In addition to the form SH-4, an SPA between the buyer and Seller is required to be executed.

3. Consideration and Mode of remittance: The share transfer must happen at a price that is not lower than the fair market value of shares as determined by a Chartered Accountant or SBI-registered Merchant Banker in its valuation report and the remittance must be made only through normal banking channels.

4. Filing of form FCTRS: Any share transfer from a person resident in India to a person resident outside India or vice-versa is required to be reported in form FCTRS on FIRMS portal of the Reserve Bank of India. The obligation of reporting is on the person resident in India.

5. KYC and FIRC: Procurement of Know Your Customer and Foreign Inward Remittance Certificate is a mandatory requirement for FCTRS reporting.

6. Other documents: The other important documents for FCTRS reporting are:

• Consent letter of Sellers
• Consent Letter of buyer
• Form SH-4
• SPA or extract of SPA
• Board resolution of the buyer, if applicable
• No objection/ Tax Clearance Certificate from the Income Tax authority/ Chartered Accountant
• Government approvals, if any. 

Conclusion:

Transferring shares in a Private Limited Company is a delicate and complex process that demands careful adherence to legal norms and procedural steps. Non-compliance can lead to invalid transactions and potential legal repercussions. Thus, it’s essential to be thoroughly informed about the intricacies involved, from the initial planning stages to the final documentation and board approval. Understanding the restrictions set by the Articles of Association (AOA) and ensuring full compliance can significantly streamline the process.

Additionally, adherence to the NDI Rules is equally important as the delay in timely reporting can attract penalties from the RBI.